Recap 2014-10-20


Oil prices have fallen by an amount similar to levels typically seen during recessions. As such, the stimulatory factors are comparable. The chart below shows the log S&P 12m price return (blue, LHS) vs the 24m log change of WTI prices, leading by 1 year. (red, RHS, and extrapolated past Oct 2015) As the chart shows, if oil prices hold here, the historical precedents are quite bullish for equities – the last time we saw an oil price fall of this magnitude without a recession was the mid 90’s, and before that, the mid 80’s. Obviously, all are not equal, and far more goes into equity returns than oil prices, but I thought the relationship was interesting.

Separately, lots of folks have claimed that the recent market volatility has been due to the decline in dealer balance sheets and risk appetite. I.e., there is a smaller ‘shock absorber.’ Which is probably true. But there are two sides here, and the other side may be that there is too much short term hedge fund money in the market. Certainly, aggregate returns over the past few years support that hypothesis. As a result, the size of the short term flows may well have increased as well. If true, this suggests that we should expect these types of positioning driven moves to recur in the future, barring a decline in hedge fund AUM.

Finally, more signs of loosening regulatory standards for mortgages, via WSJ:

Federal Housing Finance Agency Director Mel Watt said the agency, along with mortgage-finance giants Fannie Mae and Freddie Mac, reached a deal on what kinds of mistakes could trigger penalties for lenders years after a loan is issued… After the financial crisis, Fannie and Freddie required lenders to buy back billions of dollars in loans that the companies said didn’t meet the standards. As a result, lenders have said they have been wary to grant mortgages to riskier borrowers. The FHFA has tried a few times to mollify lenders’ concerns. The latest agreement clarifies what kinds of mistakes could trigger a repurchase demand many years after the loan is granted. Mr. Watt also said the new framework would include a “significance test” for mortgage buyback demands that would require Fannie and Freddie to determine that a loan would have been ineligible for purchase originally had the loan’s information been accurately reported. In his speech, Mr. Watt also said Fannie and Freddie were close to beginning new programs to guarantee loans with down payments of as little as 3%, something the companies largely have stopped doing. He said the loans would be available for loans with “compensating factors” and that details on the program would be released in coming weeks. “We have started to move mortgage finance back to a responsible state of normalcy—one that encourages responsible lending to creditworthy borrowers while maintaining safety and soundness” of Fannie and Freddie, Mr. Watt said.


  • German PPI declined to -1.0% YoY as exp vs -0.8% prev
  • Abe hinted he may delay the next consumption tax hike, telling the FT such a move would be meaningless if it inflicted too much damage on the economy – FT
  • The Nikkei reported that the GPIF will raise its allocation in domestic stocks to around 25%. Currently the investment in equities myst be in a range of 12% (+/- 6%). The weighting at the end of June stood at 17%, near the upper limit. Equities finished +4% in Japan on the news.
  • ~45% of companies responding to a Reuters poll think the BOJ should prevent the yen from weakening below 110 – Reuters
  • GS: We are just past the half-way point of regional bank earnings (10 of 18 reported) and results have disappointed – only 3 banks have beat (BBT, HBAN, FRC) as loan growth has lagged (+64bps QoQ vs. consensus of +1.2%), the credit/expense leverage stories are in the late innings, margins are down 8bps and concerns around the timing of rate rises have pushed rates lower, weighing on margin outlooks. That said, shares are down 3% since earnings (-0.6% for S&P) vs. just 1% 2015 estimate revisions. While near-term trends won’t see much pick-up, shares (11.3x 2015) appear to be pricing in an overly negative outcome.
  • US crude production still going very strong. Experts think Brent would have to hit ~$60 before production starts to get dialed back (and even then the output cuts probably won’t be very large). “Slowing American production is like slowing a freight train moving at high speed.” NYT
  • Most of the dozens of people who had direct or indirect contact in Dallas with Thomas Eric Duncan have been declared no longer at risk of contracting the virus. The Carnival Cruise passenger tested negative. "Nigeria is now free of Ebola," WHO representative Rui Gama Vaz told a news conference in the capital Abuja. "This is a spectacular success story."
  • Germany and France are in “secret” negotiations over a deal that would see Berlin sign off Paris’s new budget even though it violated EU fiscal rules. In exchange for a detailed deficit reduction and structural reform roadmap, Germany is apparently willing to accept the new French budget. Reuters/Der Spiegel
  • Banks begin charging customers for their euro-denominated deposits; in response to the ECB’s neg. deposit rate, some of the world’s biggest banks are charging customers for euro-denominated deposits – WSJ
  • ECB bank stress tests; investors are worried that the shipping loan portfolios of some of Germany’s biggest banks (inc. HSH Nordbank, NordLB, and Commerzbank) could see large write-downs under the ECB’s stress test, prompting some to incur capital problems. HSH Nordbank, the world’s largest shipping lenders, is seen by bankers in Germany as one of the most likely firms to “fail” the ECB tests – FT


