Volatilityandcompulsoryexplanations

After a rise of 4.5% on Wednesday, on Thursday Dow Jones plunged by 3.6%. So the explanations which were bandied for the Wednesday rise like Biden bump have not been able to hold for long. The spread of corona virus is again back as the prime reason for volatility in the markets.

The fact that the number of new infection cases rose in Wuhan and numbers in US were also on the rise appeared to have spooked the markets. The pertinent question is though that whether it warranted a 3.6% move.

 It appears that whatever is the move one thing is sure that the post facto explanation for the move will be readily available. It is sometime also possible that the same explanation can be affixed on completely different outcomes also. The most famous example of the same is given by NNT in his book The Black Swan. He writes that during the height of US war in Iraq when Saddam Hussein was captured, the US treasuries yields went up. On all the news websites the prompt explanation was pasted. With Saddam’s capture the “risk on” mood will be given a fillip hence the US yields are going up. On the same day in the afternoon when the US yields started going down, the same websites reported that Saddam’s capture will lead to increase in backlash by his forces hence it will lead to a risk off mood. US bonds hence is the right asset class to invest in. It appears that the urge to explain trumps over the reasoning faculties and logic many a times.

Domestically the big news was about a big Indian bank was placed under moratorium by the Central Bank on the fear of rapidly deteriorating the asset quality of the bank. There were limits put on the withdrawal by the depositors. The Indian stock markets which were already taking a red cue from the other Asian markets were impacted by this news.

Indian rupee in the morning trade breached 74 and is currently trading at 73.85. Other EM currencies are also under pressure. Euro, Pound sterling, Yen have appreciated against the dollar. Gold is trading near its near term high of 1680$/ oz. Brent oil is down below 50$/bbl. US 10 year yields are trading at life time lows of 0.82. Indian 10 year benchmark bond is trading at 6.17.

As was the case in Iraq war, our explanation for all the phenomenon are also ready.

Euro and Pound have surged as the carry possibilities against shrunk post the Fed cut. Yen, Gold and US treasuries are the safe havens. Oil is down on growth fears. EM currencies are down as the confidence crisis hits them. ZAR especially retreated as the first case of virus was recorded in the country. Indian yields are down as the expectation of some action by the central bank grows.