Before U.S. equities started slumping, some Asian and European issues managed to hold up. But as the former felt the malaise, almost all risk assets started falling. Why is this? In essence, we think it’s because of a combination of the following:
- ETFs are not as prevalent in Asian and European markets. Therefore, strong performing equities managed to keep rising. However, as holders of U.S. domiciled ETFs were either forced, or frightened to sell, all equities included in U.S. ETFs started falling—and let’s face it, with the amount of ETFs trading, almost all global small to large cap equities will be affected in a sell-off. Although ETFs have benefited all investors, it now stands clear that they provoke almost binary equity market movements; everything is either moving up, or down.
- Bitcoin and other crypto assets were also unaffected until U.S. equity markets started falling. Since crypto assets aren’t a part of equity ETFs, the only plausible explanation—if one is needed—is that forced liquidations are occurring. This stands clear as the dollar has shown weakness in line with the broad crypto market. This also strengthens our thesis that Bitcoin is only a safe have asset under certain circumstances.
To this, we can add the slump in U.S. treasuries, which may provide an explanation to who’s left holding the bag. Since both bonds and equities have fallen at the same time, it may be revealed that risk parity strategies are imploding. The same is most likely the case for funds shorting volatility. For the latter, the following interview with Artemis Capital's Chris Cole comes highly recommended.
Finally, since institutional ownership of crypto assets is still quite small, even the tiniest avalanche of contagion should affect crypto assets.