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Policy News Trumps Economic Data As Biggest Driver Of Tail Risk Events
The last six months have been anything but 'normal' in terms of market movements. Whether equity, bond, or FX markets, the high correlations and crashing disconnects have at times been incredible - leaving every risk manager's VaR calculation and desk-quants gamma-hedging program sorely lacking. Goldman specifically surveys the largest moves across asset-classes of the last six months and finds that it is policy announcements that have been far larger drivers of outsize market moves than economic data. This is a significant departure from the previous six months.
Goldman Sachs: US Daily: “Market Movers” – Policy News at Home and Abroad Driving Markets
- In our semiannual review of the largest single-day moves in the equity, fixed-income, and foreign exchange markets, our analysis shows that policy announcements in the US and particularly in Europe drove the majority of the largest market moves, while economic data releases had a relatively small impact.
- The largest moves in the equity market were concentrated in August as uncertainties escalated around the European debt crisis and fiscal policy in the US. The dollar exhibited an inverse trading pattern with risk sentiment. And the magnitude of the largest moves in the fixed income market fell from our previous report as the 2-year Treasury yield is close to zero and expected to stay there based on the Fed’s signals.
- With the European debt crisis and the US fiscal debate yet to be resolved and recent economic data stabilizing, we expect markets to continue to focus on new policy announcements going forward.
Today’s comment reviews the ten largest single-day moves over roughly the last six months (from May 1 to November 22) in the equity, fixed-income, and foreign exchange markets. During this period, markets were highly sensitive to each new development surrounding the European debt crisis; news on the US deficit debate and the Fed’s announcements also contributed to large single-day moves. In fact, all three markets reacted sharply on August 4th to the combination of the disappointing ECB policy announcement and the US deficit agreement. Given markets’ focus on policy news, economic data received relatively less attention, with reports on employment and output driving markets on days with little policy news.
Unlike in our previous report (see David Kelley, "'Market Movers' - Macro Data Mostly a Tailwind for Markets," US Daily, March 23, 2011), where the equity market (represented by the S&P 500) was fueled mainly by economic releases, the market was mainly driven by policy developments in both Europe and the US in the past six months. In particular, the market went through a period of great volatility in August that recorded seven of the ten largest moves. Starting on August 4, the combination of the ECB failing to provide clear policy guidance and the US deficit reduction agreement sent the S&P down 4.8%, the second biggest drop in the past six months. The largest drop of 6.7% occurred on August 8 after the S&P downgraded US sovereign debt which led to a sharp fall in sentiment.
Over the next three consecutive days, the S&P swung in opposite directions: the index marked the biggest gain of 4.7% on August 9 in response to the FOMC easing announcement but fell by 4.4% the next day amid escalating fear over the European debt crisis. The index recovered again on August 11 following better-than-expected claims reports, although a day without major policy news likely contributed to the gain as well. Among the top ten movement days, August 18 was the only day that was driven by economic data alone; the Philadelphia Fed survey dropped to -30.7, posting a large downward surprise (the MAP score was -20) and sent the S&P down 4.5%. 3Q GDP and jobless claims reports were the other two macro drivers, but overall economic releases were overshadowed by gloomy policy news. Following a brief respite in September, the market again posted large moves in October and early November on the back of speculation on European bank recapitalizations, statements from the EU summit, and soaring Italian bond yields. Overall, the equity market was more volatile compared to our previous report. The tenth biggest change in magnitude in the current period was 3.4%, whereas the largest change was 2.2% from our previous report. The VIX index also soared from around 20 points in the beginning of the year to around 35 points since August 4.
The fixed income market (represented by the 2-year Treasury yield) in contrast saw smaller moves in terms of absolute magnitude compared to our previous report. The average magnitude of the top ten moves was 7 basis points in the current period versus 9 basis points in our previous report. This decline mainly reflects the fact that the 2-year yield is close to zero. Prior to the FOMC’s August 9 announcement, the fixed income market reacted to policy news from Europe, especially those concerning Greek debt. Compared to the equity market, the fixed income market was more sensitive to US economic releases: the 2-year yield gained 9 basis points following a better-than-expected employment report on July 8; positive ADP employment, retail sails, and Richmond Fed reports pushed up yields by 5-7 basis points; and weak GDP reports in late May and July contributed to declines of 6 basis points each. Notably, on August 9 the Fed signaled that rates are expected to stay low “at least through mid-2013.” The 2-year yield dropped by 8 basis points in response to the Fed’s strong commitment language and has moved by no more than 4 basis points since August 9.
