"..the hurricane is not more or less likely to hit because more hurricane insurance has been written. In the financial markets this is not true. The more people write financial insurance, the more likely it is that a disaster will happen, because the people who know you have sold the insurance can make it happen. So you have to monitor what other people are doing.”
"the missile strikes change NONE of the calculus for me...Thus, the balance of risk remains in favor of upside for now until this muscle memory above (buy risk dips, sell vol) is changed... The near-to-medium-term ‘risk downside’ story to me remains largely about the rates move as ‘reflation’ has broken trend line..."
"...the current (ongoing) breakdown in the USD is representative / driving some short-term and nascent deleveraging of legacy ‘reflation’ trades as per the sudden-death of the central bank "policy divergence" story last week - which had been the primary Dollar bull-case driver over the past year..."
"I’m worried that this stock ‘melt-up’ move is extraordinarily mechanical right now - almost entirely the aforementioned forced-covering, not high conviction induced-buying - and may be sending a 'false signal' which is potentially dragging-in new buying on the breakout to new highs. This could lead to a scenario where a market can 'collapse under their own weight'."
"At this frantic vol buying pace, with VIX +17% on the day, it won’t take much longer until further mechanical deleveraging is triggered from these extremely popular retail and ALM vehicles Long story short, be prepared for another deleveraging wave (which could be happening ‘real time’ as I send) the longer vols stay at these levels, bc they’ve just been ‘stuck’ so low in recent weeks."
What are the implications from the shift toward passive investing? According to JPM there are two big ones: i) Markets become more brittle and systematically risky; ii) Crashes, when they happen, will be bigger and worse iii) Markets become less efficient
While expectations are low from Thursday's ECB meeting, it may ultimately boil down to Draghi’s communication about asset purchases. Any hint of QE tapering would spur a large-scale sell-off in the rates market, according to most Wall Street strategists. Here is what else the sellside thinks will happen.
"...we have the precedent from a much earlier time (the 1930s) when the defection of just one member from a currency union caused the system to unwind rapidly. And we can clearly sense the seeds of another popular political revolt in other member countries; a flurry of upcoming elections and referendums provides an immediate catalyst...We believe we are approaching a dramatic fulcrum point in public opinion in Europe."
The market continues to “buy into” growing long-term narrative that CBs are shifting from notional “flow” of QE purchases to yield targeting / curve steepening goals and desire for more fiscal policy. To anybody being intellectually honest, this should be interpreted in the long-term as “a path to tightening.” Long-end weakens, curves steepen.
Where's Vladimir Putin when we need him? Having saved the world yesterday by spiking crude oil with his comments, the return of bond traders today sees a resumption of risk-parity fund deleveraging (as bond-stock correlations neared record highs).