JPM Quant: Fed Could Turn Risk Sentiment Off

Get use to volatility…
Bullion.Directory precious metals analysis 16 December, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Twitter @Lemieux_26

Marko Kolanovic, head of quantitative and derivatives research at JP Morgan, has an uncanny ability to call out impending turns in the market. While on CNBC’s Fast Money, yesterday, Kolanovic said that if the Federal Reserve rubs traders the wrong way, risk sentiment could take a hit.

“You could actually have a big risk-off event if the pace of the hike is too fast,” said Kolanovic. This is very probable and is why Fed Chair Janet Yellen is trying to calm markets by saying that the rate of monetary tightening will be slow. Moreover, many traders are calling it a “dovish” hike because they are assuming the Fed is going to hike the Fed funds rate once then continue to be extremely accommodating.

In regards to hiking rates, Kolanovic said “when you gradually decrease the temperature below freezing point, a complex system does not have to respond gradually.” The JPM quant hints that traders could be underestimating the potential for havoc following a rate hike.

In “The Fed is Data-Dependent and Is Why They Won’t Hike,” I suggested that if Yellen & Co. were truly data-dependent, they would not hike. There is no basis based on numerous economic data points. Could the Fed boost rates by 25 bps today? Of course they can. But, my thesis is that if rates do increase, the Fed will quickly regret it.

Kolanovic agrees. He believes that market volatility will only worsen throughout 2016, and the lack of market liquidity (hello, junk bonds), will push volatility even higher.

Although Kolanovic’s research is much more technical, we both believe the market will soon undergo a sharp mean reversion.

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