State Street: “Move Over Zero Hedge, There Is A New Bear In Town”
Unleash Volatility Beast
Thanks for nothing, central banks!
- If central banks provided the prototypical inflection point, risk assets should get destroyed next week.
- Feast your eyes on a compendium of volatility charts. The beast wants out.
- Keys to watch: DXY, EURAUD, and 10-year yields. Move over ZEROHEDGE. There is a new BEAR in town,
* * *
Ahead of the BOJ and Fed meetings, volumes slowed to a trickle, traders got back to flat, and algos reached for the offswitch. Now that event risk is in the rear view mirror, it is time to vote. Buy-the-dip or ‘‘sell everything?’’ If classic market reflexes are in play, a market meltdown following the passing of event risks is by far the more likely outcome. That US equities launched higher is nothing, because it always does that on Fed day. The obligatory central bank forensic is a good place to begin.
Expectations as measured by overnight volatility ahead of the BOJ were the third highest in 3-years. Notably, 7 out of the 10 highest readings have occurred in 2016, which says something about the growing perception about policy failure. Expanding monetary base has not delivered higher inflation expectations or a weaker currency. Just about every 2016 meeting USDJPY sunk like the proverbial stone.
The ‘‘monetary assessment’’ conducted by the BOJ was an admission that QQE was unsustainable, and needed to be tweaked. Plan B is ‘‘QQE with yield curve control.’’ No, that is not a new shampoo. Here is the stripped down ghetto-economist version.
- Negative interest rate
- Stabilize 10-year yields at 0%
- Keep asset purchases at ¥80 tn/year
- Abandon monetary base target
- Aim to overshoot the 2.0% inflation target
- Rebalance ETF by buying less Nikkei 225 linked ETFs and more Topix, removing a well-flagged distortion.
…click on the above link to read the rest of the article…
