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Kolanovic: Market Rally Here to Stay, Sell-Off Due to ‘Systemic’ Trading

Kolanovic: Market Rally Here to Stay, Sell-Off Due to ‘Systemic’ Trading

JPMorgan quant guru extraordinaire Marko Kolanovic said investors shouldn’t worry about last week’s major market volatility, and the rally we’ve seen the past few days of trading will be more of the norm moving forward in the short-term.

Stocks of course cratered on Aug. 14 in the worst day of trading in 2019 after the bond markets signaled the dreaded inverted yield curve on the 10-year/2-year Treasurys. This inversion of the yield curve has preceded every recession of the past 50 years, and is sometimes referred to as one of the four horsemen of economic apocalypse.

Treasury yields also sank to historic lows. The yield on the 30-year Treasury bond fell below 2% for the first time in history Aug. 15, while the 10-year Treasury fell to a three-year low of 1.5% as investors piled out of stocks and into bonds.

Kolanovic, whose opinions can move markets as the bank’s global head of macro quantitative derivatives, said the stampede from stocks to bonds was driven by technical flows in an environment of poor liquidity.

“Despite fundamental risks, recent equity and bond moves were mostly technically driven,” Kolanovic wrote in a note to clients Tuesday morning. “More than half of equity moves were driven by systematic rather than fundamental trading.”

Kolanovic attributed Wednesday’s massive move to algorithmic selling by robo-advisers. According to CNBC, “about half of the selling came from index option delta and gamma hedging, about 20% from trend-following strategies, 15% from volatility targeting strategies and the remaining 15% from other products.”

He also said more than half of the move in interest rates — and the 10-year/2-year yield curve inversion — was caused by “technical drivers” such as hedging by banks.

“Even after the stock market recovered some of the losses from last week, we could still see equity inflows and outperformance into month-end,” Kolanovic said. “Our model suggests that these flows could drive a further ~1.5%-2% outperformance for equities next week.”