  • Mon: RBA Minutes, China Retail Sales, IP
  • Tue: US Existing home Sales, Japan Trade Balance, Australia CPI
  • Wed: BoE Minutes, US CPI, Canada Retail Sales, BoC, DoE Oil Inventory Report, New Zealand CPI, Japan PMI, China PMI
  • Thu: EU PMI, UK Retail Sales, Jobless Claims, FHFA House Price Index, US Markit Mfg PMI, EU Consumer Confidence
  • Fri: German GfK Consumer Confidence, UK 3Q GDP, US New Home Sales

Recap 2014-10-17


Anecdotal Items Bullish Risk:

· Greenlight Capital, the hedge-fund firm run by billionaire David Einhorn, plans to raise money for the first time in two years to take advantage of recent market turmoil

· Via @lebullmarche and Trace: Yesterday clients bot $932mm of paper, multi-yr record -> dealer inventory is now just >$5bn- lowest in over 12months

· BBG: Firms from Pacific Investment Management Co. to Blackstone Group LP say they are poised to scoop up speculative-grade corporate bonds after yields rose to the highest levels in more than a year. They’re looking for bargains after building up the highest levels of cash in almost three years. “Credit is a buy here, specifically high yield” bonds and loans, Mark Kiesel, one of three managers who oversee Pimco’s $202 billion Total Return Fund, said yesterday in a Bloomberg Television interview. At Blackstone, Chief Executive Officer Stephen Schwarzman told investors yesterday that the firm’s $70.2 billion credit unit is ready to “feast” on lower-rated, long-term debt, particularly in Europe, after “waiting patiently for something bad to happen.”

· GS: The recent sell-off in oil has been mostly driven by positioning based upon expected fundamental shifts as opposed to currently observable shifts. While looking into 2015 we have sympathy for these medium- to longer- term bearish views that have driven prices lower, we believe it is too much too early. Prices have also likely overshot to the downside particularly as the lower we go the tighter the near-term balances become. This leaves us near-term constructive despite being bearish as we look further out… We estimate that net specs have priced in a 300 million barrel build between now and the end of March, which is a 2.0 million b/d surplus. While potentially possible, it would require solid delivery from Libya, Iraq/Kurdistan and Brazil. The net spec selling ultimately moved prices into a region where many producers’ puts had been struck, increasing the selling of oil futures by non-commercial traders as they manage the risk incurred from producer hedging programs in a falling price environment.

This came out yesterday, and could be quite simulative – allowing non GSE companies to potentially securitize mortgages again.

WSJ: U.S. Regulators Poised to Finalize Relaxed Mortgage Rules

· regulators are expected to finalize a far looser set of standards for mortgages packaged into securities and sold to investors than initially proposed in April 2011.

· The rules, which stem from the 2010 Dodd-Frank law, will no longer require that borrowers make a 20% down payment to get a so-called “qualified residential mortgage.” Instead, loans will have to comply with a separate set of mortgage standards, including limits on how much overall debt a borrower can have in relation to monthly income.

Interesting items re: BoJ. Does it sound like they want to do more QE?

· Iwata said that the Bank is internally making simulations on exit strategy.(!)

