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Charting This Year's Cross Asset Chaos

Tyler Durden's picture


Whether it has been investor sentiment, equity implied volatility, or sovereign bond spreads, 2011 has been a year of extremes. The roller-coaster of various spreads, prices, curves, and flows still leaves us cognitively dissonant as we anchor on recent action and forget where we came from. BofA has produced a 'stress heatmap' that at-a-glance illustrates the behavior of 20 critical cross asset class warning signals throughout 2012 and we note this Critical Stress Signal has been in risk-off mode since July 12th - which fits well with the relative perspective we have long-held that high-yield credit is pricing for considerably more concerns than equities for instance. Seven crucial aspects are highlighted throughout the year, most notably the slower than expected tail-risk hedge demands in Europe as we suspect ECB QE complacency remains far too high. Nowhere is that optimism more evident of policy maker intervention than in the money flow indicators currently.

From BofA 2012 Global Asset Allocator

Seven crucial periods stand out in the stress heatmap:

1. Equity implied volatility continued its past behavior of underpricing risks flagged by other asset classes until the last moment, resulting in large shocks when risky assets sold off

2. Investor sentiment as indicated by Flow components were “risk-on” for most of the year, even as most market based stress measures were stretched. After a period of ‘risk-off’ in the middle of the year, the Flow-based measures are back in non-stressed territory, suggesting relatively neutral positioning into year-end

3. There were pockets of value to be found in hedges through the year: such as Equity Implied Volatility ahead of the Aug sell-off and FX Implied Volatility in late August

4. Bank funding concerns (Cross currency basis swaps) remained high through the year

5. Global Sovereign Credit stress increased significantly in Q3; it remains at historical highs

6. Some European Government bonds started losing their safe-haven status in late October

7. Demand for tail hedging was high through most of the year. Surprisingly, European tail-hedging demand was slightly lower than in both the US and Japan (ESTX50, S&P500 and Nikkei Skew).

The BofA Global Financial Stress Indicator's (GFSI’s) Critical Stress Signal has been in ‘risk-off’ mode since 12-Jul. Since then global equities have dropped 10%, commodities by 6%, and HY bonds 3%.

While BofA continue to recommend caution for investors looking to add risk, they acknowledge that policy intervention risk can lead to rapid risky-asset upside (and we did notice that the investor flows - lower right hand corner of the upper chart - as captured by the GFSI appear to be anticipating this risk)


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Tue, 12/06/2011 - 11:18 | 1950805 Jonbutterfly
Jonbutterfly's picture

The house of cards will fall when the last debtor can no longer pay . . . and then we will see Mad Max in the Western World.

Tue, 12/06/2011 - 11:38 | 1950873 JPM Hater001
JPM Hater001's picture

I will be one of the Interceptors.  Good news, the Dodge Chargers of today are faster and safer when attacked by traveling gangs of hooligans.

Tue, 12/06/2011 - 11:21 | 1950813 LongBalls
LongBalls's picture

That chart hurts my eyes. Pun intended.

Tue, 12/06/2011 - 11:22 | 1950816 GeneMarchbanks
GeneMarchbanks's picture

'4. Bank funding concerns (Cross currency basis swaps) remained high through the year'

Just go ahead and keep that in the red. Indefinitely.

Tue, 12/06/2011 - 11:24 | 1950825 AngryGerman
AngryGerman's picture

where's the bofa economic viability column, that is completely red??

again, i don't listen to dead people...i let my vodoo priest do that for me

Tue, 12/06/2011 - 11:31 | 1950852 GeneMarchbanks
GeneMarchbanks's picture

Now now... don't be impolite. Zombie is the proper term.

Tue, 12/06/2011 - 12:00 | 1950959 AngryGerman
AngryGerman's picture

sorry, even in these times i should take the time and remain politically correct...


Tue, 12/06/2011 - 11:30 | 1950844 I Eat Your Dingos
I Eat Your Dingos's picture

Zombie apocalyspe would be far more exciting than global meltdown. I guess the meltdown would do

Tue, 12/06/2011 - 11:50 | 1950909 Dr. Engali
Dr. Engali's picture

Is that a thermal image?

Tue, 12/06/2011 - 11:56 | 1950943 machineh
machineh's picture

Yes, it's King Kong.

You can see his 'eyes' in columns 7 and 2, in late April / early May.

And boy, does he look pissed!

Tue, 12/06/2011 - 11:53 | 1950925 unununium
unununium's picture

Don't forget the AZO indicator.  AZO posts $191M profit, but $310M was paid out to earlier investors (indefatigable stock buyback).  The circus continues.


Tue, 12/06/2011 - 12:25 | 1951073 slewie the pi-rat
slewie the pi-rat's picture


july...risk off...zombie calls...

  • france was breaking the UN covenants by dropping weapons into libya, britain was giving itself  false figures about the cost...
  • zeroHeads were calling fuk_u "recessionary"
  • inflation was getting transitory
  • troikas & finiMinis in clown cars; islands for sale?
  • oh, yes...QE2 was ending and the US was abt to form stuporCongo, raise the debt ceiling, and have ronPaul introduce a bill about the $1.6 T @ the FED being "owed to ourselves"
  • as i rode my bike toward the fireworks show, for the last 5 blocks i could hear every speaker from the fairgrounds blaring this song:  Cee-Lo Green – Fuck You (Lyrics On Screen)

risk-0ff, BiCheZ!

Tue, 12/06/2011 - 13:45 | 1951417 Piranhanoia
Piranhanoia's picture

Is it a good idea to rely on the statements from employees of companies that are known to have bribed every public official with their hand out?  That have sold and resold the same product to 15 buyers at one time, each buyer believing they were getting a unique security.  Leveraging themselves 100 times the value of every asset they have, marked up to its full fictional value, and 960 times if you mark it to reality.  Defending companies they purchased by any criminal means necessary to pretend the actions weren't fraud when they created the product, and aren't fraud now knowing you are defending a crime,  and in the case of Countrywide, we know that as much as 100% of what paper products they created were bogus.

And this isn't just for BofA that is DOA,  this is for all of them.

How can the words of someone at these firms now be taken seriously?  How could it get past the screeners at the top and be truthful?  Just because they are talking about what they allege are someone else's assets?  Because DofA is talking about Europe, they are supposed to be believed?  They have $1T exposure to Europe and every reason to lie with breathing.  

Make sure everyone digs the snark, as it is proving to be some of the only valid reporting on behind the scenes in fantasy land.

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