Like the equity and fixed income markets, the foreign exchange market was also driven mainly by sentiment in response to policy news. In particular, the dollar traded mostly inversely with risk sentiments. For instance, three of the top ten moves occurred in September, when escalating uncertainty in Europe pushed investors to the dollar. On the other hand, the dollar fell when risk sentiment recovered on news such as a possible European bank recapitalization and the EU summit statement that met markets’ (already low) expectations. The dollar’s inverse relationship with risk sentiment was also evident in US data releases. The dollar fell 0.9% following easing sentiment from stable consumer confidence and the Richmond Fed reports; the favorable October GDP and employment reports helped raise risk appetite and lowered the dollar; while the weaker than expected ISM report on November 1 contributed to the second-highest gain for the dollar. One exception to this inverse relationship occurred on October 20, when the dollar gained 0.8% despite the Philly Fed survey posting a large rebound to +8.7 from -17.5 in September.
Over the past six months, the overarching driver in all three markets has been policy news in Europe and the US. Interestingly, aside from August 4, the three markets reacted during different periods of policy uncertainty. Moves in the equity market were concentrated in August in response to widespread uncertainty, the fixed income market reacted mainly to policy ambiguity and speculation until the Fed’s commitment language on August 9, and the dollar posted large moves within the past two months in response to large swings in risk sentiment. As the European debt crisis and the US fiscal debate have yet to be resolved, we expect policy news in Europe and the US to remain key drivers, especially in the equity and foreign exchange markets. Recent improvements in US economic data should help calm risk sentiments, but – as the previous six months have shown –policy news can quickly overwhelm sentiment and spark more turbulent moves across markets.
Note that we use daily percentage changes in the closing price of the S&P 500 and of the trade-weighted dollar to gauge the scale of market moves in the equity and foreign exchange markets, respectively, while daily basis point changes in the 2-year Treasury yield are used to proxy fixed-income moves.
While neither policy or economic outcomes are specifically harder to hedge, it is the Knightian uncertainty of the desparate policy-makers that is perhaps most worrisome going forward - especially given the lack of resolution anywhere in the world.
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Happy Thanksgiving
It might be our last Happy Thanksgiving for a few years.
Yeah, after that it will be Happy Thanks-but-no-thanksgiving.
After this year.... the timewave collapses to ZERO.
By next year, we'll be swimming in so much volatility, that all we'll be able to do is hang on, if even.
Because these are not desperate moves by policy makers, these are sure moves by "long" planners to help the gyrations get wilder.
ORI
/final-cut-trailer-01/
just raise your own turkeys.. not that hard, except the chopping head part for some but that is good practice for the coming 'enlightment era'
It'll be interesting next year, when more people figure out who the turkeys getting stuffed are.... by looking in the mirror.
Dear World,
Are the sheep starting to realize that the politicians don't have all the answers?
Signed,
No Confidence
but what aspirations does a freed sheep really have?
Of course. This has been obvious. Top of the range, let out bad news, bottom of the range say something bulish. the insiders have been making it on vol not alpha
That's because the market discovered that policy is the only driver of economic data. That's what happens when the Fed has a hand in everything.
"Over the past six months, the overarching driver in all three markets has been policy news in Europe and the US."
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People believe what they have to believe, when they have to believe it.
Spiegel: Germany’s Finances Not as Sound as Believed
Nice CE...It's what I've suspected all along. If it's a ponzi, it's a global ponzi and everyone, including CHina is actually utterly broke.
It's all debt, all the time. There is hardly any wealth left in the system, except rapidly depreciating industrial assets.
ORI
True that.
The notion of tying all ships of state together with chains of global trade & trade agreements was perhaps not quite as brilliant as it seemed at the time of inception.
It turns out that while a rising tide might lift all boats, a freakin economic tsunami of aggregious fraud will apparently sink all boats as the chains drag each nation under, both further and faster, with no chance to manouver out of the way of this economic maelstrom.
If you don't have a life jacket, try to latch onto some floatsom...
Agree, ORI. Totally. Everyone, even the so-called wealthiest countries are drowning in debt (openly declared + partially obscured + totally hidden in state secrecy). It is definitely all debt all the time and how to manage that situation. The paper economy has so far outgrown and outstripped the real economy that the latter is almost an after thought. A point of pride like owning a sports team. No longer is it the engine of growth without the giant money spigots of the central banks
yes, money is worthless, my new hedgefund will be called Barter & Slaughter
Articles like this stretch my comprehension of finance, but the idea that policy decisions are more of a forcing function for tail risk than economic data is surprising to me. I think because so many policies - as enacted - fail to live up to the claims of the announcements. Economic data is harder to hide, so it seems that it would be a more faithful representation of potential risks. Things like sovereign debt, private debt, cash, etc. Who cares what some EU CB says? Jean-Claude Juncker was quoted as saying "When it gets serious, you lie."
In the hall of mirrors of the global financial system aka the Ponzi, it matters little what the plebes think (read consumers, businesses and the like aka Main Street). It matters what the central banks think and little else. The only game left is frontrunning the Fed.
