BofA Warns of Volatility-Shock Risk Due to Market Fragility

  • ‘Markets won’t escape economic reality,’ Saksena says
  • Strategists suggest a Russell 2000/S&P 500 volatility trade
Photographer: Michael Short/Bloomberg
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Investors need to guard against violent price swings as markets become increasingly fragile, according to Bank of America Corp.

Fragility has increased due to high-frequency traders shutting down machines as stress rises, which hurts liquidity, as well as by trend-chasing among investors reaching for better returns “against their better judgment in a world addicted to the central bank put,” BofA strategists led by Nitin Saksena wrote in a note May 19. That’s also created “a massive log-jam for liquidity” when things go sour, as players with little conviction rush for the exits, they said.