"Get Ya Popcorn Ready" RBC Says: "Markets Are Paralyzed With Uncertainty" As "Spook Story" Arrives

Tyler Durden's picture

In a post that in retrospect was timed perfectly, yesterday we first warned that the BOJ may be about to unleash a bond "VaR shock", one that would promptly lead to a global asset contagion, as a result of Kuroda's surprising eagerness to steepen the yield curve, a move which would lead to an accelerated selling of the long end first in Japan, then across the entire world where some $13 trillion in bonds trade at negative yields. We also explained how "with cross asset correlation soaring, not to mention with risk-party and CTA funds approaching record leverage, the risk is that investors frontrunning a perceived change in the BOJ's policy in two weeks time could lead to a dramatic selloff in JGBs, which then spreads across to global fixed income markets, all of which trade like connected vessels."

The warning did not stop there: as we explained previously, in early June, Goldman warned that a sharp 1% spike in rates across the curve in the US alone, would result in MTM losses of $2.4 trillion. That excludes the crossover impact into stocks, as a selloff in bonds
leads to a correlated liquidation across equities, as a result of record leverage for Risk-Parity and other quant funds...

... for whom coordinated selling in both asset classes could lead to dramatic deleveraging, and a positive feedback loop of even more selling.

Risk Parity

Our conclusion was simple: just as central banks had pushed the markets higher, so they could - and would - be the catalyst that send everything plunging as a result of dramatic changes in trillions in bond positions.

* * *

Overnight we were delighted to find that RBC's head of cross-asset strategy, Charlie McElligott not only read our analysis but appears to have agreed with everything we said.

* * *

Here is McElligott's note released this morning.

COMMENTARY: Markets don’t like getting hit four sides at once…

The “Draghi Disappointment / Brainard Bogeyman / BoJ NIRP-ier / IG Supply Tantrum” we shall call it—elegant right?!  Global rates markets continue to bear-steepen on account of four “developments”:

  1. Draghi’s ECB presser disappointed the crowd with no increases, no extensions and no tweaks—“ECB did not discuss extension of asset purchases plan.”  There also was a very slight “upgrade” to inflation as well, as the 2018 forecast was NOT dropped as expected, while stating the expected inflation will be more stable than before.  Geez.
  2. The bizarre Fed / Brainard speech episode, where an (initially understood to be) “impromptu” scheduling of Fed’s Lael Brainard to give a speech next Monday evening—immediately before the Fed’s blackout period—was interpreted by the market (and conspiracy theorists) as a sign that Yellen was rolling out the increasingly high-profile and UBER-DOVE Brainard (remember, she was the “international factors are impacting US rates” proponent who helped start the R-Star discussion) to actually be the person with the best chance to communicate a HAWKISH message on the September meeting.  In turn, by having the “person least likely to speak hawkishly” then make a case / at least say that the committee is confident on achieving its mandates, that you could get market probability north of 50% “required” to pull the trigger.  From speaking with folks close to the situation, there is a real belief that the Fed is adamant on at least one-hike this year, data be damned.  Apparently they are keenly aware that they could be driving financial asset instability.  : /  Nonetheless, it came out later in the afternoon that Brainard had been scheduled at the event in question for weeks…so head-scratching abounds. 
  3. The point I made reference to in yesterday’s “Big Picture” w.r.t. the BoJ being equally adamant on going even MORE negative with rates while also investigating “curve tweaks” (from a change in the composition of their JGB purchases to the potential for a reverse operation twist) has gained steam, with multiple media outlets floating these “trial balloons” ( http://reut.rs/2c4zgi5 ).  The concerns here are many: even more negative rates is an enormous risk after the way the market treated them post the initial move, which saw a counterintuitive strengthening of Yen and a flattening of the JGB curve which sent the Topix Banks index -25.5% to its current  YTD performance.  And again, as stated yday, an outright “reverse op twist” could be interpreted as a “backing-down” from a market that knows the BoJ is married-to the perma-stim / perma-easing path for the rest of its days.  If markets smell weakness, “things could get weird” (flipside of course being a potentially very POSITIVE reaction to a steeper curve, esp w/ banking sector…I know it’s noncommittal, but we simply can’t gauge how mkts respond).
  4. A final factor driving the move in UST (absolute) yields (and as noted a few weeks ago as a risk to what had been low rate vol) is the insane supply being pumped out of both US IG corporates, now standing at $52B on the week….and then next week, with a HUGE calendar of Treasury issuance, with potential of ~$100B in bills, ~$50B in coupons and another $50B in more US IG!  For those of you keeping track at home, that’s potentially ~$200B of supply.  Per IFR, Monday alone could see $76Bt-bills at 11:30am, and then $24B 3s plus $20B 10s both at 1pm ET.

