Week InReview
Friday | May 6, 2022
Video of the week.
Video: How asset bubbles form and what happens when they burst.
let's recap...
Federal Reserve Chair Jerome Powell says a 75-basis-point rate hike is not under active review. Photo: Bloomberg
A day after celebrating the Federal Reserve’s signal that it wouldn’t be making any jumbo-sized moves, traders woke up on Thursday deciding that the central bank will struggle to fight high inflation amid the lingering threat of a recession.

In a sharp about-face, investors sold stocks, bonds and cryptocurrencies on Thursday. The S&P 500 Index lost 3.6%, erasing about $1.3 trillion of market value, and the tech-heavy Nasdaq 100 dropped 5.1%, the most since September 2020. 

“The great puking that’s happening? I didn’t expect that,” Kim Forrest, founder and chief investment officer at Bokeh Capital Partners said by phone. “We live for the days where we’ve made people money – that’s our job – and it’s cold comfort that I’m losing people less money.”

The three major U.S. banking regulators said Thursday they a plan to rewrite much of the outdated regulations tied to a decades-old banking law designed to encourage lending to the poor and racial minorities in the areas where banks have branches. The stated aim of the overhaul of the Community Reinvestment Act by the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. is to “strengthen and modernize” the law and end years of uncertainty about its regulations for both the banking industry and advocates for traditionally underserved communities.
(Associated Press | May 5)

All of Wall Street should pay close attention. The Hwang case marks an upswing of federal investigations into a slew of suspected trading abuses. Three other broad inquiries have emerged in recent months to examine so-called block trades, short sales, and well-timed wagers. They all center on the same question: Are markets rigged? (Bloomberg Businessweek | May 4)

Powell vows to curb inflation with hikes
The Federal Reserve on Wednesday raised interest rates by 50 basis points for the first time since 2000 and Powell said similar moves were on the table for June and July. Fed officials – who also decided to start reducing their holdings of Treasuries and mortgage-backed securities next month – are trying to curb the hottest inflation since the early 1980s. (Bloomberg Markets - Economics | May 5) see also U.S. stocks close sharply higher as investors digest Powell's comments and Treasury yields fall after Powell downplays chance of 0.75 percentage point rate increase (The Wall Street Journal (May 4)

The Securities and Exchange Commission has begun questioning U.S. public companies on how Russia’s war on Ukraine has affected their finances. The regulator on Tuesday urged companies to provide detailed disclosure on their exposure to Russia, Belarus and Ukraine, from business relationships to supply-chain disruptions to their investments. (The Wall Street Journal | May 4)
Currency volatility nears pandemic levels
(Apr 28) — Currency traders anticipate policy makers will make mistakes and that is pushing expectations of future swings to the highest since just after the pandemic panic of 2020.

The JP Morgan G7 FX volatility index is 9.7%, the highest since April 2020. The bank’s measure of global volatility is also at spring of 2020 levels.

The rise in implieds coincides with a stronger dollar and rising credit risks as a Fed meeting nears. Greenback gains, while helping slow U.S. inflation, tighten financial conditions and can cause trade deficitsthat undermine growth. This is a problem for a Fed that wants to hike rates.

Free-floating currencies were once viewed as the great equalizer. But the link between the dollar and trade has broken down recently as countries source and invest locally and geopolitical tensions rise. Traders have also become accustomed to central bank interventions via quantitative easing.

In coming sessions, traders will get a bird’s-eye view of how governments and central banks deal with these problems. The Bank of Japan felt compelled to keep priming the pump. The PBOC is not far behind. Europe’s gas-supply issue will probably worsen over time unless peace prevails or rubles are bought. And the Fed has to juggle several balls to avoid stagflation.

Currency traders are buying options to not only cover short volatility or long greenback positions, but to hedge policy outcomes. This may help explain why bullish dollar skews have not moved as much as at-the-monies.

A measure of yen five-year volatility is 9.7%, highest level in four years, while one-year euro-yen volatility is 11.4%, the highest since the peak of the pandemic.

Source: Robert Fullem | Bloomberg Government
the cyber cafe
Illustration: Andy Rementer | Bloomberg
Nobody knows where the red line is for cyber warfare
The Soviet Union and the U.S. never used nuclear weapons on each other in large part because of mutually assured destruction. Cyberweapons are different. Cyberattacks by governments and private hackers have exploded in recent years. Many are financially motivated, but others involve espionage or, in several high-profile cases, sabotage of physical infrastructure. There’s broad agreement that at some point a cyberattack would be considered an act of war, but no one knows where the line is.

eMail espionage
Hackers are stepping up campaigns against corporate email systems in an effort to collect sensitive information about corporate development, mergers and acquisitions and large transactions, according to new research from cybersecurity firm Mandiant Inc. The advanced persistent threat group, which Mandiant calls UNC3524, dwells in systems undetected for weeks and months, mining messages and attachments, especially targeting individuals involved in sensitive company dealings. Mandiant researchers outline tactics and signs of compromise. 
— Mandiant

4 ways SEC's new proposed rules put cybersecurity front and center
  • Advisors would be required to conduct – and document in writing – periodic assessments of their cybersecurity risks and information systems.
  • At least annually, advisors and funds would need to review the design and effectiveness of their cybersecurity policies and procedures.
  • The proposed rules would require advisors and funds to protect more data and ensure that their information systems are adequately protected.
binge reading disorder
Photo: Beth Sacca | WSJ
Weird, loud and toxic: Deal with your co-workers' annoying quirks
They’re taking Zoom calls without headphones. They’re strolling over to your desk in sweaty gym clothes. And, yup, they’re microwaving fish again. Back at the office, the quirks suddenly seem louder, grosser and harder than ever to confront. Our tolerance for other humans has grown thin.

How companies can prepare for a long run of high inflation
Consumers, businesses, governments, and investors are particularly concerned about recent inflation news. Thanks to demand continuing to outpace supply and Russia’s attack on Ukraine and the West’s subsequent sanctioning of Russian goods and trade, inflationary pressures and supply chain issues are real and here to stay. It’s important to develop an in-depth understanding of these problems and create a gameplan to address these rapidly evolving challenges.

Beware the banter: How trading floor jokes can backfire
What might be passed off as a cheeky joke to a work colleague, could end up getting you or your employer sued. That’s according to new research from law firm GQ Littler, whose findings shine a light on the fine line between one person’s perception of an offhand comment and what is actually discrimination or harassment, with “banter” increasingly being used as a defense in legal proceedings to these kinds of allegations.
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