Mean Reversion

Key Events In The Coming Vacation Week: All About Inflation

With the traditional post-payrolls market lull setting in, and most trading desks taking a week or two off, it will be a relatively quiet week with attention turning to inflation data with releases in the US, China, Norway & Switzerland, a key factor as central banks consider if/when to tighten in the near future.

"It's Going To Be A Long Summer" One Trader Warns No One, Not Even The Fed, Believe Their Own Forecasts

It was fun while it lasted. For a few brief months, The Fed appeared to 'hawkish, no matter what' as data-dependent morphed into data-ignorant. Markets relished the confidence-inpiring message from the ivory tower academics... but, as former FX trader Rich Breslow notes, none of that occurred in reality and now, "no one really believes even their own forecasts," adding that, as markets wake up to this reality, "it's going to be a long summer."

Deutsche: The Market Broke In 2012, "This Is What Everyone Is Talking About"

"After 2011, the two measures of risk decouple with VIX consistently low despite growing uncertainty. The breakdown is structural, and it is visible across all market sectors, not only equities. Current levels of complacency are alarming. This is what everyone is talking about... The longer this regime continues, the lower the threshold of painful unwind."

Valuations: It Is Different This Time

"Stock investors have been waiting on the Godot of growth for most of this century and one can’t help but wonder at what point they’ll get up and leave the theater..."

RBC Is "Astounded" By The Magnitude Of This Rotation

This is "classic 'shorts outperforming your longs' stuff," notes RBC's head of cross-asset strategy Charlie McElligott, as he warns Friday's VaR-shock is a worst-case scenario against a backdrop where post-financial-crisis highs in 'net' and 'gross' exposures are currently deployed by the majority of equity hedge funds. However, he does offer a silver-lining for stock dip-buyers (and what to watch for).

RBC's Mean Reversion Model Is "Exploding Higher" As The "Rotation" Begins

Amid yesterday's "nothing-burger" from the big-three event risks, the market initially shrugged off any worries. However, as RBC's head of cross-asset strategy, Charlie McElligott notes, "all of the juicy stuff continues to occur under the surface within the US equities complex."

RBC Warns Equity Markets Have Entered The 'FOMO' Stage

It’s risk-parity heaven right now, notes RBC's head of cross-asset strategy Charlie McElligott, with global equities (developed and EM) AND fixed-income all continuing their torrid rallies, but McElligott warns this is a classic "from worst to first" PM-grabbing into a new "Fear Of Missing Out" stage of the equities-rally.

What Is Causing China's Yield Curves To Invert: UBS Answers

The inverted curve reflects a contradiction between market expectations on policies and economic fundamentals. On one hand, the slowdown of economic growth may prevent the back end of the yield curve from further going up. On the other hand, financial institutions' funding costs have kept rising but the financing costs for the real economy measured by loan rates have not risen that much.

RBC: Welcome To "The Insanity Loop"

"It's a classic 'pennies in front of a stream-roller' / 'negative skew' return profile - a Taleb distribution...The problem is….IT KEEPS WORKING, because market expectations for rates / curves / inflation expectations remain D.O.A., which perversely keeps the major global central banks 'reflexively easy'..."

Bill Blain: "My Prediction Is That Around October 12 Markets Will Get Horribly Interesting"

"There are just too many contradictory currents out there. The unsustainability of burgeoning consumer debt, unfeasibly tight credit spreads, the sandcastle foundations of student loans, autos, housing and the CLO market, China, Trump, politics.. worries about what follows Brazil in the EM market, and whatever... The risks of a massive consumer sentiment dump."

Bill Blain: "Take The Red Pill, And Let’s See How Deep This Rabbit Hole Takes Us"

"The bottom line is yesterday’s slight bounce back in what remain Risk-Off markets feel about as solidly supported as an alligator in the Washington Mirror Pond.If there is a theme to what’s really going on, its “tedious inevitability.” So, with due respect, “bear” with me (geddit? see what I did there?). Take the Red Pill, and let’s see how deep this Rabbit Hole takes us. "