· Although the impact on FX market was limited, it is worth noting that the BoJ failed to collect the target amount in today’s T-bill purchase operation for the first time since the initiation of QQE

There are some very interesting weekly charts today:

10y: Massive hammer candlestick on 10y yields… but the close remains lower week on week in the context of a year long downtrend:

The 5y chart is even more interesting… the massive bear trap in Sept resolved into a reversal below the bottom of the rising triangle. 5y yields are now in no man’s land, technically speaking, without a clear trend.

2y yields, however, closed at the bottom of the rising channel that started with the Taper Tantrum. The technical setup for a bet for higher yields looks pretty good:

The S&P chart looks decent. Massive hammer candle stick with intra-week levels below but a weekly close above multiple long term supports. (50wk ma, the 1880 level, the 12/31/13 close) Obviously we’ll need to see more constructive price action in the coming weeks to confirm, but for now, it’s looking good.

Likewise, CDX HY spreads widened above but closed below long term resistance:

The VIX chart showed how unexpected this move was. The entire body of the weekly candlestick was above the weekly Bollinger Band. The last time that happened was the week of August 12th, 2011. While that week did not mark the ultimate low for stocks, it did mark the high for the VIX and the beginning of the consolidation phase.


  • U Michigan Confidence improved to 86.4 vs 84 exp and 84.6 prev
  • US Housing Starts was a better than expected, but Building Permits were a bit weaker. However, both were positive and revisions for both were higher.
  • Canada Core CPI was stable at 2.1% as exp
  • BOE’s chief economist Haldane said he has grown gloomier on the outlook for UK growth and he now believes rates can stay “lower, for longer.”
  • Gulf nations to oppose any cut to the OPEC production ceiling according to the WSJ. A source said “if we are going to end up with lower market share and prices will fall anyway, let’s stick to market share.”


  • Mon: German PPI, RBA Minutes, China Retail Sales, IP
  • Tue: US Existing home Sales, Japan Trade Balance, Australia CPI
  • Wed: BoE Minutes, US CPI, Canada Retail Sales, BoC, DoE Oil Inventory Report, New Zealand CPI, Japan PMI, China PMI
  • Thu: EU PMI, UK Retail Sales, Jobless Claims, FHFA House Price Index, US Markit Mfg PMI, EU Consumer Confidence
  • Fri: German GfK Consumer Confidence, UK 3Q GDP, US New Home Sales

Recap 2014-10-16: A Short list of Silliness


An abbreviated list of silliness includes:

· Brent Donnelly @ Citi ran a survey where 1 in 6 respondents expected the next Fed move to be QE4.

· 5y Inflation Breakevens are at levels not seen since people feared that the EU wasn’t going to exist

· WTI term structure in contango.

· 2y Treasury yields below 30bps.

· VIX at 30 with the Fed not hiking for at least 6 months and no systemic risk.

· Articles like “Wall Street Might Know Something the Rest of Us Don’t.”

As I said last Friday, I think we will get a low in risk assets this week. With options expiry tomorrow, anything can happen, so I don’t want to preclude anything. And confidence in really any sort of market call in the near term is low. But one source of comfort is that pretty much all product specialists I’ve spoken to over the past few days agree there is value in pro-risk positions in their space. This means that value buyers are probably out deploying capital already. Given where put/call ratios and option skews are, (flattest since July 2009!) I think most real money players are done w/ their risk hedging programs here as well. Whether there has been sufficient stop outs / margin calls relative to the amount of value buying, however, is obviously anyone’s guess.

I believe that the market is a mechanism that essentially seeks ‘pain trades’ within the context of a longer term ‘fair value.’ This is akin to Jesse Livermore’s saying that stock prices go along the past of ‘least resistance.’ Now without a doubt, this market move has been fast and furious and bewildering to a lot of folks, including yours truly. As a result, it is common to see people say that while they expect a recovery in prices, but it will take time because confidence has been damaged. Which may well be true. But once the downside stops have all been hit and positions are cleared out – the pain trade will be to the upside. And the offside group is the fast money crowd. The CEO of the world’s largest asset manager said "This is all more of the fast money moving out", calling the downturn "a meltdown with a lot of hedge funds and fast money.” So we shouldn’t be surprised if the market ramps up the way it fell down. The fact is that this risk off move was likely strongly accelerated by low levels of liquidity resulting from the shrinking of broker-dealer balance sheets. And the thing about low liquidity is that it exacerbates price action in both directions.

