The streak is dead.
It took red headline flashes of another downed Malaysian aircraft (this time by bad dudes), military action in the Middle East, and the White House in lockdown over a suspicious package (which subsequently turned out to be an Amazon delivery of the president's speculative purchase of a Carmelo Anthony Bulls jersey), but the SPX moved 1% yesterday.
More than that...it moved down!
As noted previously in the space, the streak of sub-1% days was the longest since 1995. Well, since Macro Man wrote that piece, the SPX tacked on another 21 days worth of low-vol trading before finally succumbing tothe nefarious schemes of evil speculators reality.
To put that in perspective, the last time we went this long with such low vol:
* The Dallas Cowboys were about to win the Super Bowl
* Internet browsing looked like this (and Wikipedia didn't exist):
* Brett Favre looked like this:
* Danny Blind, the father of Netherlands fullback Daley Blind, captained Ajax to victory in the European Cup
* Derek Jeter had 12 hits in the major leagues
* The SPX was at 605
* Fed funds were at 5.75%
* USD/JPY was at 102.05 (gosh, no wonder yen vols are so low!)
So is this the beginning of the long-awaited secular uptick in vol? It is tempting, very tempting to think so. Of course, Macro Man (and, he presumes, other punters as well) are naturally disposed to expect vol to tick up, so the risk is that one sees a trend shift in every shadow.
While it is true that it is often an unexpected catalyst that prompts a notable reversal of fortune in markets, from Macro Man's perch geopolitical turbulence comes pretty low on his list of legitimate game-changers.
Simply put, these sort of incidents have an execrable track record of having a lasting, meaningful impact upon financial market conditions. While it is true that Yellen yesterday suggested that rates could rise earlier than commonly supposed if labour market data exceeds expectations (which clearly would be a game-changer), the problem is that she bends over backwards to drag in ancillary indicators to "prove" that headline employment data over-states the strength of the labour market.
So what are we supposed to look at to make our judgements as to the timing of rate hikes? (As an aside, when did the incredibly lame euphemism 'policy firming' replace the more prosaic 'rate hikes' as a descriptor of the thing the Fed hasn't done in more than eight years?)
Do we focus on NFP and the U-rate? Or U-6, tepid wages, and the 'inexplicable' decline in the participation rate? That Macro Man even has to ask the question, even rhetorically, is pretty damning for the Fed's communications strategy.
As it happens, the very uncertainly over which indicator to choose, and Yellen's penchant for cherry-picking the figures that support her prior view), could ultimately be the thing that increases vol. While it is probably unwise to completely ignore the sweeping pronouncements of 'Hollywood' Bullard, it seems quite safe to conclude that his view is not one that is mirrored at the core o the committee.
Either way, one can only hope that it will be another two decades (at least) before we talk about such a long streak of low volatility again.
It took red headline flashes of another downed Malaysian aircraft (this time by bad dudes), military action in the Middle East, and the White House in lockdown over a suspicious package (which subsequently turned out to be an Amazon delivery of the president's speculative purchase of a Carmelo Anthony Bulls jersey), but the SPX moved 1% yesterday.
More than that...it moved down!
As noted previously in the space, the streak of sub-1% days was the longest since 1995. Well, since Macro Man wrote that piece, the SPX tacked on another 21 days worth of low-vol trading before finally succumbing to
To put that in perspective, the last time we went this long with such low vol:
* The Dallas Cowboys were about to win the Super Bowl
* Internet browsing looked like this (and Wikipedia didn't exist):
* Brett Favre looked like this:
* Danny Blind, the father of Netherlands fullback Daley Blind, captained Ajax to victory in the European Cup
* Derek Jeter had 12 hits in the major leagues
* The SPX was at 605
* Fed funds were at 5.75%
* USD/JPY was at 102.05 (gosh, no wonder yen vols are so low!)
So is this the beginning of the long-awaited secular uptick in vol? It is tempting, very tempting to think so. Of course, Macro Man (and, he presumes, other punters as well) are naturally disposed to expect vol to tick up, so the risk is that one sees a trend shift in every shadow.
While it is true that it is often an unexpected catalyst that prompts a notable reversal of fortune in markets, from Macro Man's perch geopolitical turbulence comes pretty low on his list of legitimate game-changers.
