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The market turmoil that briefly wiped more than $1 trillion off Japan’s main stock index and sent shares of big-cap technology stocks tumbling has been blamed on a cocktail of factors, from the sell-off in the yen carry trade to fears of a looming U.S. recession.
But for those who managed to manage the crisis, the crisis was determined by a seasonal peculiarity of the workplace: summer vacation.
Senior investors scrambled to respond to the global sell-off from their holiday homes, and junior traders struggled to keep up with the chaos that unfolded as markets plunged and then recovered this week. Those stuck at their desks said a lack of liquidity — the volume of money moving around global financial markets, slowed by staff shortages during the holidays — worsened the market turmoil.
“It was a perfect experience volatility “A worst-timed event… If everyone is out for the summer and you don’t have enough liquidity when something like that happens, you’re in big trouble,” said Dan Scott, head of Vontobel’s multi-asset boutique. “Everyone was stuck in the same trades and suddenly we had a paradigm shift.”
The few traders who had not yet soaked up the sun in warmer climes – and were able to answer calls from the FT – described frenetic scenes in offices on Monday as Japan’s Topix index suffered its biggest sell-off since October 1987.
“An acquaintance of mine was going to watch field hockey at the Olympics on the Eurostar,” said a merger arbitrage trader who asked to remain anonymous. “He went into the tunnel and had no connection just as the contagion was spreading. The Eurostar’s Wi-Fi or lack thereof probably cost him millions of dollars.”
The phenomenon of the August slump in the workplace – when productivity falls as temperatures rise, schools close and staff go on holiday – is familiar across many sectors. In hospitals, some studies They suggest that mortality increases in midsummer, partly because doctors are on leave and newly graduated doctors start working on the wards.
In the financial arena, staff shortages and a lack of liquidity in August, which bring with them increased volatility, have become a fact of life. But there is some data to back up the clichéd advice to “sell in May and get out.”
A study of 51 stock markets by academics from Princeton and Columbia “confirm[ed] a widespread belief that stock turnover is significantly lower during the summer because market participants are on vacation.” Returns were also lower. Other Liquidity changes linked to national holidays, including the negative returns preceding them, are referred to as the “holiday effect.”
Looking ahead to MondayAccording to Citi analysts, historic liquidity losses in US Treasuries were “evaporating from markets across all assets.” The group said in a note to clients this week that buy and sell orders in the Treasury market were being filled at 30 percent of the usual depth. Illiquidity “is even more extreme” in US Treasury bond markets. actionsthey added.
“The summer effect is big,” said Rich Rosenblum, co-CEO of cryptocurrency market maker GSR, who added that listings for new altcoins are at multi-year lows. “If we had 10 listings this week, I’d call some of my guys and girls back from the summer to help out. But we don’t have any listings.”
A junior trader at a US hedge fund told the FT that his manager went on holiday, leaving him alone to deal with some of the worst market turmoil in years, including managing severe losses.
An out-of-office reply from a trader at a major European bank included a photo of American hip-hop artist Snoop Dogg with a horrified expression (sunglasses on his head in shock) and the text: “Me coming back from vacation and watching the market open.”
Guy Stear, head of developed markets strategy at Amundi, said “one should be a little wary of violent market moves” in the first week of August.
Analysts say a number of complex factors – from carry trade divestment to geopolitical uncertainty and disappointing tech earnings – have been responsible for dampening investors’ risk appetite. However, the scale of the market moves “may be as much to do with the lower liquidity we see at this time of year as it is with the scale of any readjustment in sentiment or economic outlook,” said Oliver Blackbourn, portfolio manager at Janus Henderson.
A stockbroker at a Japanese investment bank said several of his colleagues had cancelled vacations planned for next week. Others described a charged office atmosphere as colleagues who had disconnected over the summer reconnected with work. “We have an internal call every day, usually about 100 people join. [On Monday] “In August we had 300,” said Max Kettner, chief multi-asset strategist at HSBC. “That says something about the mood at the moment.”
But there were moments of calm elsewhere. One currency trader at a major European bank said his desk was “actually not that busy” even as bond and risk asset prices swung wildly.
“Unless there is a risk and it goes away, people tend to just sit back and watch on days like that,” they said. “Otherwise, it’s like trying to catch a knife that falls to the ground.”
Additional reporting by Nikou Asgari in London, Leo Lewis in Tokyo and Arjun Neil Alim in Hong Kong
Join US chief financial commentator Robert Armstrong and his FT colleagues from Tokyo to London for a subscriber webinar on 14 August (12:00 BST/07:00 EST) to discuss the recent trading turmoil and where markets are headed next.. Sign up for your subscriber pass at ft.com/marketswebinar and ask our panel your questions now.