The market is at extreme risk of a ‘flash crash’ — here’s what could send it over the edge and trigger the next big meltdown
Markets are going through an extremely turbulent patch right now as stocks, bonds, currencies, and commodities all face increasing volatility.
Bank of America Merrill Lynch explains how these conditions are ripe for a “flash crash,” and outlines what final steps must occur for the market to be plunged into widespread chaos.
There’s no denying it’s a turbulent time in markets.
Stocks suffered through an epically bad October, and came under renewed stress this past week. Debt markets faced serious pressure as the bonds for market stalwart General Electric tumbled to record lows. And oil is fresh off a 12-day skid — its longest of all time.
Turbulence has also rocked currency markets. The British pound-US dollar pairing has been particularly unstable in recent days as rate-hike guidance from the Federal Reserve and speculation around a Brexit collapse have whipsawed rates.
This rising cross-asset volatility is one of a handful of elements creating a highly vulnerable situation in markets — one that could result in a so-called flash crash, according to strategists at Bank of America Merrill Lynch.
BAML is also worried about what it describes as “vicious deleveraging,” which is when a company attempts to reduce its debt burden by quickly selling assets. This is a particularly pressing issue in China right now. And the US faces its own reckoning of sorts as the Fed hikes rates, which raises lending costs and makes refinancing more difficult.
There’s also what BAML refers to as “dislocation risk,” which can be highlighted by “abnormal spreads.” The example the firm provides is the spread between Libor and Euribor — both of which represent the rates at which European banks lend to one another.
As the chart below shows, the relationship between …read more
Source:: Business Insider