Thu. Jan 20th, 2022


This is an audio transcript of the FT News Information Session podcast episode: Stock market fragility

Marc Filippino
Good morning from the Financial Times. Today is Wednesday, December 1st, and this is your FT News Briefing.

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Marc Filippino
The new Omicron variant and a more hawk-sounding Fed chair startled investors yesterday, and the world’s largest clothing retailer has new leadership. On top of that, the recent turmoil in the stock market has caused market viewers to talk about fragility.

Robin Wigglesworth
When the calmness breaks, it breaks with more ferocity than it would have been a few years ago.

Marc Filippino
We’ll talk to Robin Wigglesworth about the recent market fluctuations and whether there is cause for concern. I’m Marc Filippino, and here’s the news you need to start your day.

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Marc Filippino
US stock markets were rattled yesterday by fears about the Omicron coronavirus variant and remarks by Jay Powell, chairman of the Federal Reserve. The S&P 500 ended the day almost 2 percent lower. Brent crude oil prices fell nearly 4 percent. Powell spoke with U.S. lawmakers and indicated his support for a faster dismantling of the Fed’s pandemic bond purchase scheme. He mentioned the increased risk of higher inflation. But the FT’s US economic editor, Colby Smith, says the Fed needs to balance competing forces.

Colby Smith
So with this new variant, what it can mean is more intense supply chain disruptions, more intense bottlenecks as well, and all of these factors are going to contribute, perhaps to higher prices. But at the same time, if fears of capturing Covid keep people from re-entering the workforce, you know that it could also mean that the recovery on the labor market front is even more bleak than it has been in recent months. So this is a very, very difficult position for the Fed at the moment. But they have a dual mandate – which means price stability and full employment – so if inflation gets really out of control, I do not think the Fed will hesitate to tame it.

Marc Filippino
Colby Smith is the FT’s American economic editor.

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Marc Filippino
So this market turbulence started last Friday. This was caused by concerns about the Omicron variant. Shares and oil prices have had their biggest declines in more than a year. Before that, investors had been without this kind of turmoil for a while. The intensity of this dive into a long silence makes people talk about market fragility. Our global finance correspondent Robin Wigglesworth wrote about this, and he’s joining me now to talk about it. Hi, Robin.

Robin Wigglesworth
Hi Marc, how are you?

Marc Filippino
Things are good. So Robin, if I understand correctly, market pushes become less frequent but more intense, you know, why is that?

Robin Wigglesworth
Well, fundamentally, you’re right. The markets have developed quite dramatically over the last two, three decades, but especially since the financial crisis. These days, it’s essentially high. frequency trading, these are algorithms that trade with other algorithms at speeds that are unfathomable. This has meant that trading is cheaper than ever before. But it also means that markets respond very quickly to shifts in sentiment. And one of the phenomena that has always been with financial markets is that when markets are turbulent, it’s harder to sell and the impact of selling something is far greater than it would be in normal times. This has always been the case, (but it seems to be) even more pronounced over the last 10 years. And that, along with many other factors, is why people talk about how the market system is more fragile than many people really appreciate.

Marc Filippino
Right. And for people who like maps and numbers, there’s the Vix index. It is the index that measures expected volatility, and it jumped 10 points on Friday. And that is, you know, it’s gone up a few times over the last few years.

Robin Wigglesworth
So in general, the stock market is actually calmer than it was (sic) history. And then it had spikes, for example March 2020 and then on Friday. But the nails are bigger and the and the cribs are deeper than they were in the past. So if you look at the volatility of Vix, which is a separate index called VVIX, it has generally been on the rise for 20 years.

Marc Filippino
So Robin, some people point to central banks and say, “Hey, you know, keeping interest rates so low encourages risks, and that leads to volatility.” How does this fit into this idea of ​​market fragility that we are talking about?

