“Top-line market volatility has indeed declined but remains high relative to history. In fact it would have to go down another 30 percent just to get to the long term median level,” said Melissa Brown, global head of applied research, Qontigo, in an email.
“In addition, the ‘new’ market risks remain, as we see a lot going on under the surface. For example, the volatility of a number of countries, currencies, industries and style factors remains elevated relative to a longer term history, although they have all come down since the market bottomed in March … On the positive side, asset correlations have fallen, indicating that the market is less worried about all stocks being impacted by the crisis.”
Esma recently reported a thread of new risks emerging from coronavirus, including a high rate of settlement fails and price uncertainty for funds. And while fragile market liquidity was experienced at the start of the pandemic, liquidity challenges for low volatility net asset value (LVNAV) funds have emerged over recent months, Esma economists said during a webinar last week.
“Some parts of the EU money market fund industry also experienced a lot of stress, in particular LVNAV money market funds (MMFs),” said Antoine Bouvert, senior economist, Esma during the webinar.
“What happened is on the liability side there was redemption from investors and they wanted to raise cash and on the asset side, the money market instruments in which those funds invested became quite illiquid, which means that those funds were only to serve as assets at deep discounts.”
But some vendors are sceptical of market liquidity remaining fragile. According to Mika Mustakallio, CEO, MORS Software, liquidity is often a cover for deeper issues.
“Liquidity is a funny animal because everybody talks about liquidity and most often, something happens and yes, you could say that liquidity stopped, but mostly there is actually something else behind it – that your risk position is off, or you’re not credit worthy suddenly and nobody borrows to you,” says Mustakallio.
“Liquidity is actually the mask or disguise to hide some other problems.”
According to Mustakallio, banks and asset managers should focus on risk assessments to temper volatility.
“It’s really difficult to predict macroeconomic aspects of coronavirus: growth, pension money, levels of interest rates, market liquidity,” he says.
“But then the prudent way of handling a bank, a prudent way of taking care of your customer investments, a prudent way of ensuring that you have your risks diversified and you have a certain level of limits in banks or central banks that you can cash some of the securities in and get cash money if there are some unexpected inflow pauses or breaks; from that point of view I think banks should check these ad hoc situations and be able to be prepared for and have buffers on those.”