Oh, and also this:

It’s not going to prevent transmissions that have already occurred, but the wake up call this week and the tightening of both training and standards should go a long way toward limiting future transmissions.


  • US Philly Fed declined to 20.7 vs 19.8 exp and 22.5 prev
  • NAHB Survey declined to 54 vs 59 exp and prev
  • US Jobless Claims declined to 264k vs 290k exp and 287k prev. Lowest print since April 2000!
  • New Zealand PMI improved to 58.1 vs 56.5 prev
  • China M2 improved to 12.9% YoY vs 13.0% exp and 12.8% prev. M1 growth, however, was quite weak, falling to 4.8% vs 5.9% exp and 5.7% prev


  • Fri: Triple Witching, Yellen Speaks, Canada CPI, US Housing Starts, U Michigan Confidence
  • Mon: German PPI, RBA Minutes, China Retail Sales, IP
  • Tue: US Existing home Sales, Japan Trade Balance, Australia CPI
  • Wed: BoE Minutes, US CPI, Canada Retail Sales, BoC, DoE Oil Inventory Report, New Zealand CPI, Japan PMI, China PMI
  • Thu: EU PMI, UK Retail Sales, Jobless Claims, FHFA House Price Index, US Markit Mfg PMI, EU Consumer Confidence

Recap 2014-10-15


Well, if it isn’t obvious, clear signs of panic today. One example of many: people are buying 2y notes at 30bps. In other words, betting that the Fed doesn’t hike for almost 2 years, even though the Fed says it thinks it will hike in less than 12 months. I mean, I understand buying treasuries for capital preservation, but why don’t people just go to cash or TBills instead of buying 2y notes? Is Ebola going to affect the solvency of the banking system?

Positives: the small cap Russell 2000 index, which lead the way lower, closed up on the day. The Dow Transports were also up on the day. High Yield was roughly flat. 30y yields are so low that, relative to equity valuations, the S&P hasn’t been this cheap since early 2013. The candle stick chart of the VIX.

Negatives: the SPX still closed lower, with a lower high and low. (the most important factor. SPX is now in the congestion range that prevailed for most of March-May) Oil lower on the day, although marginally.

Anyway, here’s a historical read on SARS and H1N1. Different from Ebola, obviously, with only a 10% mortality rate, but has a much quicker transmission vector via respiratory droplets. One research article estimated that H1N1 may have killed as many as between 284k-579k people, with 18k confirmed instances. Ebola currently has 4,656 laboratory confirmed cases. The H1N1 pandemic was first described in April 2009, and began to taper off in November 2009.

Finally, I missed this interesting bit yesterday:


  • A second nurse in Texas has Ebola, but flew just hours before her diagnosis.
  • UK Employment was decent, with the ILO UER measure falling to 6.0% vs 6.1% exp and 6.2% prev. Weekly earnings were also strong, ticking higher to +0.7% vs 0.6% prev
  • US Retail Sales were weak, falling -0.3% MoM vs -0.1% exp. The control group declined -0.2% vs +0.4% exp
  • Empire Mfg dropped sharply to 6.17 vs 20.25 exp and 27.54 prev
  • US Core PPI declined to +1.6% YoY vs 1.7% exp and 1.8% prev
  • China CPI declined to 1.6% vs 1.7% exp. This was the lowest print since January 2010. Food prices were a large driver. PPI declined -1.8% YoY vs -1.6% exp and 1.2% prev


  • Wed: New Zealand PMI, Consumer Confidence, RBA FX Transactions
  • Thu: EU CPI, US Jobless Claims, US Philly Fed, NAHB Survey
  • Fri: Triple Witching, Yellen Speaks, Canada CPI, US Housing Starts, U Michigan Confidence
  • Mon: German PPI, RBA Minutes, China Retail Sales, IP
  • Tue: US Existing home Sales, Japan Trade Balance, Australia CPI
  • Wed: BoE Minutes, US CPI, Canada Retail Sales, BoC, DoE Oil Inventory Report, New Zealand CPI, Japan PMI, China PMI

Recap 2014-10-14: BAML FMS Takeaways


The most recent survey was taken from October 3rd to the 9th, i.e. while the S&P was between 1967 to 1929.

