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  • It's the time of year for learning from mistakes.

  • Luckily, lots of people made lots of them in markets in 2018.

  • So what did we learn?

  • 1. What goes up...

  • Yes, this is an obvious point, but it suddenly seemed to take a lot of investors by surprise, that markets can go down, as well as up.

  • Two big shocks in 2018 drove this home.

  • One in February, when the Vix index tracking expected volatility went haywire, delivering a heavy blow to the S&P 500 that fanned across other assets.

  • And one in October, sparked by a mix of higher interest rates in the US, and cracks in big tech.

  • The latter was initially written off as a blip, but recoveries through November and December have proven fleeting.

  • Brace for more volatility in 2019,which some investors have described as the year of the bull, the, bear and the kangaroo.

  • 2. The hedges don't work.

  • So, it's OK, though, right?

  • When stocks and other so-called risk assets hit the skids, you can always fall back on government bonds and have currency, surely.

  • Well, not this year.

  • Correlations that typically hold fast have fallen apart and no one is quite sure why.

  • Government bonds, notably in the US, have dropped out of long-held ranges.

  • And the Swiss franc and yen, usually mechanical beneficiaries in times of stress, failed to climb.

  • This has been a nightmare for many hedge funds and other investors.

  • The most plausible explanation I've heard for this breakdown in reliable patterns is that the power in trading has shifted away from banks.

  • The muscle memory employed by traders on trading floors is just not there any more.

  • That leaves other funds and high-frequency traders to fill the gap.

  • And with fresh eyes, it's always been tough to see why the yen, for example, plays that role.

  • Easy fallbacks are just so 2017.

  • 3. It's the politics, stupid.

  • Never have political consultants been in such high demand among investors.

  • Hedge funds that correctly predicted the election of a maverick new coalition government in Italy made a fortune on the subsequent collapse in Italian government bonds.

  • Turkish politics, no stranger to drama, generated a full-blown currency crisis.

  • The plot of the Brexit soap opera meanwhile, has become so baffling that many overseas investors are simply staying right out of sterling markets.

  • The smart money says sterling is heavily undervalued at this point, but until the politics clears up, it's impossible to put money behind that view.

  • 4. From QE to QT.

  • And finally, after a decade of quantitative easing from central banks, we're shifting to quantitative tightening.

  • Turning off the stimulus taps, in other words.

  • Has the Fed raised rates too much already?

  • Will it hit the brakes?

  • How bumpy will the US landing be?

  • In Europe, investors almost unanimously believe the withdrawal of support will be smooth and well-managed.

  • With such widespread confidence, what could possibly go wrong next year?

It's the time of year for learning from mistakes.

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B1 UK FinancialTimes volatility politics government sterling quantitative

2018: four lessons from the markets

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    Jessieeee posted on 2019/01/02
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