While the moves in equity (VIX) and credit (CDX, ITRX) protection costs last week shocked many out of their recent coma of complacency, former fund manager Richard Breslow warns it was the lack of reaction across markets broadly that investors should be more worried about.
We really need to stop using the expressions “risk-on” and “risk-off.” Or if that’s too much to ask, how about a short holiday while we collect our wits. We grossly over use them to the point of rendering them meaningless and trivial. And reliance on these crutches is just a way of avoiding thinking about what might actually be going on. The markets’ perception and appetite for risk isn’t something that can be measured on an hour by hour basis. A few random basis points isn’t a measure of anything.
And the reality that markets remain laughably correlated on a short-term basis means they are all just reflecting the same factor signal not giving independent confirmation of where we might be headed.
The S&P 500 had its highest close of all-time last week before crashing to levels not seen in over three weeks. That’s not risk-off. It wasn’t wealth destruction on a mass scale. If you think that was a disaster, you may be in the wrong line of work. Or at least, you may want to give some thought about what you would do when there is a proper setback. Maybe call that “risk-offest?”
It’s a mistake to analyze serious geopolitical risks by jumping up and down about minuscule moves in emerging market currencies or credit spreads that have little value to begin with. People were actually comparing the size of the South Korean economy to that of Iraq to try to convince us that this war would be a really bad one. No comment.
The yen has been rallying since the Fed went dovish at the last Congressional testimony by Chair Yellen. The first 400 pips versus the dollar were the good news on rate hikes that propelled the last leg up in equities and helped trash Treasury yields. The cross didn’t fall on last week’s news from 114.50, it did so from 110.50. And that was with the help of yet another CPI miss.
It would be an enormous mistake not to take the North Korean problem very seriously or not be concerned. It’s also misguided to think the markets are addressing the issue by widening Italian spreads to Germany by a few basis points from YTD tights. That’s called knee-jerk reaction, not prudence.
If you want to be concerned and confused by how traders responded to this news do so based on how little anything moved, not by how much.
During that entire “sell-off” asset prices were quite decidedly showing a firm risk-on bias.
And one glance at overnight futures (and VIX) suggests it's BTFAONW dip deja vu all over again...