Average Cash balances increased, but not by a lot. Cash balances were actually higher a couple months ago:

Growth expectations have fallen to 18 month lows:

Equities allocations have fallen to the lowest level in 2 years.

But exposure to Japanese equities are worryingly high:

And the buy Europe risk trade is broadly over:

It appears that the move out of Equities has mostly gone to Fixed Income, rather than cash. Bond allocation is at the highest level in 7 months, and at the high end of the range that has prevailed since mid 2013, after the ‘Taper Tantrum:’

Long USD has jumped to become perceived to be the most crowded trade

The data points to the hypothesis that global investors are switching from equities to fixed income on the back of falling, but still positive growth expectations. It is ironic that many survey participants had worried about valuations in equity space over the past few months, but are now buying 10y US treasuries at 2.2%, the lowest level since last June, and 30y US treasuries at below 3%, the lowest level since last May. In aggregate, given that equities are sporting an earnings yield of 5.8%, the move does not appear to be driven by valuation concerns unless people are actually expecting earnings growth to be negative. (which may be positive but is not at all evident in the data)

One major headwind for equities is that the High Yield market has not been able to bounce. Though it is now near 2013 lows, we may well need to see long term buyers step into the market here. However, oil prices are still falling, which is impacting the energy names in the HY index. Given that the weight of the index is ~13% and the fall is ~5%, after adjusting for recovery value it is arguable that current oil prices are already discounted in the price. But with oil still on the move, obviously that comparison is in flux.

A couple of centrist FOMC members also made dovish noises. Vice Chair Fischer noted that “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise.” Williams said that QE may be needed if economy falters.

In any case, I saw several reports over the long weekend noting that breadth is now at levels that have historically been coincident with lows. The always good Quantifiable Edges has a proprietary breadth term that has hit levels that have historically lead to bounces over the next 4 weeks. @ukarlewitz noted that the percent of S&P 500 members above their 200 day moving average fell to 41% on Friday, a level that marked lows in the last bull market. And though it did not mark the outright lows in 2010 and 2011, the first print at or below 41% marked the beginning of the consolidation period.

Here’s another way to look at it.


  • German ZEW declined to -3.6 vs 0 exp and 6.9 prev. This is the lowest print since 2012
  • US NFIB Survey declined to 95.3 vs 95.8 exp and 96.1 prev
  • Kuwait joined Saudi Arabia and said they will not immediately reduce oil production to offset tumbling prices, a signal OPEC is unlikely to move forward with Venezuelan calls for an emergency meeting. The IEA thinks crude will need to fall below $80 to limit US shale production. h/t Jordan
  • Bloomberg noted that foreign sales last year accounted for 46.3 percent of revenues for S&P 500 companies, although US exports represent just 13.5% of GDP.
  • China Trade Balance declined to 30.1Bn in Sept vs 41Bn, exp, although base effect adjustments meant that both exports and imports rose 15.3% and 7.0% respectively, both stronger than expected.
  • France CPI declined to 0.4% YoY as exp vs 0.5% prev
  • UK CPI dropped to 1.2% vs 1.4% exp and 1.5% prev. The Core measure was the driver, falling to 1.5% vs 1.8% exp and 1.9% prev. The core figure was the lowest since April 2009
  • Australia Business Confidence declined to 5 vs 8 prev
  • New Zealand House Sales improved to -12% YoY vs -16.3% YoY
  • Ireland will announce a plan to phase out the “double Irish” tax structure today. All Irish registered firms will over time automatically be deemed to be a tax resident, bringing the law inline with US and British rules. h/t Jordan


  • Wed: Draghi Speaks, UK Employment, US Retail Sales, PPI, New Zealand PMI, Consumer Confidence, RBA FX Transactions
  • Thu: EU CPI, US Jobless Claims, US Philly Fed, NAHB Survey
  • Fri: Triple Witching, Yellen Speaks, Canada CPI, US Housing Starts, U Michigan Confidence
  • Mon: German PPI, RBA Minutes, China Retail Sales, IP
  • Tue: US Existing home Sales, Japan Trade Balance, Australia CPI

Recap 2014-10-10: Random Thoughts on Equity Price Action, Long Term Charts


Seems like most people are as confused as I am about what’s driving the market sell off. That is likely to beget further risk reduction. Volatility and uncertainty will need to fall before longer term buyers step in.

