- Whipsawing prices, economic turmoil, and red flags at banks are stoking fears of a market meltdown.
- The Fed’s rate hikes are a key driver of the recent volatility and darkening outlook, experts say.
- Here’s what six experts have said about current market risks and threats to the banking system.
Volatile assets, economic woes, and signs of distress at major banks are fueling fears of markets breaking down and roiling the global financial system.
Market strategists point to the Federal Reserve as a key driver of the current mayhem. The US central bank has raised interest rates from almost zero in March to a range of 3% to 3.25% in a bid to cool historic inflation.
However, the rate hikes have caused stocks to tumble, bond yields to climb and the US dollar to surge. The risk of a global economic slowdown has risen in turn, experts say.
Notably, Credit Suisse’s stock plunged this week, and the cost of insuring against the Swiss bank defaulting on its debts soared. Those moves suggest investors are growing worried about the lender’s stability as it prepares to restructure its business.
Here’s what 6 experts have said about the risks in markets today:
1. Charlie McElligott, a cross-asset macro strategist at Nomura
“The velocity of things breaking around the world … is obviously a ‘neon swan’ telling us that we are clearly now in the market accident stage,” McElligott told the Financial Times. He was describing the current dangers as blatant, compared with a “black swan” — a rare, unpredictable, and impactful event.
The strong dollar is “causing tremendous strains economically … and increasingly, metastasizing in markets,” McElligott added.
2. Michael Edwards, the deputy investment chief of Weiss Multi-Strategy Advisers
“When financial conditions tighten this much, everyone is looking for who or what will be the cause for central banks to blink,” Edwards told the FT.
He said the Fed has to tighten funding conditions to cool the buoyant US economy, meaning “someone will get hurt.”
3. George Goncalves, head of US macro strategy at MUFG
“This is a story about boiling lobsters,” Goncalves told the FT. “You put them in cold water and slowly turn the heat up.”
“That is what is happening in markets, the Fed is turning up the heat,” he continued. “But because the market is still flush with liquidity, it’s not yet clear where the weakness is.”
4. Cathie Wood, the head of Ark Invest
“There are stresses and strains in the financial system that I believe have begun to show themselves,” Wood told CNBC on Tuesday. “We are experiencing a major financial shock.”
Wood pointed to the pain felt by Britain’s pensions sector when UK government bond yields surged last week, and the soaring cost of insuring against America’s biggest banks defaulting.
5. Sheila Bair, the former chair of the Federal Deposit Insurance Corporation (FDIC)
“It’s concerning when a bank in market conditions like this says that they’re restructuring, they’re going to sell assets, they’re going to raise capital,” she said about Credit Suisse in a Fox Business interview on Thursday. “I think this bears really careful observation.”
Bair emphasized the dangers of derivatives, underscored the interconnectedness of the banking system, and noted there’s always a big loser when something breaks down.
“The complexity around these products, the fancy financial engineering, who’s left holding the bag?” she asked. “It was AIG last time, let’s hope it’s not Credit Suisse this time.”
She also urged the Fed to ensure the financial system remains stable as it proceeds with further rate hikes, or it could cause a credit crunch that hammers American consumers and businesses.
6. Bruce Kasman, the head of economic research at JPMorgan Chase
The financial system isn’t especially vulnerable today, as banks remain relatively healthy and most corporations have little need for financing, Kasman told the FT.
However, he noted the US Treasury’s financial stress index has surged to almost a two-year high, suggesting higher rates and a stronger dollar are spreading stress across financial markets.
“Risks to global financial stability are an increasingly known unknown for the outlook,” Kasman said.