Goldman warns machines will ugly up the next selloff — but here’s your silver lining
A week that started out pretty fabbo is quickly turning pear-shaped, as the geopolitical roller-coaster gears up to take stocks on a second-day ride lower.
“With earnings mostly over, the market is being driven on every little piece of news. And with pre-Memorial Day holiday volume lightening, it doesn’t take much selling to drive stocks lower,” notes Peter Schultz, notes chief strategist at The Winning Secret newsletter.
Not a bad time, then, to take a look at whether the market’s itchy finger is jerked by emotion or machines. That’s a point driven home by our call of the day from Goldman Sachs, which says computer-driven trades could amplify the next selloff.
In a note to clients that’s making the rounds, Goldman delves into the topic of flash crashes — like one in February and another in August 2015 — that have been blamed mainly on programmed trades.
Goldman’s analysts question whether asset classes that have seen big growth in algorithmic trading — such as grain, crude oil and equities — can hold up in moments of heavy stress.
“The fact that even some of the biggest, most heavily traded markets appear vulnerable to flash crashes provides plenty of ex-ante reason to worry that these small cracks in the foundation may betray deeper structural issues that have simply not yet been exposed,” writes Goldman’s head of global credit, Charles Himmelberg, in the note.
As Himmelberg notes, high-frequency traders, or HFTs, “know the price of everything and the value of nothing” — and that means they miss the nuances of what a monetary policy meeting means for the market.
The danger is once HFTs start pulling liquidity out of the market, others follow, and then it gets ugly. And as Goldman points out, it’s not clear who will step into provide liquidity when the market needs it most. (Certainly, central banks seem less keen, these days.)
Is there a silver lining? As the bank’s analysts point out, financial innovation has helped improve market liquidity. But they caution that investors must be on guard for the costs it brings, such as trading fragility.
The author of the Heisenberg Report, which published extracts of the note, gave it a good going over. Here’s the verdict:
“There’s no need to worry about trying to keep a running tally of everything that can go wrong. The doomsday crowd is all over that and especially as it relates to HFT. In fact, we’re just lucky the tinfoil hatters let the rest of us get a word in edgewise — if only so they can point to it and say ‘I told you so.’”
The marketDow YMM8, -0.76% and S&P 500 futures ESM8, -0.66% are deep in the red, with Nasdaq-100 NQM8, -1.00% NQM8, -1.00% also signaling a tough start for techs. That’s after the Dow DJIA, -0.72% , S&P SPX, -0.31% and Nasdaq COMP, -0.21% finished lower on Tuesday.
The dollar DXY, +0.54% is rising, but haven demand is driving up the yen USDJPY, -0.82% while the Turkish lira USDTRY, +3.8658% is hitting fresh record lows. Crude oil US:CLM8 is also pulling back.
Asia ADOW, -0.86% had a bumpy session, while European stocks SXXP, -1.07% are dropping away from 4-month highs after downbeat economic data.
See more in Market Snapshot.
The buzzTiffany TIF, -0.97% is jumping on blowout results, and Target TGT, -1.82% is going the other way after a profit miss. Lowe’s LOW, -1.88% is rising on an upbeat outlook.
Political and geopolitical worries are still rumbling. Trump dropped a hint last night that his administration would be submitting “something very special” on tax cuts before November.
As China/U.S. trade relations skate on thin ice, there’s more trade strife brewing. Trump is reportedly looking at a 10% cut in EU steel and aluminum exports when the tariff exemption runs out, while a U.S.-EU clash is building over Airbus subsidies.
Reports that Kim Jong Un is worried about a coup back in North Korea while he’s yukking it up with Trump just lessen the likelihood of the June summit. Meanwhile, the White House says it had nothing to do with that commemorative coin.
Wynn Resorts WYNN, -0.15% shareholders voted against an exec compensation plan, months after founder Steve Wynn quit amid sexual-misconduct allegations.
A unit of Foxconn 2354, -0.95% , which assembles Apple AAPL, -0.25% iPhones, plans to raise $4.25 billion in what could be China’s biggest IPO since 2015.
The minutes of the latest Fed meeting are in the economic spotlight. Ahead of that, we’ll get readings on manufacturing and services activity and new-home sales.
Check out: Why the Fed may float new ideas to market in its latest minutes
The chartU.S. consumers may be reining in their spending and facing tougher times, going by our chart of the day. By Bianco Research (h/t The Daily Shot), it lays out indicators of search activity on Google.
It shows a rise in Google searches — to a level not seen since 2008 — for terms such as “bankruptcy,” “chapter 7” and “payday loans.”
Random readsStacey Abrams may go on to make history as the first black woman elected state governor, after she won Georgia’s Democratic primary.
The great Pulitzer-prize winning author Philip Roth, dead at 85.
Yrs ago, my dad ran into Philip Roth on the UWS and told him: “I love you.” 2 yrs later, my dad runs into him again and apologizes for the burst of affection and Roth, w/o missing a beat, says: “I’ve been waiting for that apology for 2 years.” May his memory be a blessing.— Rachel Lauter (@RachelLauter) May 23, 2018
U.S. government employee in China may have been hit by a sonic attack.
Surviving a Hawaii volcano lava bomb.
Two lynxes arguing on the side of the road. Just about everyone can relate.
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