Peter Brandt noted that both the DAX and Russell have broken below long term support. Bespoke noted that based on a limited sample, there is a bearish bias stretching out through the next month:

But other studies via @WildCatTrader suggest the opposite:

Selected commentary from JPM: The failed rally from Fri 10/3 was one thing but the inability of stocks to at least trade flat following Wed’s surge has killed off the last few near-term market bulls. 1925 obviously has been strong support and people are hesitant to press close to this level but for many the 200day MA has become the next “inevitable” stop for the SPX cash (that is now ~1900). At least last week (Thurs morning 10/2) the sell-off had an authentic and mildly panicked feel to it w/participation from both MFs and HFs. This week though has been different w/volumes lower and faster-money HFs dominating. The flows had a much more artificial and forced feel. The Thurs descent was particularly troubling in that it was very calm and orderly. . The growth questions are one thing but lurking beneath the surface is the age-old fear of a QE-less market and how stocks can possibly survive the absence of Fed balance sheet expansion. As of the end of Oct the Fed will no longer be expanding its balance sheet and it has become very popular to look back at the experiences post QE1 and QE2 and extrapolate them to the future (in Mar ’10 when QE1 ended the SPX slumped ~16% and after QE2 in June ’11 the index fell nearly 20%). Obviously there was a lot more going on in 2010 and 2011 besides Fed purchases but that isn’t stopping investors from grouping all the QE eras together.

Given the current pace of market moves, various options based indicators, and given my hypothesis that options hedging activity may have had an outsized impact, we should have a tradable low towards the end of next week. And this may be completely spurious, but real yields appears to have been leading PE for most the past 12 months. If the relationship holds, that also points to a low around late next week.

Some other perspectives:

· @RareviewMacro noted that: the Largest weighting in $HYG is #Oil & #Gas @ 13.5%.
Here’s a chart of HYG vs the front WTI contract over the 12 months:

As a result, it’s probably not a surprise that the selloff in HY doesn’t seem over yet. Here’s a chart of the price of CDX HY Series 22,

Having said that, WTI has gotten reasonably cheap here, IMO. Even with all the shale production, it’s not too far from the marginal cost of production. It can obviously fall another further given the global growth concerns, but it’s probably reasonable to expect supply to start reacting soon. Some commentators have noted that the drop in oil should help real incomes and hence real GDP growth, which is true, but the effects are likely to be quite modest and with a long lag. The chart below of ISM and WTI price changes (which is extrapolated for future dates) illustrates:

· FTA notes about yesterday’s move: Over the past 50 years, the market’s been down this far in a day 289 times, or almost six times a year. It is nasty, but on this basis it looks normal.

Separately, let’s take a look at the longer term charts:

SPX is now the most oversold since late 2012. In addition, this is the lowest weekly close since May and qualifies as a lower low. However it is now not far from a series of support levels: the bottom of the weekly Bollinger Bands, (the first time in 23 months!) the 40-week moving average, (roughly the same as the 200 day) and the support / resistance at ~1880 that was in play for most of 2Q. Given the prevailing sentiment and technical backdrop, there is a good chance those levels hold, at least in the near term. Also worth nothing is the time dimension. The sell off will be 4 weeks old at the end of next week. The S&P hasn’t had a fast correction (loosely defined as a correction that excludes consolidation periods) lasting more than 5 weeks since 2011.

