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Bridgewater predicts new era of volatility, risks of recession rise

Bridgewater predicts new era of volatility, risks of recession rise

The world’s biggest hedge fund has warned that last week’s bout of volatility is unlikely to be short-lived, with more to come as rates rise and the era of global quantitative easing begins to draw to a close.

In an interview with the Financial Times, Bridgewater co-chief investment Bob Prince said the turbulence seen last week was set to continue.

‘There had been a lot of complacency built up in markets over a long time, so we don't think this shakeout will be over in a matter of days,’ he said. ‘We'll probably have a much bigger shakeout coming.’

The US stock market last week was on course to suffer its worst five-day run since October 2008, but a late rally on Friday afternoon helped the S&P 500 pare losses to 5.2%.

Having stayed stubbornly low for over two years, volatility returned to the market last week. The Cboe Volatility index (VIX) spiked at almost 50 early Tuesday morning, before dropping off to finish the day at around 37. Over Wednesday it retreated to end the day at 25, on Thursday it peaked at almost 36, before dropping from a high of 39 on Friday to end the week at around 30.

Prince told the FT that volatility was likely to stay around, in part because central banks were starting to tighten the loose monetary policy that has defined the post-crisis economic landscape.

‘Last year equity markets had a free run. But this year we are going from central banks contemplating tightening policy to actually doing it,’ he said. ‘We will have more volatility as we are entering a new macroeconomic environment.’

Meanwhile Prince's co-CIO and the founder of Bridgewater Ray Dalio has said the US was further along the business cycle than he had thought and that he sees a growing risk of recession in the next 18 to 24 months. 

In a post published on LinkedIn Monday, Dalio wrote: 'Recent spurts in stimulations, growth, and wage numbers signaled that the cycle is a bit ahead of where I thought it was.'

He said the Fed's reaction the sell-off would be crucial, but that this was tricky period for central banks. 

'What we do know is that we are in the part of the cycle in which the central banks’ getting monetary policy right is difficult and that this time around the balancing act will be especially difficult... so that the risks of a recession in the next 18-24 months are rising,' he wrote. 

'While most market players are focusing on the strong 2018, we are focusing more on 2019 and 2020 (which is the next presidential election year). Frankly, it seems to be inappropriate oversight to not be talking about the chances of a recession and what that recession might look like prior to the next election.'

Market update

US stocks began the week positively following their worst five-day run for two years.

The S&P 500 finished last week down 5.2%, having been on course for its worst week since October 2008, which it avoided thanks a late rally in the afternoon of Friday, February 9.

This continued into early trading today, with the index rising 1.45% , climbing to 2,657.99. The Dow Jones Industrial Average was up 1.61% at 24,581.58, while the Nasdaq Composite rose 1.25% to 6,960.30, at mid-day trading today.

Global markets had been buoyed by the late rally in US stocks last week. In Europe the Stoxx 600 was up 1.17%, the UK’s FTSE 100 rose 1.19% and the Shanghai Composite 0.8%.

US markets were boosted by a strong performance in energy, with this sector of the S&P 500 rising 1.8%, as oil prices rose 1.1% to $59.87 a barrel.

The yield on US Treasuries moved down slightly from 2.862% on Friday, to 2.829%.

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