Risk Premium

"August Sucks" MIT Quant Warns New Strategies "Are Creating Volatility"

"August Sucks," concludes MIT Quant guru Andrew Lo, reflecting on the systematic-trading strategy effects on markets, and it's not going to get better any time soon. As he explains to Bloomberg, "algorithmic trading is speeding up the reaction times of these participants, so that’s the choppiness of the market. Everybody can move to the left side of the boat and the right side of the boat now within minutes as opposed to hours or days." As we have noted many time, Lo explains how "crowded trades have got to the point of alpha becoming beta," warning that volatility-targeting strategies (such as Risk-Parity) are not only "exaggerating the moves," but he cautions omniously reminiscent of the August 2007 quant crash, "I think they are creating volatility of volatility."

What Declining Global Reserves Mean For Bond Yields: Goldman's Take

As Deutsche Bank put it on Tuesday, we've officially reached the end of the "Great Accumulation" as slumping Chinese growth, plunging crude, and an imminent Fed hike have put enormous pressure on emerging economies’ accumulated stash of FX reserves and that means that buyers of USD assets are becoming sellers at the expense of global liquidity and the perpetual bid for some core paper. Now, Goldman has weighed in, noting that the rise in foreign FX reserves held by non-G-7 countries that started around 2003-04 (at around US$1trn) appears to have ended for good.

Goldman Warns This Extreme Indicator "Is Rare Outside Of A Recession"

The current VIX level of 26 is equal to the median VIX level over the last three recessions. As Goldman warns, while extreme VIX levels periodically occur, our analysis shows that VIX levels in the high-twenties to low-thirties for extended periods of time are rare outside of recessions. Furthermore, this was foreseeable as equities were ignoring potential warning signs from other asset classes prior to the recent sell-off.

The Ghost Of 1997 Beckons, Can Asia Escape? Morgan Stanley, BofA Weigh In

The similarities between the current crisis and that which unfolded in 1997/98 were so readily apparent that many analysts began to draw comparisons and that may have added fuel to fire over the past week. Now, there seems to be a concerted effort to calm the market by explaining that while there are similarities, there are also differences. And while some of the world's imperiled EM economies may be in better shape to defend themselves this time around, when attempting to cope with a meltdown it may be more important to look at where things are similar and on that note, here’s some color from Morgan Stanley and BofAML.

Goldman's 4 Reasons Why The S&P Will Remain Unchanged For The Rest Of 2015

These are Goldman's four reasons why the bank expects the S&P 500 will end 2015 unchanged from the current level: High starting valuation, negligible earnings growth, outflow from domestic equity mutual funds and ETFs, and modest economic growth. Offsetting these headwinds to a higher market, buybacks remain robust and serve as a pillar of support in the current environment.

Global Markets Turmoil After China Extends Currency War To 2nd Day - Devalues Yuan To 4 Year Lows

Despite claiming yesterday's devaluation was a "one-off", The PBOC has devalued the Yuan Fix dramatically for the 2nd day in a row - now 22 handles weaker than Monday's Fix. Offshore Yuan is trading at 4 year lows against the USD. The carnage from this dramatic shift is just beginning as global equity markets (US futures to China cash) are tumbling, US Treasury bond yields are crashing, gold is up, China credit risk is at 2 year highs, and China implied vol has exploded to 4 year highs. Ironically, China's government mouthpeiece Xinhua explains "China is not waging a currency war; merely fixing a discrepancy."

Oil Trading "God" Loses $500 Million In July On Commodity Rout

It appears that after the great collapse of 2014, oil trading "god" Andy Hall refused to learn from his mistakes, and was convinced that oil would promptly rebound up to its historic levels. He was wrong, and as Reuters reports, after two consecutive months of 3% losses in May and June at which point he was up just 2% for the year, July was by far the cruelest month in history for the oil trader, a month in which he suffered a whopping 17% loss, one which lowered his aum by $500 million to $2.8 billion.

"This Is The Largest Financial Departure From Reality In Human History"

We have lived through a credit hyper-expansion for the record books, with an unprecedented generation of excess claims to underlying real wealth. In doing so we have created the largest financial departure from reality in human history. Bubbles are not new – humanity has experienced them periodically going all the way back to antiquity – but the novel aspect of this one, apart from its scale, is its occurrence at a point when we have reached or are reaching so many limits on a global scale. The retrenchment we are about to experience as this bubble bursts is also set to be unprecedented, given that the scale of a bust is predictably proportionate to the scale of the excesses during the boom that precedes it. Deflation and depression are mutually reinforcing, meaning the downward spiral will continue for many years. China is the biggest domino about to fall, and from a great height as well, threatening to flatten everything in its path on the way down. This is the beginning of a New World Disorder…

Global Stocks Jump After Greeks Vote Themselves Into Even More Austerity

And so the 2015 season of the Greek drama is coming to a close following last night's vote in Greek parliament to vote the country into even more austerity than was the case before Syriza was voted into power with promises of removing all austerity, even with Europe - which formally admits Greece is unsustainable in its current debt configuration - now terminally split on how to proceed, with Germany's finmin still calling for a "temporary Grexit", the IMF demanding massive debt haircuts, while the rest of Europe (and not so happy if one is Finnish or Dutch) just happy to kick the can for the third time.

Citi Identifies Contagion "Trigger Point" For More ECB QE

Should markets fret, and ECB action becomes necessary then we think the markets will price ECB action well before highly stressed levels. If we for instance take it view of the monetary policy stance impact seriously then market moves that take real yields to levels that persisted before the ECB started easing policy (negative rates started in Jun 2014) may be a trigger point.