A Decline in Liquidity.

Market regime change.

1. Dramatic price swings in US financial markets have probably been exacerbated by a decline in liquidity, the Federal Reserve reported on Monday as it warned of a “higher than normal risk” that trading conditions will suddenly deteriorate. The US central bank’s warning on liquidity — the ability to buy or sell an asset without influencing the price — follows several frenzied months in US markets. A sell-off has wiped trillions of dollars off the value of stocks and bonds while closing the door on new share listings and raising borrowing costs for consumers and corporations. Conditions in Treasury, commodity and equity markets have been noticeably poor this year, with traders reporting that they have struggled to conduct even relatively small trades without influencing price. The Fed on Monday said the ability to buy or sell at prices quoted by broker dealers had “deteriorated” and was worse than should be expected given levels of volatility. It added that the decline in liquidity might be compounded by brokers and high-frequency trading firms “being particularly cautious” given the market conditions. (Source: ft.com)

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2. Emerging market currencies have fallen by their most since the early stages of the pandemic as a “toxic” mix of rising US interest rates and slowing Chinese growth dims the outlook for developing economies around the world. An MSCI gauge of emerging market currencies has tumbled by more than 4 per cent since early April as the Federal Reserve embarks on an aggressive tightening of monetary policy in a bid to rein in high inflation, boosting the US dollar while battering stocks and bonds. Draconian coronavirus lockdowns in China have piled on further pressure by threatening a crucial source of demand for emerging economies. The Chinese renminbi fell to its weakest level against the dollar in more than 18 months on Monday after data showed the country’s exports grew at the slowest pace in two years last month, spurring a further bout of selling across emerging market currencies. (Source: ft.com)

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3. Rather than trading at $1, as designed, the TerraUSD coin, or UST, slipped over the weekend to around 99 cents. By Monday evening in New York, it had plunged to 60 cents, obliterating its previous low of 92 cents in May 2021. It clawed back some of its losses as the evening wore on to hover at around 78 cents -- still solidly below its dollar peg, though, and a sign of trouble. What caused Terra’s coin to become untethered is a topic of intense internet debate. The disconnect happened alongside a sharp selloff in crypto-assets -- including a plunge in Bitcoin to below $30,000 -- and a broader retreat from risk assets including stocks. Whatever the catalyst, it’s no small thing: There are around 18.5 billion of UST in circulation, according to CoinMarketCap, a big enough presence that its swings could have systemic implications for other coins and protocols. “It’s fairly clear that there is a crisis of confidence,” said Kyle Samani of Multicoin Capital. He added that it was not certain whether UST would survive. That raises the prospect of the current turbulence snowballing into one of the biggest crypto blowups in recent memory. (Source: bloomberg.com, italic emphasis added)

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4. Robin Wigglesworth:

(T)here are signs everywhere that a pretty profound market regime change is upon us, and that people are only starting to grapple with the implications. The Nasdaq has now given up all of its 2021 gains, and many — like Loeb — believe that this is just the beginning of an epic shakeout, rather than the end. The most vulnerable are still-profitless companies that need the grace of equity or debt investors to stay alive. Loeb hints that many of the more speculative companies that relied on stock options to attract talent might already entering a death loop as the value of their equity withers. (Source: ft.com)