Get used to whipsawing equities markets. A 17 per cent sell-off in European stocks in the first six weeks of the year has now turned tail: the region's blue-chip STOXX Europe 50 index is now close to where it started. With sell-side market-making restricted and investors bruised, further bouts of the jitters look likely.
The plunge made enough sense in the early weeks of the year. Financial stocks and commodities firms experienced the most extreme price swings. A move to negative rates by the Bank of Japan at the end of January heightened investor fears over the ability of banks to create economic value, given that tougher capital rules and endless misconduct fines had depressed returns. For oil and mining stocks, hedge funds' short-selling intensified a dramatic selloff and subsequent rebound in shares: Glencore and Anglo American, whose shares were both hammered in 2015, have more than doubled in price since January 20 - while the FTSE 100 index, of which both are constituents, is up 9.5 per cent.
The broader market instability is trickier to pin down. It can be divided into the temporary and the permanent. In the first camp is the fact equity investors are sitting on their hands: European fund managers' cash holdings as a proportion of their overall portfolios haven't been this high since 2009, reckons Bank of America Merrill Lynch. The WisdomTree Europe Hedged Equity Index, which tracks European equities but hedges currency effects, hasn't seen daily inflows since December 2, according to Credit Suisse analysis on March 11.
Wary investors might come back, which would be good for equity markets. But longer-lasting changes to markets argue for more uncertainty. High-frequency trading accounts for about a quarter of total equities turnover in Europe, according to the Australian Securities & Investments Commission. Indiscriminate selling by computers can exacerbate market moves.
Equally, the US ban on proprietary trading by investment banks has lessened their ability to provide support to clients by buying their stock. One equity strategist estimates broker-dealers can take no more than a quarter of the risk they once could. Investors are used to complaints that fixed income markets are being starved of liquidity. Now equities are following a similar path.
The plunge made enough sense in the early weeks of the year. Financial stocks and commodities firms experienced the most extreme price swings. A move to negative rates by the Bank of Japan at the end of January heightened investor fears over the ability of banks to create economic value, given that tougher capital rules and endless misconduct fines had depressed returns. For oil and mining stocks, hedge funds' short-selling intensified a dramatic selloff and subsequent rebound in shares: Glencore and Anglo American, whose shares were both hammered in 2015, have more than doubled in price since January 20 - while the FTSE 100 index, of which both are constituents, is up 9.5 per cent.
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The broader market instability is trickier to pin down. It can be divided into the temporary and the permanent. In the first camp is the fact equity investors are sitting on their hands: European fund managers' cash holdings as a proportion of their overall portfolios haven't been this high since 2009, reckons Bank of America Merrill Lynch. The WisdomTree Europe Hedged Equity Index, which tracks European equities but hedges currency effects, hasn't seen daily inflows since December 2, according to Credit Suisse analysis on March 11.
Wary investors might come back, which would be good for equity markets. But longer-lasting changes to markets argue for more uncertainty. High-frequency trading accounts for about a quarter of total equities turnover in Europe, according to the Australian Securities & Investments Commission. Indiscriminate selling by computers can exacerbate market moves.
Equally, the US ban on proprietary trading by investment banks has lessened their ability to provide support to clients by buying their stock. One equity strategist estimates broker-dealers can take no more than a quarter of the risk they once could. Investors are used to complaints that fixed income markets are being starved of liquidity. Now equities are following a similar path.