Snap back to reality

Are markets starting to come to grips with the end of QE and the concomitant focus on rate lift-off?  Or is this simply the seasonal risk-asset weakness in September-October that used to be par for the course before central banks decided to control asset prices by virtual administrative diktat?  Or even one of those occasions where markets decide to react to geopolitical developments, be it the war against IS or the protests in Hong Kong?

For sure, the bread-and-butter fixed income markets have not sold off nearly as much recently as they did during the taper tantrum last year.  Then again, there's been quite some time to adjust to the idea of an eventual tightening, and in any event markets know that that it will be the arch-dove Yellen, as opposed to unknown quantity Larry Summers, who'll be driving the bus on policy change.

That having been said, the more speculative brand of fixed income has snapped back to reality.  As noted recently in the comments, HYG has come under the cosh quite a bit recently.  To those of us who have have occasionally bemoaned how easy it was for buy'n'hold carry monkeys to generate outsized returns, recent weakness is a welcome dose of reality.  Of course, some of this weakness may well be down to quarter-end considerations, and the inability/unwillingness of any financial intermediary to warehouse this stuff because of the onerous capital charges they incur.  Perhaps we'll know more come Wednesday and the new quarter.

At the time of writing, equities are also looking poorly, though bouncing a bit from the opening gap.  As noted recently, the negative divergence from the highs was something of an ominous sign, and stocks have duly kept rolling over.  At this point a test of previous lows just north of 1900 in the SPX would appear likely; it could well prove to be one of those weeks where a 'good' payroll number is bad for stocks.

And then there's the USD, most specifically USD/JPY.   Here we are at the highs, with rates not really going anywhere over the last few days, risk assets looking wobbly, momentum starting to ebb, and even the Japanese themselves appearing to call time on the current bout of yen weakness.  It seems to be taken as something as a given that USD/JPY powers higher in the last trimester of the year; after all, it worked a treat in 2012 and 2013.  However, given everything else that's going on, Macro Man cannot help but wonder if USD/JPY is a little on borrowed time up here- if only temporarily.

USD/JPY is one of those pairs that tends to defy gravity...until it doesn't.   While Macro Man will concede that he doesn't have as good a handle on positioning as he would if he were back at his old gig, the chart above (and the results of his poll) would suggest that the market's long.   While it's always tough to go short contrary to one's underlying bullish view, there's nothing wrong with repairing to the sidelines when the risk/reward temporarily dips below an acceptable threshold.  From Macro Man's perch, that would appear to be the case at the moment, particularly when you add in the randomizer of a payroll number on Friday.