"Do not trade on headlines"

Monday was a perfect example of why Macro Man likes to keep a "DO NOT TRADE ON HEADLINES" sign near his desk.   Having a visible reminder of this precept provides a powerful behavioural anchor to act in the desired manner, and desirable it is for his particular brand of macro.   After all, if the ISM can only properly release their monthly survey on the third try, what's the point of reacting every time a red headline hits the Bloomberg screen?   In any event, the Algo-bots can obviously react more rapidly than any human, so by trading on a headline you're just giving them a chance to take profits quickly.   No thanks.

It's only been a few days, but the Shift-F9 button on Macro Man's keyboard is already looking a bit worn.  It's been 35 trading days since the last 1% decline in the SPX, the longest streak since last August.  (If you're curious, that streak ended at 36.)

European CPIs duly underperformed consensus expectations on aggregate, let by a rather stunning miss in Germany (0.6% vs 1.0% expected.)  Strangely, Macro Man somehow doesn't think that the streets of Frankfurt will be lined with protestors this week, calling for the assembled ECB governing council tgo deliver badly-needed monetary easing.  After all, as Draghi himself pointed out a few months ago, low CPI means that Hansel and Gretel can buy more stuff with their hard-earned Deutsche marks euros!

That EUR/USD only retreated back to Thursday's closing levels would appear to suggest that the position is widely held, if perhaps not too deeply.  Given the performance gap at most macro shops in 2014, it's hard to see any position being held too deeply until the end of the summer.  Sod's law, of course, is that the long-awaited Abenomics: Part III trade will materialize while the market is in its current stasis; the much-ballyhooed GPIF asset allocation announcement is starting to get more and more press, a reliable sign of a building narrative.  An interesting question is how high USD/JPY can go before the market start to gets sucked in to forced buying.  Certainly by 104, though one would have to think that if we're >103 after payrolls then at least some demand would materialize.

Elsewhere, Macro Man ran some numbers today to check on a p.a. bet that he has on with a chap we'll call the Pocket Rocket, an equity derivs broker.   The gist of the bet was that Macro Man took the "over" on a 12% realized vol threshold for the SPX in 2014, with a steak dinner at, er........stake.  In late January it felt like the PR was almost ready to pay up early (was a sushi lunch an acceptable get-out price?), but he stuck to his guns.  As of Monday's close, the ytd realized vol has been 11.4%.

Frankly, given the relentless nature of the Shift-F9 rally over the last six weeks or so, Macro Man was gratified to see the number still so close to the bogey, because it certainly doesn't feel like the market can get much less volatile than it has been the last couple of weeks.

In any event, he thought it would be fun to run  a comparative analysis, looking at the calendar year realized vols since 1970.   For a little added spice, he highlighted the years in which a new chairman of the FOMC was appointed.    The results are set out in the chart below.


Somewhat contrary to expectations, years featuring new Fed chiefs tend to have lower-than-average SPX volatilities....unless the Fed Chairman's initials are "A.G.", of course.  Probably unsurprisingly, low-vol periods tend to cluster.  It it curious to note, however, that despite the most vol-suppressing monetary policy regime that we've ever seen, the last three years of realized SPX vol have actually been higher than those that culminated with Bernanke's appointment in 2006....and gee, didn't that end well?

The difference, of course, is that Bernanke ended a tightening regime, whereas Yellen (oh please, any deity that will listen!) will presumably start one over the next 12-18 months.   Depending on your perspective, that could either mean a further few years of low before policy "bites", or a rapid uptick in vol once a tightening turd gets thrown into the punchbowl.  Either way, the tightening headline, when it comes, will be one to anticipate rather than react to.


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Anonymous
admin
June 3, 2014 at 10:27 AM ×

Excellent post as ever.

SX5E 5d realised vol at 1! (yes 1!!!) Markets are dead.... Until they suddenly aren't. Everything depends on a bit of vol coming from the USTs, maybe FED updating the dots at June FOMC to provide that bit of movement? Otherwise it is going to be an extremely painful summer with the WC thrown in to really kill trading volumes.

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Macro Man
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June 3, 2014 at 12:45 PM ×

I'd say that there's a not-insubstantial chance that the dots get killed, which in the short run might withdraw another source of speculation, though in the longer run could serve to increase vol by removing an anchor for markets to price EDZ contracts.

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CV
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June 3, 2014 at 1:12 PM ×

Why the heck is EURUSD up on a 0.5% CPI print ... was that already in the price?! Colour me puzzled :)

Claus

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abee crombie
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June 3, 2014 at 1:47 PM ×

Good ol' Auto correlated Vol. How the VXX still increases shares is beyond me, also everytime I look back it seems like the greatest short ever.

But I'll look to credit spreads to see when the regime has truly changed.

I'm getting the feeling summer vacation trading might start next week and go into September

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Leftback
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June 3, 2014 at 2:45 PM ×

Silly season started weeks ago, Abee.

Massive short positions still out there in USTs. After ADP tomorrow there will probably be even more people piling into that ahead of the BLS number Friday, so you know what happens next.....

Lucy Moves The Football

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Retail Chump
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June 3, 2014 at 3:22 PM ×

The clock is ticking...
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2014/05/20140522_tick.png

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abee crombie
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June 3, 2014 at 6:07 PM ×

True LB, maybe the summer days already started.

But I wanna see the party on Thursday. Negative deposit rates, now that would be great!

And while I think Mario disappoints does that mean I really want to BUY the Euro (for a trade I guess) but from an allocators point of view that doesn't get me excited.

Topsy turvy regardless

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theta
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June 3, 2014 at 9:24 PM ×

Retail chump,
What would the conclusion be if you had looked at the same chart in late 2012? You may actually be able to find an old post with said chart (and accompanying commentary that proved disastrous/silly as the market ripped higher).
All this chart should tell you is that spot levels are negatively correlated with volatility. The causation is usually the other way around though than that implied by the chart, so there's no predictive value whatsoever.

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Retail Chump
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June 3, 2014 at 10:55 PM ×

@theta - Largely agree (the chart is from ZH and they do like their doomsday predictions). My point is purely that vol is mean-reverting (in the longer-term), and we're currently undergoing a severe vol compression phase in most fin markets with significant risk events ahead.

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theta
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June 4, 2014 at 7:38 PM ×

Yes, it does seem ZH type :-)
The funny thing is that if you extend it to the left, i.e.include the nineties, the mid cycle vol compression equivalent is circa '95. I wouldn't want to be short at that time and for the next five years. I'm not arguing for a late nineties style melt up but I'm just pointing out that vol compression has zero predictive power for future spot direction. Nor does it have for vol itself btw, because yes it will mean revert, i.e. vol will go higher, but buying vol here suffers from negative carry due to rolldown, which most likely will offset any Vega gains.

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