Monday morning bullet points

* The big talking point in the UK over the weekend was the press report that the framework of a potential deal with the EU has been discussed that would allow Britain access to the single market, allow it to impose an emergency brake on immigration for a period of seven years, but require ongoing contributions to the EU budget.  If such a deal were to materialize, it would be a fantastic one for the UK- so much so, that it's hard to see the entirety of the rest of the EU going for it, as there is insufficient disincentive for others to follow suit.  Of course, the devil could be in the details; "access to the single market" is not the same as being in the single market, particularly when it comes to writing rules and regulation.  Let's see if similar stories get floated in the non-UK press, where of course they may not be so well received...

* As a follow up to Friday's post on the VIX, it is worth reminding readers that volatility is autocorrelated; that is, low vol begets low vol, and periods of high volatility cluster.  Unsurprisingly, therefore, the majority of the time a low level of the VIX corresponds to a low level of future realized volatility-which tends to be associated with generally strong equity market performance.   The same holds true to a large degree with the slope of the curve as well.   Using the same 1st-3rd contract curve as Friday, Macro Man plotted the subsequent 40d realized volatility for the SPX.  As you can see, there is a large cluster of points between 0-5 vols for the curve and low/moderate subsequent realized volatility.   As always, the trick is spot the turning point early enough to cash out longs/set shorts at attractive levels, without incurring too many false positive signals.  As noted last week, a flattening of the curve will be a good sign that such a time may be approaching; however, with the US presidential election currently captured in the 4th contract, it may be some time before the curve flattens properly.


*  Will the Fed turn tail again and put September back on the table?  It's hard to see why they wouldn't, given the last payroll number, the lofty levels of equities, and the apparent resilience to the Brexit vote outside of the UK (and even within the UK, judging by the FTSE, which of course you shouldn't.)  After all, putting September back on the table gives the FOMC the chance to do some more free easing by taking it off again should markets catch a spot of indigestion.  While market pricing isn't quite as extreme as it was at the height of the Brexit debacle, market expectations for Fed funds at the end of next year still look for rates just 30 bps higher than current levels, which was the extreme of the year before the Brexit vote.


* The G20 has called for monetary, fiscal, and structural measures to boost growth.   Gee, where have we head this before??  Macro Man has been in the market for 23 years now, and it seems like multilateral institutions have been calling for structural reforms for at least 22 of them...and yet the French labour market, to take an example, it still broadly similar to the way it was when Macro Man worked in Paris as a wide-eyed 23 year old in 1994.  As an aside, why doesn't every country that can issue debt at negative levels do so to the hilt to pay for infrastructure?  If the fiscal multiplier is greater than one (and most research suggests that it is at the moment), it's a colossal win....surely better than hoping another 6 months of buying BTPs at crazy low yields will do the trick.

* That Kuroda once again pooh-poohed the legal possibility of helicopter money over the weekend, may mean nothing, but given the tidy run up in the Japan reflation trade since the Upper House election, risks now appeared to be skewing towards disappointment again for the BOJ at the end of the week.  The BOJ has a fairly limited scope for increasing its asset purchase sizes; why not wait for the government to make the opening gambit and tailoring the monetary response to fill in the gaps?  In many jurisdictions, monetary policy is a bit like Dr. Feelgood's Healing Oil and Resurrection Bitters...nowt but a jar of snake oil that can, at best, induce a pleasurable placebo effect.  No, at this point, fiscal policy looks to be the real medicine.  Too bad the doctor is so rarely in....

 
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admin
July 25, 2016 at 11:40 AM ×

Seven years is a long time in politics... long enough to gin up enthusiasm for another referendum to go back in again?

Breakfast in Cambridge this morning, brief conversation with a French couple. LB managed a facsimile of a Gallic shrug when discussing the recent choice of the British electorate.

Nothing going on in FX this morning. EU bank stocks drifting up.

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John Beech
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July 25, 2016 at 12:41 PM ×

Did I miss your VW resolution? Did you take the offer? Did you consider an independent shop? What in Hell happened to the engine, anyway? As a long-time hot rodder, I wonder this. My bonafides: http://www.hobbytrading.com/private//62gto/ and feel free to contact me if you'd like help sorting out the engine in your problem child.

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Macro Man
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July 25, 2016 at 1:10 PM ×

Sold for $2500. TBH while the car was lots of fun to drive when it worked, it was generally a disappointment. Build quality was shoddy (had a panel fall off after a month)and had had previous engine issues (fuel injectors magically failed.) I couldn't really justify to myself putting any more money towards a car that had a catastrophic engine failure after 45,000 miles.

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Anonymous
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July 25, 2016 at 2:53 PM ×

Japan Exports Down for 9th Month. Exports to the U.S. fell 6.5 percent in June from a year earlier, while shipments to the EU declined 0.4 percent and sales to China, Japan’s largest trading partner, dropped 10 percent.

On the speculative deal between the EU and Britain: As long as they get their monthly check from Britain for their hookers and blow and 5 star hotels, any deal will do.

Britain needs a Common Market with Europe, not a political union, and the European economy and its people need the same except the unelected power-hungry technocrats at the EU stand opposed. The resultant discontent in the region is a tragedy of immense proportions and will only get worse over time unless the will of the people overcomes the power of those in political control.

Why I voted to exit the EU:
http://www.nassauinstitute.org/articles/article1410.php

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Anonymous
admin
July 25, 2016 at 2:56 PM ×

Oil bulls, please note: Over the past five years, refiners’ thirst for oil has dropped an average of 1.2 million barrels a day from July to October.

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Anonymous
admin
July 25, 2016 at 3:01 PM ×

HEDGE FUNDS cut net long position in Brent + WTI fut + opt by -31 million bbl to 453 million bbl in week to Jul 19

via: https://twitter.com/JKempEnergy/status/757529796586967040

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abee crombie
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July 25, 2016 at 3:58 PM ×

LB, your CAD call was spot on. Breaking out ... dido for oil, though its starting to get into an interesting level, with interesting seasonals as Anon pointed out and MS has been saying. MLPs are holding up, thankfully. Oil equities though should start reconsidering

MM for all the talk of VIX, curious if you have run anything with VIX vs HY/IG spreads. Me thinks the two are very much correlated in HFT models, but currently the spread is pretty wide.

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Anonymous
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July 27, 2016 at 12:46 PM ×

"As an aside, why doesn't every country that can issue debt at negative levels do so to the hilt to pay for infrastructure?"

Now this is something everyone should be asking their politicians.. The only thing I'd add is "at negative levels for 5 years or more", as the debt will require to be rolled at some time..

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