J.P. Morgan said Wednesday research by its interest rate analysts suggests the market volatility since Aug. 14, when the yield on the 10-year Treasury note dipped below the 2-year yield, and the Dow Jones Industrial Average
tumbled 800 points, has been cause more technical than fundamental. Marko Kolanovic, J.P. Morgan’s global head of quantitative and derivatives strategy, said “more than half” of the recent move in interest rates and inversion of the yield curve was caused by technical drivers, including convexity hedging of mortgages, bank portfolios and variable annuities in poor liquidity conditions. Meanwhile, “more than half” have also been driven by “systematic” rather than fundamental trading, Kolanovic said, as he estimates about $75 billion in equity flows was a result of programmatic selling in a low liquidity environment, comprised of index option hedging, trend-following strategies, volatility targeting strategies and other products, such as levered and inverse ETFs. Kolanovic said that, plus the low equity positioning by hedge funds, is “positive for equity performance going forward.” The Dow rose 226 points, or 0.9% in afternoon trading, and was down just 0.3% since just before the Aug. 14 selloff.
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