Curveball

Let's assume that you think the Fed will raise rates two more times this year, and for the sake of argument three times in 2018. It stands to reason that your forecast for two-year yields at the end of next year has to be about 2.5%-to-3.0%. The argument for this sequence of events seems fairly straightforward. The U.S. economy is growing—albeit not spectacularly—, unemployment is sub-5%, and the FOMC is anxious to put the era of super-loose monetary policy behind it. The key question, though, is what your corresponding forecasts for 5-year and 10-year yields are, because we're closer to a do-or-die moment for bonds and the Fed's "hiking cycle."

I think we're looking at a four-scenario outlook. 

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Markets and Tradingclaus vistesenequities, bonds, yield curve, equity sectors
It's all relative

Volatility returned to equity markets last week, but it was a quick visit. The S&P 500 slid 1.8% on Wednesday, the VIX jumped and babies were thrown out of with the bathwater in Brazil. For a short while, it looked like significant chink in the armour, but this market is not easy to bring down. Equities snapped back at the end of the week and volatility receded. On the week, the S&P 500 ended down 0.4%—after a 0.3% decline the week before—just about the same as the MSCI World. One of the main debates on the Tee Vee Thursday morning was whether this "pull-back" marked the beginning of the big kahuna sell-off and a global recession. When the market goes up, we cry foul due to high valuations and tentative evidence of "bubble behaviour," and when it finally stumbles it stands to reason that it must the beginning of the big unravelling.

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Markets and Tradingclaus vistesenEM equities, EZ equities, Equities, Eurozone, emerging markets
Are markets really that boring?

Traders and strategists on Bloomberg TV had one overarching message last week. It's boring out there, too boring. John C. Bogle's Vanguard and Larry Fink's Blackrock have turned passive investing into a volatility crushing monster. Indexation is an immovable force, which takes no prisoners, evidenced by the fact that the return on the main U.S. stock indices is driven almost exclusively by five major names. Trying to beat the tide by picking stocks—both long and short—is proving nigh-on impossible for active managers. Adding insult to injury, the bond market is a snoozer too. The curve can't figure out whether to steepen or flatten in response to the Fed' slow hiking cycle—I am betting on the latter—and yields have been range bound as a result. Clearly, investors aren't easy to please. When volatility is soaring, they assume foetus positions and cry for central banks to rescue them, and when low volatility finally arrives they deplore the lack of opportunities. Maybe it is just a question of the porridge being neither too hot nor too cold, but when punters start complaining about low volatility my spider sense goes off. 

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Markets and Tradingclaus vistesenVIX
Is it time to worry about low oil prices again?

Markets raised a lot of interesting questions last week, and most of them had nothing to do with the French presidential elections. The main talking points were the stumble in oil prices—and other industrial commodities—and the growing anxiety that the stop-go cycle in China is edging towards the former rather than the latter. The main question everyone is asking when the market breaks key levels is whether it is the beginning of a more prolonged move. I am no expert, but if pressed I think oil and commodities will snap back. The chart below shows trailing flows of the DBC commodity ETF, which have been depressed recently. This doesn't preclude a further rout, but it suggests that investors' positioning and sentiment don't favour it. This story is corroborated by CFTC data, which shows that spec positioning in oil have been reduced significantly. This doesn't look like a market which is being caught out complacently long as was the case last time oil was routed. 

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Asia, Markets and Tradingclaus vistesenoil, commodities, China, bonds, US Bond Yields