More troubling for the bulls who are unable to get the much needed close of trading panic flush as a result of daily last hour levitations is Gundlach's call that the VIX needs to surge above 40 before a bottom can be made in the high-yield junk bond market. Today the VIX closed up 11% to 26.00, a long way off from the panic and revulsion that would send it north of 40. Indeed, the last time the VIX rose above that level was on August 24, when the VIX calculation actually was broken for a brief period of time to avoid crushing countless VIX-linked investors.
We’ve already gotten a taste of what happens when asset classes finally “adjust” to underlying “demand” with the commodity markets: having operated based on Central Bank money printing for five years, they then wiped out ALL of those gains in six months.
It would appear The ECB has undertaken the same baffle'em with bullshit meme the rest of the world's central planners have embraced. Speaking this morning (this time not to a private hedge fund group), The ECB's Benoit Coeure stated unequivocally that "The ECB doesn't see overvalued asset prices." Well that's nice, apart from the -38bps yield on German 2Y notes. But then... to lull investors from their stupor, Coeure unleashed, "The ECB does see "little bubbles" in some markets." Which ones we can only wonder as they prepare to buy Muni bonds...
"The ECB’s bond buying programme has created favourable financing conditions and provides member states with an incentive to defer much-needed budget consolidation and structural reforms. However, further structural reforms to strengthen markets and competitiveness are crucial for a self-sustaining economic recovery. In addition, monetary policy is leading to a build-up of risks to financial stability which could pave the way for a new financial crisis."
After a disappointingly un-uber-dovish speech this morning by Draghi,it appears The ECB needed to full ease-tard to make sure 'markets' believe. EURUSD tumbld 50 pips - to the lows of the day - after Reuters reports that, in what is becoming increasingly clear desperation, The ECB is mulling buying the debt of cities and regions.
Sweden’s Financial Supervisory Authority wants banks to reconsider the notion that all sovereign debt is risk-free. That said, there's nothing to worry about if the sovereign debt in question is issued by Sweden. And that's a relief if you're the Swedish central bank, because you've been buying a whole lot of Swedish government bonds.
Now that Mario Draghi has telegraphed more easing from the ECB come December, the question is what exactly the bank will announce. Will Draghi cut the depo rate further into negative territory? How long into 2017 will PSPP be extended? Given the scarcity of purchasable paper, will the ECB expand the universe of eligible assets and if so, will Draghi go full-Kuroda knowing full well that you never, ever go full-Kuroda?
You’re doing yourself a disservice if you don't have a basic working knowledge of what, say, a volatility surface means. We're not saying that we all have to become volatility traders to survive in the market jungle today, any more than we all have to become game theorists to avoid being the sucker at the Fed’s communication policy table. And if you want to remove yourself as much as possible from the machines, then find a niche in the public markets where dark strategies have little sway. Muni bonds, say, or MLPs. The machines will find you eventually, but for now you’re safe. But if you’re a traditional investor whose sandbox includes big markets like the S&P 500, then you’re only disadvantaging yourself by ignoring this stuff. Ignorance is not bliss...
Way back in June we documented the “curious” case of Sweden’s broken QE and when we used the term “broken”, we didn’t just mean that inflation expectations weren’t moving higher. We meant that bond yields were rising as the adverse impact from the illiquidity "premium" surpassed the price appreciation benefit from frontrun central bank buying. Fast forward three months and Sweden looks set to “solve” the broken QE problem and by extension ensure it can stay in the currency war games by expanding the list of eligible assets to muni bonds.
A confluence of circumstances have conspired to make asset allocation a somewhat vexing task these days. The so called “tricky trinity” is comprised of the following three factors: decelerating global growth, the absence of a policy put, and risk premia offering but a limited buffer. For HSBC, this means "remaining highly risk averse" going forward.
"The risk could be that brokers may not be able to execute forced liquidations in case of sharp declines in the overall stock market. It can be positive if they are using the funds to develop new businesses but negative for China’s financial market if they keep lending out for margin financing."
Deflation is back on the front burner and it's going to destroy all of the careful central planning and related market manipulation of the past 6 years. Clear signs from the periphery indicate that a destructive deflationary pulse has been unleashed. After years of suppression, the forces of reality are threatening to overwhelm our managed global ""markets"'. And it's about damn time.
"Greece would survive, have new powerful friends, have bargaining chips that neither Europe nor America could ignore; China would have projected the use of the Yuan right in to Europe, and Russia would have more than a toe-hold for military power right inside NATO. If I was Tsipras or Varoufakis I would be on the phone right now."