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Hardy: How to trade the aftermath of the 'flash crash'

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After a dramatic sell-off across both US and European equities, the markets are looking for direction as investors try to make sense of the wreckage. John Hardy, Saxo Bank’s Head of FX Strategy, provides his perspective on yesterday’s ‘flash crash’ and offers insight on the cause of yesterday’s volatility.

Multiple factors contributed to yesterday’s sell-off according to John, but the main cause may have been a lack of volatility, ironically. During periods of low volatility the markets can become lopsided as investors all shift towards one side of the deal, creating an opportunity for extreme volatility as the market adjusts to more balanced levels. Panic could have also been stimulated by psychological factors such as the US Federal Reserve’s upcoming rate hike and the recent Ebola outbreak.
 
To gauge whether this 'flash crash' is behind us or not, John is looking to the Russell 2000 as a barometer. This index diverges from the other broader market indices and did not experience the same levels of volatility as the S&P 500.