* Timing, market positioning added to sharp market moves
* Any lull may only last until non-farm payrolls on Friday
* Volatility begins path to long-term average
By Simon Jessop
LONDON, June 28 (Reuters) - U.S. Federal Reserve Chairman
Ben Bernanke may have lit the touchpaper on the market rout of
recent weeks, but some of the fuel was rather prosaic.
The sharp financial market swings caused by his comments on
May 22 about scaling back monetary stimulus were compounded by
seasonal and other factors that should be absent in early July,
even as the panic over an early end to stimulus subsides.
Among them were the need for some fund managers to make
forced changes to their investments to align with their
benchmarks, mid-year hedge fund redemptions, and a step back
from over-exposure to popular trades.
Together they stirred up many billions of dollars throughout
markets and that drove volatility higher, even without the
There is no argument, of course, that Bernanke's and other
Fed comments had a huge impact. Euro zone stock gains, for
example, were wiped out for the year.
But the desire of many funds to take money off the table,
either to park it on the sidelines before starting again in the
second half or to return cash to investors, added to the
"A lot of the disruption... has been caused by the hot
money," said Stephen Walker, head of equities research and
market strategy at Ashcourt Rowan, which manages 1.5 billion
pounds ($2.31 billion), referring to hedge fund trade strategies
that are often more nimble.
"We've had a very rapid (market) adjustment and it coincides
with fairly large hedge fund redemptions at the end of this
month. Hedge funds... were quite big net sellers this month."
One reason, according to data from hedge fund administrator
SS&C GlobeOp, was an increase at the half-year mark in the
amount of money investors asked to be withdrawn.
In the meantime, many trades were becoming too popular, with
a huge demand for assets such as U.S. Treasuries, and emerging
market and peripheral euro zone debt. So when the stampede to
the exit began, it was more unruly than might otherwise have
been the case.
"Bernanke's speech was really just the match that lit the
flame. When you look at the positioning that we had in the
markets and the excessive amounts of carry trades, it was an
accident waiting to happen," said David Keeble, global head of
fixed income strategy, at Credit Agricole.
Using the quarter- and half year-end period to book profits
and reduce risk made a lot of sense, Guillermo Felices, director
in Asset Allocation Research at Barclays, said.
Among those doing so were funds that had to. Many buy and
sell assets at the end of a defined period, usually the quarter
or half-year, so that their holdings more accurately reflect the
benchmarks against which their performance is judged.
Others, such as tracker funds, needed to buy and sell as a
result of changes to indexes by providers like FTSE. Such a
process, called rebalancing, can result in trades totalling
hundreds of billions of dollars globally, although the actual
figure is not precise, a London-based portfolio trader said.
"You'd expect to see a lot of that rebalancing trade done at
the end of the month. The fact that, so far, volumes have been
light, suggests a lot was done earlier in the month, after the
Fed comments," he added.
Central bankers across the world have sought to soothe
markets, suggesting any end to stimulus is a long way off. It
has worked to some extent, but that does not mean a return to
the way things were.
Stephane Deo, global head of asset allocation at UBS, said
that the Fed stimulus, which pumped money into the financial
markets, killed volatility. That has now been reversed.
"The volatility we've seen since the announcement has been a
little bit excessive, but we're entering a phase of greater
vol," Deo said.
Stock market volatility on the U.S. Standard & Poor's 500
is up 30 percent since Bernanke spoke, and could
well return to its long-run average of around 20 from its
current 17, Deo said, a potential 50 percent rise from end-May.
Volatility in the currency markets, meanwhile, as measured
by one-month expectations of movement in the euro/dollar rate
has risen from a December low of 6.3 percent to 8.4
(Additional reporting by Anirban Nag, Francesco Canepa, Ana
Nicolaci da Costa, Atul Prakash, Toni Vorobyova, Marius Zaharia,
Richard Hubbard and Alistair Smout; editing by Jeremy Gaunt)