Simply put, these sort of incidents have an execrable track record of having a lasting, meaningful impact upon financial market conditions. While it is true that Yellen yesterday suggested that rates could rise earlier than commonly supposed if labour market data exceeds expectations (which clearly would be a game-changer), the problem is that she bends over backwards to drag in ancillary indicators to "prove" that headline employment data over-states the strength of the labour market.
So what are we supposed to look at to make our judgements as to the timing of rate hikes? (As an aside, when did the incredibly lame euphemism 'policy firming' replace the more prosaic 'rate hikes' as a descriptor of the thing the Fed hasn't done in more than eight years?)
Do we focus on NFP and the U-rate? Or U-6, tepid wages, and the 'inexplicable' decline in the participation rate? That Macro Man even has to ask the question, even rhetorically, is pretty damning for the Fed's communications strategy.
As it happens, the very uncertainly over which indicator to choose, and Yellen's penchant for cherry-picking the figures that support her prior view), could ultimately be the thing that increases vol. While it is probably unwise to completely ignore the sweeping pronouncements of 'Hollywood' Bullard, it seems quite safe to conclude that his view is not one that is mirrored at the core o the committee.
Either way, one can only hope that it will be another two decades (at least) before we talk about such a long streak of low volatility again.
12 comments
Click here for commentsvol is too low, aggregate positioning is crowded, fixed income shorts are protected by WWF, risk parity funds generated an information ratio of approx 3.0 since the beginning of the year.
Replydon't think it is going to last forever.
I think MM needs to be careful about the lackadaisical mention of a downed passenger jet and the implications on the far-removed world of 'high finance'.
ReplyDunno, ..... perhaps the lackadaisical attitude relates somewhat to the "Macro" nomenclature in the URL.
ReplyAnon @ 9.40
ReplyWhile the shooting down of the Malaysian airliner was clearly a tragedy, the scope of this blog is, as you charmingly put it, "high finance."
That the jet was shot down by some very unpleasant people does not alter this fact. That financial markets apparently moved on the news headline makes it fair game for comment and indeed analysis.
Moreover, I can assure you that nothing about my writing is 'lackadaisical.' Occasionally flippant, yes. Then again, if all you want is dry analysis, then perhaps bank research or the newspaper may be more to your taste.
On July 16, Option Monster put out this alert on VXX August options...
ReplyVideocast: Big VIX action in August
http://www.optionmonster.com/news/article.php?page=videocast_big_vix_action_in_august_95223.html
Didn't something similar occur just before 9/11?
Does your chart offer additional insight if you drop in the SPX?
ReplyMM and fellow commentators, question for you all. HYG has been steadily falling since the beginning of the month, but when I look at CDS and BBB spreads I dont see nearly the same move. (or maybe its bc I am delayed) Am I missing something bc according to HYG/JNK I am getting some some warning signs. Any thoughts
ReplyAbee, the underlying index, the Iboxx high yield index, has started rolling over. At the same time, HYG has moved from a tiny premium to NAV to a discount, exacerbating the price decline. The reason, of course, is net selling of the ETF, presumably from profit takers.
ReplyBuy the dip again folks. The Americans will do nothing about Ukraine, the Fed will print more money and buy spooz. The EU are irrelevant and totally dependant on Russian gas. The SP500 will reach a new all-time high come Monday/Tuesday. If tomorrow there is global, nuclear war, wait a day then buy more spooz. Then repeat. Nothing is gonna change this year.
ReplyThanks MM. HYGSO, shares outstanding looks like we gonna take another dump lower soon. Maybe BKLN(SO) will follow.. Looking at a few of the individual bonds though I dont see much panic, yet
ReplyWell said about Yellen making it more difficult to predict policy.
ReplyApparently I'm the only dog out there not properly trained - every time we get a spike in vols or a dip in markets I get scared and lighten up, only to have regrets the following day. Your comments about geopolitics basically not mattering at all is spot on.
If tense(r) geopolitics is not a reason to sell, the bullish thesis which is getting more legs around N. America natty exports should benefit from this with time. The achilles heel to the argument is that gazprom can always undercut NA exports, making infrastructure development a risky gambit. The more Russia gets wedged away from Europe the stronger the case is for productive long term deals.
Longer term NA gas looks too cheap.
MM - while the scope is unquestionably finance, and there is nothing wrong with an opinions about market reaction to geopolitical risk, referring to a painful tragedy followed by the childish stuff in parentheses - that it was downed by bad "dudes" - doesn't seem to fit in a serious sentence. If you think it does, then I would be happy to solely get my daily fill of macro from the sell-side or fin press.
Reply