After decades of cheap borrowing due to ultra-low interest rates, the world’s largest hedge fund says that financial markets will now face volatility never seen before. The investment chief at the hedge fund Bridgewater, Bob Prince, believes that the market turmoil from last week will continue.
Prince believes that global markets currently suffering from a “shakeout” will continue to see outflows throughout the foreseeable future, which will cause even greater “shakeouts.” Prince believes investors and markets have become too complacent during the era of cheap borrowing.
In a report by the Financial Times, most major financial markets saw a huge selloff last week due in large part to rising bond interest rates. Many analysts also believe that trading strategies formulated by algorithms caused a big portion of the selloff.
Equity markets in the United States rallied late last Friday, which helped to ease some of the pain caused by the losses suffered earlier in the week. At one point during the week, the markets were trading at levels that have not been seen since the financial collapse of 2008. The S&P 500, which is the benchmark index for most investors, was down 5.2 percent for the week.
Volatility continues to remain high among most investors, and analysts speculate that more pain could be coming in the next few months. However, markets could regain some of their footing in the short term as investors consider that the overall U.S. economy remains fairly healthy.
With central banks hinting at tightening monetary policy, some analysts speculate that the free run investors saw in 2017 is over. With higher volatility and a higher interest rate environment, the U.S. will soon enter a new environment of macroeconomics, according to Prince. He also speculates that much of the turbulence in equity markets will occur toward the end of 2018, once investors start to cover their short volatility bets.