Market Volatility Surges: From Rate Hike Expectations to Potential Cuts, Collateral Haircuts at Zero Raise Concerns of a Brewing Crisis

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As we navigate the currents of financial markets, the landscape reveals a precarious situation. Reflecting on the March 2020 crisis, which extended beyond the realm of COVID-19 to a massive blowout of the basis trade, the present scenario raises alarms. Collateral haircuts hover at zero or near-zero levels, with banks shouldering increasing risks. Astonishingly, the forward P/E ratio for the ‘Magnificent 7’ is just below average, signaling potential vulnerabilities.

The recent whirlwind in rate expectations adds another layer of uncertainty. In a span of six months, markets swung from anticipating four rate cuts in 2023 to expecting no more hikes and potential cuts starting in May 2024. The growing probability of rate cuts as early as March 2024 further intensifies the turbulence. Futures, in turn, are experiencing unprecedented volatility, echoing the heightened fragility of the current financial landscape.

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