The spook story for low-volatility equities for years has been a spillover of rate vol—see all of our various “tantrum” episodes.  Why?  Because of the painful grind higher in cross-asset correlations as the market has become more macro--thanks to both 1)  global central bank policy that is essential based around controling one asset (USD) and tamping-down volatility through unprecedented asset-purchases…along with 2) the enormous growth of systematic strategies, especially those which target volatility and / or use leverage to “balance risk” across asset classes based on historical volatility

Risk-Parity as you all know has been a favorite “bad guy” to mention during these episodes (otherwise the strategy is a ‘home run’ the rest of the time in a global QE environment), because (being painfully simplistic here) they run leveraged long fixed income as it is a historically “low volatility” asset.  But under certain economic condition “buckets” (inflation / growth) you too can run very long risk assets too…ESPECIALLY with HISTORICALLY DEPRESSED TRAILING VOLATILITY.  I.E. RP / target vol / CTAs are most likely REALLY REALLY long equities right now bc of this, which is SPX 30 day historical vol sitting at its 10 year lows, with 50 day historical vol on the same cusp:


So the punchline is that many systematic macro, risk-parity or vol targeting funds are very long both equities and fixed-income (helping drive the recent correlation)…and when a “butterfly flaps its wings” in one leg of the trade, suffering a “macro drawdown,” we have seen in the past “VaR shock” selling episodes as other positions are taken-down as well. 

In turn, the long-end of fixed-income took it in the face yday and today, from Bunds to Gilts to Treasuries:


Markets are paralyzed with uncertainty—and I’m not even including Trump’s recent resurgence.  How can you get more aggressive with your growthier / reflationary / cyclical outlook when not only is global economic data turning south again, but you have a month ahead with so much event risk--btwn ECB / BoE / BoJ / Fed / first US Presidential debate?  Pile-on four different banks downshifting on growth / saying to get more defensive this week (most notably Trahan  / Lazar at Cornerstone), you have a real pivot forming….especially as so much performance has been “gained back” (certainly within the equities complex) on the shift back into the “reflation” thesis.
EQUITY L/S HF PERFORMANCE SEES GAIN OF +4% SINCE SHIFTING OVERWEIGHT CYCLICALS / UNDERWEIGHT DEFENSIVES: Upper panel shows correlation of “high hedge fund concentration” equities holdings basket against the ‘cyclical / defensive’ equities ratio.  In turn, the below panel shows the % performance in the HFR Eq L/S HF index.


…THIS THEN GETS PRETTY SCARY WHEN YOU LOOK AT THE SWOON IN GLOBAL DATA: Global developed market surprise index plummeting, against the same ‘cyclical / defensive’ equities ratio from above, which is trading back at extremes.  Ruh-roh.

So here we go: BoJ seemingly ready to commit to go deeper negative rates and experiment with their curve, the Fed is seemingly locked-and-loaded on a hike as global growth rolls over, a deluge of supply into a suddenly wobbly rates backdrop (and a world ‘stuffed to the gills’ on duration via NIRP and QE forcing real money / AML community into deeper “yield seeking” / “yield compression” behavior), and a loaded-coil of synthetically low volatility across asset classes…as cross-asset correlations trickle back near multi-year / crisis extremes.

Get ya popcorn ready….

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kliguy38's picture

I know I'm afraid.....save me Janet

froze25's picture

Breaking now: Democratic presidential nominee Hillary Clinton delivered a keynote speech at the National Baptist Convention Thursday night, but photos show that many people failed to show up.

Plenty of photos, totally humiliating. Room was packed before Hillary, then emptied right before she was going to speak. lol awesome! Trump 2016


The Duke of New York A No.1's picture

As the Chinese would say "Ho Lee Phuk".

jcaz's picture

That's awesome....   The DNC forgot to factor in one minor thing-  NO ONE likes this bitch.....

Typically promising more free shit at the end of her speech-  panic button being punched early.....

The Duke of New York A No.1's picture

A Trump win gives the FED political cover to do their rate hike in December - the FED will be able to blame a market crash on Trump - they'll paint Trump as the fall guy.

jcaz's picture

As opposed to what- continue to paint the tape with a phony monetary policy forward with Hillary?  Doesn't matter who is President,  and Trump doesn't give a shit if he's blamed for anything.   When it comes apart,  I don't want Hillary in charge.

The Duke of New York A No.1's picture

The stock market bubble may pop/crash before the FED gets a chance to raise ... then they go negative like they are doing across the pond.

BuddyEffed's picture

Expect a record short covering rally soon, based on the amount of "bad" news headlines being generated.  

In order to generate ever larger debts to follow the exponential that debt is on, there will need to be record short covering rallies from now on too.

Recent "Spooky" headlines like the and others will stick in the minds of those holding short positions, and when the short covering rally starts, those holding their shorts will panic and feel like they were fooled into their taking short positions.  When they bail on their shorts to stem their tide of losses, they will just feed the short covering rally with more fuel. 

espirit's picture

In the meantime...

Jump You Fuckers.

phatfawzi's picture

by 4:00 p.m will be green, buy the dip. 

Manthong's picture

..gotta buy me some of that NIRP paper…the longer the duration, the better.