Robin Wigglesworth
Well, that explains both why volatility was lower and markets bouncing in the good times and why when the calm breaks, it can break fiercely. But markets are recovering fairly quickly. Because fundamentally, what we have seen lately, say, 12 years since the financial crisis, is that central banks have acted more aggressively to prevent any potential financial crises. Thus, when markets are thrown into an extinction as a result of some kind of event, such as a global pandemic, they act so forcefully that the market decline, although serious, bounces back very quickly. And it encourages people to take more risks because they know central banks have their backs. And it all works well until there is some event that is so big, it makes markets go down. Because they kind of went over their skis so hard to take risks, the drop is so much worse. But once again, that old feedback loop kicks in again where people realize, oh, well, central banks have our backs. Let’s just recharge at risk, and we start the whole cycle all over again.

Marc Filippino
Right, and this idea that central banks have the backs of the markets goes just as far. Now think about where central banks around the world are raising interest rates or they are talking about interest rates to try to tackle inflation.

Robin Wigglesworth
Well, that’s what people are worried about, it could kill, this market regime, as people call it. There are many other facets to it. So there is the liquidity provision, HFT, the many investment funds that automatically increase the stock market exposure based on how volatile things are. And then the central bank sits, as people call it. But the danger is that the central bank may be the most powerful force of all. And if inflation accelerates from here or stays high, it could mean central banks feel their hands are tied when it comes to the response to a market volatility. And those kind of short-circuits that the central bank has put on that people have been relying on for 12 years now. And buying the dip, which has been the winning strategy for the past, yes, decade, suddenly no longer works. And people are getting their faces ripped off as the old Wall Street saying goes.

Marc Filippino
So Robin, how nervous should we actually be? Because last time we talked, you warned against risk in private markets. Now you’re talking about risk in public markets (laughs). Are you just trying to be a little scared here? Do you know, is there any positive result we can take away?

Robin Wigglesworth
Well, it’s just born for financial journalists, right? We are all worried about missing out on some apocalyptic disaster (laughter). So we cover our ass. You know, broadly speaking, I’m an optimist. I tend to think that things tend to work out in the long run. Financial markets will be higher in a decade. You will probably have made money in both public and private markets and so on. But the journey there can be quite violently disturbing. And I’m always worried about the, how several factors can rub against each other. That if you think of the markets as like a big clock, if one of the gears kind of breaks, how does it affect all the other gears? So how can something happen in public markets leading to private markets or vice versa? How can central banking policy prosyclical risk-taking and leverage and so on and so forth. . . I think there is a lot to pay attention to before. So yes, I’m top, top notch optimistic. But when I look at the guts and guts of markets, I sometimes get a little panicky.

Marc Filippino
Robin Wigglesworth is the FT’s global financial correspondent. Thanks, Robin.

Robin Wigglesworth
Thank you for turning me on again.

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Marc Filippino
Shares in the world’s largest clothing retailer were sharply cut yesterday. Inditex shares fell more than 6 percent after the company, which owns the clothing chain Zara, appointed its new chairman. This is 37-year-old Marta Ortega. She is the daughter of Inditex founder Amancio Ortega. The appointment was supposed to end doubts about succession at the company, but investors seem to have been surprised. The younger Ortega has worked in different parts of the business for the past 15 years and started as a sales associate. Her appointment was part of a broader management shuffle that includes a new executive chairman who will play the leading executive role at the company.

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Marc Filippino
And a little more company news before we go.

Audio track
Morrisons makes good things happen.

Marc Filippino
The British supermarket chain Morrisons points to its green credentials with an announcement that its cage-free eggs will also be carbon neutral. How? The company plans to feed its egg producers – who would be chickens – with insects instead of soy-based chicken feed. It is working with a new company that will provide mini-insect farms to Morrison egg suppliers. Now you might be thinking, do chickens not usually eat bugs? Yes, but raising birds indoors means that most of the feed comes from soybeans and grains. Environmentalists have linked soybeans and chicken feed to the destruction of the Amazon rainforest and the loss of biodiversity in Brazil.

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Marc Filippino
You can read more about all these stories at FT.com. This was your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

This transcript was generated automatically. If there is an error, please send the details for a correction to: tikfout@ft.com. We will do our best to make the amendment as soon as possible.



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