Oh. I see. So the traders are all frontrunning the Fed? (and presumably the ECB?) And this is all that's left to the market? It doesn't seem like this can go on for too long before a mass exodus occurs.
It doesn't seem like this can go on for too long before a mass exodus occurs.
Sadly, unless we get a reset that's all that is left. The global central banks control the money spigots. In a debt-ridden, over-leveraged global economy, that dwarfs all other forms of economic activity and "growth". That's the great distortion we are all living in right now. It can go on for a long long time unless something disrupts it
what will disrupt it will be the power grabs.. just like the fall of U.S.S.R. was really a run on the public assets by the new oligarchy
when there is enough fiat/debt exchange to fool the world to sell their souls that will be the tipping point
especially given the lack of resolution anywhere in the world.
Foam as the waves crests. Surfers live for these times.
ES selling off...looks like small triple top from late oct to about 11/17...ES 1193 close from 8/4 taken out and no obvious significant support...should revisit and take out 1110ish imho...
http://www.youtube.com/watch?v=KheJE71GzpA
Uploaded by RussiaToday on Nov 22, 2011
Watch the full Keiser Report E213 later today. Every week Max Keiser looks at all the scandal behind the financial news headlines. This week Max Keiser and co-host, Stacy Herbert, discuss the Koch Brothers and MF Global and Northern Rock and Richard Branson's blonde hair and big, shiny teeth. In the second half of the show, Max talks to independent radio journalist Richard Thomas about Occupy LSX, poll tax riots and financial apartheid.
KR on FB: http://www.facebook.com/KeiserReport
When normal gets here you're not going to like it...
Is it gonna be the "new" normal the braying jackasses spew all the time?
Is it gonna be "new" like feudal Europe, Stalin's Ukraine, Mao's "Great Leap Forward," the "New" World Order, or perhaps like 1776?
any chance in hell hollywood would make a movie about the Kulaks??
way too many evil truths
http://ricochet.com/main-feed/American-Kulaks
Let me throw another log on the fire.
according to Bloomberg News: in a piece entitled "
MF Global Customers Missing $1.2 Billion Denied Committee""
MF Global Inc. brokerage customers, who may be missing more than $1.2 billion from their accounts, won’t be allowed to form a committee to represent their interests in bankruptcy court, a judge ruled.
Customer accounts believed to hold $5.45 billion were frozen Oct. 31, the day after the New York-based company reported a shortfall in funds that are required to be segregated under rules of the U.S. Commodity Futures Trading Commission. A previous estimate of about $600 million in missing funds was raised to $1.2 billion yesterday by James Giddens, the trustee appointed to liquidate the company and distribute refunds to customers.
Far-Reaching Case“Nobody in the legislative history of this country thought about a case like this,” Lewis Kruger, a lawyer for a group of customers, argued before Glenn today. “This case may determine whether there is a commodities market in the future. I have great concern about what’s going to happen in this industry. This is a far-reaching case and it needs to have an imaginative resolution.”
Separately, a spokesman for Giddens, Kent Jarrell, said the estate, which had previously run out of money to contribute to the 60 percent it plans to distribute to customers, will receive $1.3 billion from Harris Bank in Chicago. It’s the last large sum that will come into the estate, Jarrell said in an interview after the court hearing. It does not affect the missing funds, he said in an e-mail.
While Giddens is overseeing distributions to customers at MF Global Inc., its parent, MF Global Holdings Inc., once run by former New Jersey Governor and Goldman Sachs Group Inc. (GS) co- chairman Jon Corzine, filed for bankruptcy separately to apportion returns to creditors, including bondholders and lenders such as JPMorgan Chase & Co. (JPM)
"
http://www.bloomberg.com/news/2011-11-22/mf-global-1-2-billion-shortfall...
"This is a far-reaching case and needs to have an imaginative resolution"
.........................................
I call bs on this stentence. Is rounding up the crooks and putting them on trial in criminal court such an "imaginative resolution"? I suspect if these crooks were facing ten years in the cross bar hotel they would cough up the money they have stolen.
........................................
"This case may determine whether there is a commodities market in the future."
........................................
Ain't central planning great? Who needs a commodities market for price discovery? Hey, we have central bankers! They know it all, just ask them. Just stand aside and let the central planners set interest rates and commodities prices... then when you go to the store and the shelves are empty the central bankers will say: "Who coulda knowed this would happen". Here is a tip... don't be near ground zero when this hair brained scheme blows sky high.
Headline risk, Bitchez!
Remember back in late 2009 when Herman Van Rompuy as first permanent president of the European Union, citing the way world leaders would begin to deal with crises, said: “2009 is also the first year of global governance with the establishment of the G-20 in the middle of a financial crisis.”
