Machines driving a 'fire sale' is a top market risk in 2019, Deutsche Bank says
- Deutsche Bank listed an algorithm-driven, "fire sale in equities and credit" as one of its top risks to markets in 2019.
- "Monetary and fiscal policy are out of ammunition and the world experiences a Minsky moment," is also on the list published by the firm's chief international economist, Torsten Sløk.
- Other risks included slowing economic growth in China and Europe hitting the US economy, a yield curve inversion slamming equity and credit market confidence, and central banks around the world slowing - or ending - fiscal stimulus.
Looming Brexit uncertainties. A Treasury yield curve inversion slamming investors' confidence. Slowing growth in China and Europe contributing to a slowdown in the US economy and triggering a rise in the US dollar.
Those are some of the items Deutsche Bank listed as the top risks facing the market in 2019. The note, out Friday, came at the end of a wild week for the stock market which saw the S&P 500 close down 17% from its record high in September; the Federal Reserve's fourth rate hike of the year on Wednesday pounded stocks in the US.
Atop the 30-item laundry list of concerns from Torsten Sløk, Deutsche Bank's chief international economist, is the continence of a computer-driven, so-called "fire sale" in stocks and credit. He told Business Insider that although the list is in no particular order, his chief concern right now is algorithm-driven trading that produces stock-market moves to a degree that is not easily understood.
See also: Apple buys Tesla and a solar flare wipes trillions from the economy: 10 outrageous predictions for 2019
"There's just no consensus on why stocks are selling off the way they are," Sløk said in a phone interview on Friday.
In other words, the risk exists that the market is behaving in a way that is not reacting to fundamental drivers, but rather computer-driven moves. After all, Sløk said, he sees indicators like steady non-farm payroll numbers, rising ISM manufacturing and non-manufacturing data, and the Federal Reserve's own sunny short-term outlook as signals the economy is relatively solid.
"With that backdrop, you start leaning back and asking the question, 'Why is the stock market down 20%? Why are credit spreads so much wider?'" he said.
"And there are really no simple stories. That's why people begin to talk about algos selling off, risk-parity trades, other much more complicated explanations that essentially are explanations that can't be quantified and really can't be understood very well by financial markets."
In several places on his list, Sløk highlights slowing growth in China as a potential risk to the broader market, including the Chinese economy being "less and less responsive to stimulus." China's Shanghai Composite has fallen 23.94% this year as US-China trade tensions persist.
Another major theme across Sløk's list of concerns is the potential for weakening demand for fixed income investments as the European Central Bank and the Bank of Japan wind down their respective stimulus programs.
One item missing from his list? Risks related to cryptocurrencies, which was on Sløk's list of market risks (specifically, a "Bitcoin crash" impacting retail investors' confidence) for 2018.
Sløk's full list is below.
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