Beyond the Crypto Crash, a Big Squeeze Jolts Stock Markets Anew

Being glued to crypto news this week meant missing adventures in regular markets that while lacking the same high drama, made up for it in terms of money at stake.

In case you missed it, stock and bond traders spent the last five days still caught in the thrall of an event that may be hard to recall for people mesmerized by the collapse: Nov. 10’s inflation report, which ignited a short squeeze among traders expecting a worse number. Reverberations continued to be felt in terms of positioning, trading in derivatives and probably also in wrongly prepared portfolios.

As usual in 2022, the biggest venue of impact was the US stock options market, where trading volumes are smashing records as investors of all stripes rush into short-dated contracts to catch up. It’s creating snags for what had been billed as the great inflation trade, with the mighty dollar losing luster and technology shares reclaiming their long-lost leadership, at least briefly.

The recalibration was prompted when a soft print on consumer prices triggered a reset of the perceived path for Federal Reserve monetary policy. Exacerbating it are money managers who had cut equity exposure to the bone during the bear market and found themselves caught out. With almost everyone sitting on the same side of the trade and exiting at once, an already-turbulent market got weirder.

“Crypto is just part of a broader mosaic of an almost dysfunctional market,” Doug Fincher, hedge fund manager of Ionic Capital Management, said by phone. “Not to be cynical, but look at CPI last Thursday. It was two basis points better than expected, and the market exploded. There’s a massive amount of technical factor rotation. There’s just a lot of crosscurrents in a really volatile, strange market.”