What could go wrong with a sound strategy like that?

bleu's picture
bleu (not verified) Manthong Sep 9, 2016 7:34 PM

THIS is the REAL spook story: http://wp.me/p4OZ4v-3z

Bush Baby's picture

The flock of black swans are starting to blackout the sun.

Never One Roach's picture

Stores are empty, online sales way down and consumers are busy fighting with their Obamacare insurer to get cancer treatment.

Even house prices are finally beginning to tumble.

A bankrupted economy.  Obama's legacy.

"Yes we can!"

... Bitches

espirit's picture

Guess that I should pick up some JiffyPop for around the campfire to use when the power goes off.

/sarc on or off-I forget?

lasvegaspersona's picture

What..the city has no bums that will take fifty bucks to sit and applaud?...must be some town.

SimpleJackBlack's picture
SimpleJackBlack (not verified) The Duke of New York A No.1 Sep 9, 2016 3:45 PM

All red except Doucha Bank up 3%???


lakecity55's picture

Soros has bought up the Electoral votes, no need for her to campaign.

espirit's picture

Meh. Is General Hospital still on at 3pm?



walküre's picture

are they sure this was a Baptist convention? looks like the Friday prayer meetings in Deerborn

Goldbugger's picture

Looks like they brought in the KKK, whoops no that's a Choir. I'm sure PAID to be there.

Takeaction2's picture
Takeaction2 (not verified) kliguy38 Sep 9, 2016 10:09 AM

Dow Down 200....Gold and Silver down also..Vix Spikes....The BIZZARRO World Continues.  

abyssinian's picture

Gold will turn green before 4 pm

Hitlery_4_Dictator's picture

-200 is the new -15, considering how high the dow is

lakecity55's picture

They slapped Au down knowing the bond news would hit!

froze25's picture

They still haven't figured out that you need to let the bankruptcies happen, the debt to be written off and the asset values need to come back down to a real value. Creative destruction is a necessary part of the economic cycle. They are trying to prevent it to keep their BS paper assets at an elevated level.

css1971's picture

Writing off a debt, leaves the credit cycling in the economy. It's already been spent. Now it's untethered by debt.

Father ¢hristmas's picture

Lotta lobbyists have been hired to pay off faggot politicians to keep the music playing, baby.  Lotta envelopes and trips to Boca and Palm Springs for this stagflation.

This is what it's all about, pops.  When your guy is on time with them envelopes and plane tickets to Tahoe, you don't have to suffer the embarrassment of bankruptcy before you assrape the taxpayer.

The faggot politicians like Harry Reid just storm into the room, spit on their finger, and make you squeal like a pig.

BandGap's picture

The "small fires to prevent big fires" scenario is long gone. The blaze that is going to hit will lead to a resurrection from the ashes.

lasvegaspersona's picture

Not this time...this time the dollar is dying and all behaviors change. This is 'last gasp' stuff. Hyperinflation is gradually happening..first in equities then in toilet paper, if you can find it. They have done a remarkable job of preventing sudden collapse. Anyone who doesn't understand what is coming by now...well good luck to all.

Hitlery_4_Dictator's picture

Sorry, we've heard this before. This does not feel like the time, yet. Getting closer though. 

Quantum Bunk's picture

October 2014, August last year. Brexit. I'm not going to flinch until we are down 40%

new game's picture

paper tyme, call the paper xperts, calling cb's; print da paper NOW...

ah, fuck what's a few trillion amoungst oligarchs, lol.

Hitlery_4_Dictator's picture


Premiere Lady Fitness in south Austin abruptly closes, customers out of money"
lakecity55's picture

Sounds like they made the midnight move and hauled all the equipment off!

Infowars could take it over, have exercise stuff and sell supplements.

Hitlery_4_Dictator's picture

Their ain't no where left to run to.  What are the CA tards going to do now?

Consuelo's picture





It won't be announced...

buzzkillb's picture

Long fat finger resets.

LawsofPhysics's picture

"Markets" - LMFAO!!!

Antifaschistische's picture

I don't feel that the market is paralized at all...it's easy to eliminate volatility if you put in a buy/all order when the true market price is trending down.  My hypothesis is TPTB are propping up a sliding market to preserve the existing structure.   If Trump moves into the White House...all props will be withdrawn.

LawsofPhysics's picture

Irrelevant.  Global Weimar is inevitable now.

In the meantime...

"Full faith and credit"

Here2Go's picture
Here2Go (not verified) LawsofPhysics Sep 9, 2016 11:24 AM

"Markets" ~ Only a money counterfeitting jew (who had all the 'nodes' in place to control the outcome, & thereby, greedily  pick up a few sheckels in front of the steamroller) could love...


lemme take a wild fucking guess...


Goldman had all its clients long going in & the dipshit jew mouthpiece Gartman had everyone long & then... oops...

LawsofPhysics's picture

Yes, there really needs to be a "Contrarian Indicator Award" of some sort in eCONomics...

SomethingSomethingDarkSide's picture

"Apparently they are keenly aware that they could be driving financial asset instability.  : /  "


Love it.

Soul Glow's picture

The market is flush with tulip bulbs this morning.