The Bear Bellowing Louder: Are We Approaching A Flash Crash?

Life is all about falling down and getting up. Economics, unfortunately, ignores such diktats of life. Thus when the price of a commodity starts falling, it can quickly spiral out of control. This could even lead to a disastrous “flash crash.” This is a rapid decline in prices usually within an extremely short time frame which is usually due to automatic trades executed by black-box trading when combined with high-frequency trading. This interconnectedness has wiped off trillions of dollars in the past. Now economic analysts are worried that there is one on the horizons.

These are people working at the Bank of America Merrill Lynch who have made the foreboding predictions. According to them, the recent instability in the cryptocurrency and oil markets might be the forerunner of more bad news. In a recent report they noted that due to increased volatility across multiple asset classes, coupled with the deleveraging that has been overseen in the oil markets over the past few weeks, there are alarming indicators of a looming “flash crash” in markets

Reportedly, while speaking to Reuters an analysist warned:

“Ingredients of flash crash rising … bond, FX, equity volatility all trending up, vicious deleveraging events, dislocation risk via abnormal spreads, triggers could be violent U.S. dollar move and/or shock macro data forcing abrupt GDP and earnings downgrades.”

A crazy dash for the bottom, on the 14th of November, saw the price of Bitcoin (BTC) nosedive from around the 6400 mark to a shade over $5,500. As expected this has shaken the entire industry and the total market capitalization of all cryptocurrencies tumbled to about $175 billion. This extreme unpredictability caught many off-guard. In fact, the BTC volatility rate exceeded all indexes since the massive slump back in April this year. Similarly, crude oil had a torrid time as well. It has now hit an eight-month low, with a reported one-day fall that was the worst in over three years. As a result, this is the first time in over 2 decades that cash has outperformed stocks and bonds.

At the moment over a $100 billion has flown into equities while a further $60 billion has found its way to money market funds and bonds. This is when there is a simultaneous outflow from various corporate bond funds, which lost a total of $4 billion. This is yet to seriously impact high-yield corporate bonds and the U.S. dollar. In fact, the forecast is for the U.S. dollar to be great again and continue its steady recovery from 2015, till the first quarter of 2019.

At the moment no one is sure what caused such a panic sell. Soichiro Tsutsumi , a trader at eWarrant Japan Securities K.K. in Tokyo, has noted that the loss of $6,000 support is deeply disconcerting as a lot of industry players have a “business models reliant on a client pool.” Rob Sluymer, another analyst says that whatever the cause, this collapse means that the crypto markets are, at the moment, set up into a “deeply oversold” area. He further warned that “longer-term technical indicators aren’t so favorable.” The forecast for the future is the only silver lining. He feels that Bitcoin will undoubtedly fight back and “support a multi-month rally.” The question still remains how quickly can the market and the industry shrug off the damage dealt this week.

The market is a cruel mistress, yet after the freefall on the 14th, the prices of BTC has relatively stabilized. The small downturn would no doubt plateau after the aftershocks subside. This is certainly a time to lay low and look at the long position.

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