A rally in global risk that started during last night's first presidential debate on the market's take that Hillary came out on top fizzled, following news that the DOJ is assessing how big a criminal fine it can extract from Volkswagen (-3.8%) over emissions-cheating "without putting the German carmaker out of business", while Iran's oil minister Zanganeh told reporters Iran is ununwilling to freeze output at current levels. Deutsche Bank dropped to a new all time low while its default risk hit fresh record highs.
While today's biggest event for both markets and politics will be tonight's highly anticipated first presidential debate between Trump and Hillary, markets are waking up to some early turmoil in both Asia and Europe, with declines in banks and energy producers dragging down stock-markets around the world, pushing investors to once again seek the safety of government bonds and the yen.
After Wednesday’s policy statements by the Fed and Bank of Japan, a harsh light is being shined on the incredible nature of their communications. It would be wise in the current environment to structure investment portfolios with a pro-volatility bias.
Until minutes ago, this week's rebound in global equities appeared to be running out of steam as oil retreated from a two-week high and a dollar slide ended. However, as noted just around 6am, Reuters reported, citing as it usually does various "anonymous sources", that in a radical departure from its long-held policy of not cutting production, Saudi Arabia was prepared to cut production on condition that Iran freezes output, which led to an instant spike in crude.
Gold was up 1.5% and silver surged 3.1% yesterday after Janet Yellen again failed to raise rates from record lows at 0.25%. The Fed maintained ultra loose monetary policies which are again creating stock and bond market bubbles in the U.S. and other countries.
And just like that: risk-parity / various other leveraged ‘target risk’ strategies (S&P Target Risk Aggressive Index saw its best day since first week in July yesterday) are back in the driver’s seat, as the Fed and BoJ went back to their “happy place” of a vol-suppression kind of world. That is exactly who / what we are seeing in equities futures, UST futures / curves right now. Lever it up again!
"We are, it seems to us, entering the period we shall call the “Zimbabwe-isation” of the global capital markets and we say that with all sincerity… and requisite trepidation. This will end badly of course. These things always do, but until they end… until the music finally stops… the game has to be played and the music, as it plays, has to be enjoyed."
Following the Fed's "hawkish hold" and the BOJ's "confused contradiction", global risk (and non-risk) assets got the green light, and as a result stocks and bonds rallied in Asia and Europe, with US equity futures rising another 0.4%, advancing with oil and industrial metals, as iron surged in Chinese trading.