Switzerland’s surprise announcement in January that it was scrapping the Swiss franc-euro peg sent the market into turmoil. The franc subsequently soared and euro share prices plummeted with greater velocity than a pro Alpine skier. On 13 March, the Bank of England (BofE) warned that there is more of that type of unexpected jolt to come, although it is hard to pinpoint where from.
Short, sharp shocks
As investors trade in increasingly volatile markets globally, Chris Salmon, Executive Director for Markets at the BofE advised that the City be cognisant of trembles in the market and on the lookout for “short, sharp shocks” that could throw recovery off kilter.
Citing
Chris Salmon’s speech,
Here Is The City started by reassuring the financial services sector that “markets stabilised over the following weeks to avoid contagion to other markets” in both the Swiss franc-euro quagmire and the Greek bailout debacle, when it initially flared up.
However, the article echoed Salmon’s graver caution that “this may not be the case every time” and that “financial markets may not have been truly tested for the ability to absorb price moves or flows that persist for a prolonged period, or for a wider spillover between markets.”
And then came the real warning: “Market participants take heed.”
Here Is The City article
Known unknowns
In a similarly cautionary tone, CNBC’s interviewee Bill Blain, a strategist at Mint Partners in London, expressed his concern about a host of dormant “known unknowns.” In other words, “we know [events are] going to happen, but we don't know how much pain [they’re] going to create.”
Blain pointed out that potential shocks are better disguised in today’s increasingly complex and distorted financial system, rather poetically summing up his point by adding: “The unexpected consequences of a feather falling in Hong Kong causing an ice age in Europe are getting harder to predict.”
CNBC piece
Living on the edge
Thankfully,
Investment Week’s contributing author Richard Jeffrey, Chief Investment Officer of Cazenove Capital, adopted a slightly less doom-and-gloom attitude. Admittedly, Jeffrey described the current climate as one where investors are “living on the edge,” with “a persistent fear things might be about to take a turn for the worse,” but he enthused that investors are nonetheless “hoping that we are on the verge of something rather more energising.”
And he believes they are right to do so, at least to some extent. “The good news is a substantial amount of the damage done during the recession has been mended – either completely or partially.” Of course, this does not negate the potential for those pesky short, sharp shocks that Salmon vehemently warns of. So for now, in chorus with Blain and Salmon, Jeffrey concedes: “Those memories of an ever-sunny summer will become more and more distant.”
Investment Week opinion
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