Why Deutsche Thinks 2017 "Was The Most Boring Year Ever"

As part of the macro forecast in his just released 2018 Credit Outlook (more on that in a subsequent post), DB's Jim Reid first looks back at the almost concluded 2017 and muses that "whichever way you cut it, it’s likely that 2017 will go down as one of, if not the least, volatile year ever for the vast majority of asset classes. The recent sell-off in early/mid November has been a bit of a wake-up call but overall this remains a blip." In fact, it makes him wonder if 2017 was "the most boring year ever?"

To make the argument , Reid presents figures 10 and 11 to show vol measures for equities and treasuries respectively, and notes that "realised volatility on the S&P 500 has recently been the lowest since 1995 and close to the lowest in the 90 year history of the data, the VIX has been at the lowest since data started in 1990 and the MOVE index in November 2017 traded at the lowest since the data started in 1988."

Reid then notes that given the close correlation between major asset volatility levels and credit spreads, the latter are not particularly stretched in valuation terms given the external volatility environment is so suppressed, something Fasanara capital has been focusing on, by highlighting the flood of vol sellers but cautioning that stability itself breeds instability. In any case, Reid notes that the recent sell-off is a blip on these longer-term charts, and in Figure 12 shows the relationship between credit spreads in Europe versus a regression model of where spreads should be given volatility in European equity and rates markets and global FX vol.

Deutsche also shows the same for USD credit in Figure 13 but based on US equity and rates volatility as well as global FX volatility.

Reid joins countless other strategists opining on the lack of vol in the past year, asking "why has volatility been so low and can it continue?" His answer is that the most likely reason for volatility being so low is a combination of:

  • Synchronised and firm global growth;
  • Inflation that has consistently been in the ‘Goldilocks’ range and not accelerating as much as expected in 2017, and;
  • Global central bank liquidity which in 2017 has still been close to peak levels.


On global growth we’ve now had eight years of growth and six years of very steady almost predictable levels of output relative to expectations. Indeed the IMF forecast for the globe has ranged from 3.3% (2012) to 3.7% (2014) based on forecasts made around the start of each calendar year and in each year the outcome has not been too far away from these numbers. In this environment investors have been confident enough in the stability to push vol lower. The slight beat at a global level in 2017 (without inflation – see below) has only helped this.

For inflation, Reid notes that "we’ve continued to see a sweet spot of prices picking up enough from the 2015/16 lows to discount deflation risk that many felt possible at the time, but not enough to really convince investors that the central bank put is dead. For financial markets the soft inflation readings in 2017 without any deflation fears couldn’t really have been much better."

In other words, or just one word: "goldilocks", although as Goldman stated last week, "goldilocks is unlikely to continue into 2018."

Which brings us to Reid's key point, and perhaps the most important of all, namely "that we have also had a year of incredibly accommodative monetary policy even with slowing reinvestments and tapering. The combined size of the Fed, ECB, BoJ and BoE balance sheets has expanded to around $14.9tn which represents an increase of $1.8tn relative to the end of 2016."

However as we look forward it’s almost certain that 2018 will represent a changing of the guard for ultra-easy policy. As of October 2017 the Fed has begun (albeit gradually) the process of unwinding its balance sheet, the ECB has announced that it will further taper the growth of its balance sheet in January (although the impact of reinvestments will somewhat buffer this move), the BoE recently raised its benchmark interest rate for the first time in a decade and the BoJ is purchasing less now given its focus on controlling the yield curve rather than targeting a set monthly amount.

Finally, putting these observations in practice for the equity market means that if the S&P 500 can hold on to complete its 13th successive positive total return month - with November currently running at just under +1.5% - it'll be the first time ever in the c.90 years we have monthly returns data that we've seen such a run. We've also never seen every month in the year experience a positive total return. Whether November might create the first of these new records might depend on where we go on the expected Senate vote on tax reform later this week...


niemand aliens is here Mon, 11/27/2017 - 11:00 Permalink

this time it´s your turn. murica will come apart at the seams. time is up for the next big joomanji.  “If we get caught they will just replace us with persons of the same cloth.  So it doesn’t matter what you do.  America is a Golden Calf and we will suck it dry, chop it up, and sell it off piece by piece until there is nothing left but the World’s biggest welfare state that we will create and control.  Why?  Because it’s God’s will and America is big enough to take the hit so we can do it again, again and again.  This is what we do to countries that we hate. We destroy them very slowly and make them suffer for refusing to be our slaves.”– Benjamin “Bibi” Netanyahu(Benjamin Netanyahu was in a meeting at Finks bar in Jerusalem, a well-known Mossad watering-hole. Here is what he said as taken directly from the transcript of the recording, which was witnessed and which has been 100% fully authenticated.)

In reply to by aliens is here

mo mule Mon, 11/27/2017 - 10:51 Permalink

Let the market, crash who cares?  Only the top 5%, the rest of us, the bottom 95% are already in a depression.  It's us verse's them. Main street won't be hurt that much. It's the one's that have benefitted from all this fake bullshit free Fed money that's going to be hurt. Let them eat cake.  Crash crash crash. The big bank's need to be forced to lend to main street at much lower rates. President Trump needs to Open the Discount Window. Banks should be required to lend a certain amount to main street. At least 30% of their Federal Money Holdings.  You reading this Trump? haha  

LOL123 Mon, 11/27/2017 - 12:34 Permalink

It's Synchronised alright. Lol Lynn Rothschild's worldwide Holdings include "financial instruments" and she sits on the board of Alfred Herrhausen Society of International Dialogue of Deutsche Bank and has been a member of the United Nations advisory Committee on Inclusive Financial Servives and as an Advisor to the Deursche Bank Microfinance Consortium. And E.l. and she sit on the Federal Reserve ( USA). Their "Clinton" puppet lost but they still hold the reigns and rules of the monopoly game...it isSynchronised alright!