Well, they’ve come a long way, Baby. The policy of the Federal Reserve to manipulate markets is unquestionably the chief driver of market movement. This is a cover up story. Markets are behaving abnormally because they are being manipulated and Goldman, striving to come up with an explanation as to why they are no longer responsive to economic news, places the blame on “policy,” when it’s just plain old manipulation.
Mary Ellen Synon, based in Brussels as a columnist for the Irish Daily Mail, had this to say today about our “policy” makers, i.e., manipulators:
Italy: where the world’s first virus state replicates its DNA.
I’ve just come from a press conference with Jose Manuel Barroso, the European Commission, and Mario Monti, the new unelected prime minister of Italy dropped into office last week by the Brussels cartel.
The conference was sick making.
Of course, it was no surprise to fine Monti here in Brussels, meeting Barroso, and meeting Herman Van Rompuy, the unelected president of the European Council. Both Barroso and Van Rompuy are members of the cartel that pulled off the coup in Rome and put Monti in office.
Tomorrow Monti’s off to Strasbourg to meet his other ‘electors,’ Nicholos Sarkozy and Angela Merkel. Then he will go back to Rome where he will have a meeting with Olli Rehn, the commissioner-for-bail-outs.
I hope Monti has a big notebook, because he’s going to be taking a lot of orders.
And so, watching Monti on the pressroom podium bask in Barroso’s delighted and patronizing smiles, I was feeling humiliated for the whole Italian people: surely he should be back in Italy, talking to members of parliament and to the Italian people, who have not voted him into office.
Instead he was standing as an acolyte to Barroso, and Barroso was making no secret of his delight of having someone ‘committed to the European Union’ as prime minister of Italy.
Barroso then assured Monti ‘he has my full confidence.’
Which is when I almost had to reach under my seat for the sick bag. Barroso was acting like he was a gracious head of state expressing confidence in a new prime minister he had chosen. He was not like an unelected EU bureaucrat—which is all that he is—who ought to have no power at all in the politics of member states.
Trouble is, we now know Barroso and his unelected, untouchable lot have plenty of power in the politics of member states, otherwise the former European Commissioner Monti would not have been standing next to him on the podium as an unelected prime minister.
What we had here today in Brussels was a perfect example of the EU as the world’s first virus state. The Brussels cartel doesn’t need to put ifs officials into all the most crucial positions in the member states. No, all the cartel has to do is get the officials of member states to do its work for it.
It used to be the EU only managed to divert the civil service of member states to do its work. Now it has achieved so much more: the EU and its cartel have put their own ex-eurocrats in as prime ministers of Greece and Italy.
In Britain, Nick Clegg, a former commission eurocrat, and former euro-funded think tank employee, and former member of the European Parliament, has control of David Cameron* over EU policy.
A virus: first it finds a weak host cell; then it injects its DNA and takes control. The contagion is underway. http://synonblog.dailymail.co.uk/
*Note from Wikipedia (another banker)
David Cameron's great-great grandfather Emile Levita, a German-Jewish financier (and descendant of Renaissance scholar Elia Levita) who obtained British citizenship in 1871, was the director of the Chartered Bank of India, Australia and China which became Standard Chartered Bank in 1969.[13] His wife, Cameron's great-great grandmother, was a descendant of the wealthy Danish Jewish Rée family on her father's side.[14][15] One of Emile's sons, Arthur Francis Levita (died 1910, brother of Sir Cecil Levita),[16] of Panmure Gordon stockbrokers, together with great-great-grandfather Sir Ewen Cameron,[17] London head of the Hongkong and Shanghai Bank, played key roles in arranging loans supplied by the Rothschilds to the Japanese Central Banker (later Prime Minister) Takahashi Korekiyo for the financing of the Japanese Government in the Russo-Japanese war.
Charlemagne tried to unite Europe. Frederic Barbarossa tried. And Napoleon did too.
Will Herman Van Rompuy succeed where they failed?
Sorry but that IMF puff-piece rebranding we have the bazooka pea shooter whatcha-ma-call-it fucking bullshit rumor today with the credit lines to save Sarkozy from suckling Merkel's mystery prize hole while doing the full Monti under the influence of the new Popular Spanish Fly was enough to set me off.
These markets are broken. Any rumor causes 2 standard deviation moves whether or not there is any truth to them...even if they are utterly non-sensical.
Market volatility has indeed picked up since August, but there is no solid evidence that this volatility and market action is due in greater part to policy-making over economic data. It is not even clear that econ data is the cause of most market movements over policy-making in "normal" times. How does one separate the variables, and prove cause and effect? One cannot, other than anecdotally.
Every month we hear the same thing: "markets are more manipulated/out-of-whack/unusally behaving/untradeable than ever". I garauntee that we will be hearing the same thing in every month to come, for about forever.
The Goldman report is data mining by Quants gone wild, and Goldman money managers looking for excuses for their performance