In rates space, 30yr yields are now at the lowest level since the Taper Tantrum, and the given the recent failed move higher and the continued trend lower, the technical backdrop is as strong as it’s been all year. Oh, and apparently there are growth and disinflation concerns now too, so that’s not going to hurt:

However, the belly has just been consolidating. The high print for yields back on Sept 18th and 19th turned out to be a massive bear trap, and yields are now at the bottom of the rising wedge that has been in place for over a year. This suggest paying fixed / shedding duration may be good risk reward. (Normally, that would be a positive sign for equity prices as well, but perhaps not now, given recent correlations)

The oil sell off has gotten a lot of attention, but note that we are now at the most substantive support/resistance levels since … a month ago. The $90 level has been in play since late 2007:

EURUSD was unable to break below 1.25, and given the speed / volatility of the move and the first substantive higher weekly close since the end of June, seems quite vulnerable for a retracement:

USDJPY has similarly rejected 110 amidst a series of articles suggesting growing Japanese concern regarding excessive Yen weakness:

AUD was unable to bounce this week, and prices are right at long term support. The picture for CAD is similar.

Gold, unlike Silver, has held above the 1200 support level. Given that long term yields have been falling, the weak price action is quite concerning:


  • S&P revises France outlook from stable to negative; affirms its AA rating
  • Draghi noted he expects credit to pick up soon next year “as the banking sector is progressively cleaned up and the deleveraging process reaches its conclusion, banks will have new balance sheet capacity to lend, and our monetary policy will become even more effective” Draghi said the next step is to “exploit the available fiscal space, so that fiscal policy can work with rather than against monetary policy in supporting aggregate demand” further noting that “the aggregate fiscal stance must be supportive of aggregate demand in the current cyclical position, and this can and should be achieved within the existing rules”. Mr. Draghi drew the conclusion that for “Governments and European institutions that have fiscal space, then of course it makes sense to use it”.
  • Canada Employment was strong, rising 74.1k vs 20k exp and -11k prev, and driven by Full Time rather than Part Time employment. The Unemployment Rate declined to 6.8% vs 7.0% exp and prev, with the participation rate steady at 66.0% as exp.
  • The WSJ discusses how “fracking firms are being tested” by the current crude environment. “At $90 a barrel and below, many hydraulic-fracturing projects start to become uneconomic.”
  • OPEC price war shows no signs of abating as Iran matches Saudi Arabia; Iran will sell its crude to Asia in November at the biggest discount in almost six years, matching cuts by Saudi Arabia.
  • USDA WASDE report End Stocks:
  1. Corn: 2081M vs 2152.5M exp
  2. Soybean: 450M vs 488M exp. However, Production was broadly inline at 3927M vs 3990M exp
  3. Wheat: 654M vs 705M exp


  • Mon: US Holiday, China Trade Balance, Australia Business Confidence
  • Tue: France CPI, UK CPI, German ZEW, US NFIB Survey,
  • Wed: Draghi Speaks, UK Employment, US Retail Sales, PPI, New Zealand PMI, Consumer Confidence, RBA FX Transactions
  • Thu: EU CPI, US Jobless Claims, US Philly Fed, NAHB Survey
  • Fri: Yellen Speaks, Canada CPI, US Housing Starts, U Michigan Confidence

Recap 2014-10-09


The price moves in equities are bewildering. Massive moves, on no news. Even more interesting is that bonds barely moved today. High yield also sold off, but in a fairly modest fashion. In other words, it seems like equities are moving massively in a vacuum. People are de-risking by reducing equity leverage and going to cash only. That may sound like the market is full of goldbugs, but as we know, gold has gotten killed.

It has been popular to ascribe equity weakness to growth concerns, but bond yields do not support that hypothesis.

The only explanation I can think of is that someone is short a ton of gamma around the 1950 mark. There was similar volatility around that figure on 7/31 and mid August.

I’m grasping at straws though – I don’t really have anything other than price action to support that hypothesis. If true, another question is when the options mature. The October options expire next week, so there is a chance that this volatility around the 1950 figure goes away after next week. Open interest in SPX cash and futures options exhibit a strong tilt towards puts (and has been for some time) for strikes below 1960. Perhaps most of those puts are held by long only investors who are not actively delta hedging, which suggests dealer hedging has been a large driver.

The CBOE skew index has been elevated since late June, which suggests that market participants have been willing to pay a high premium for out of the money puts (relative to calls) since then, when SPX was trading around the 1970 level. The sharp drop on 7/31 corresponded with some normalization of that skew:

Not clear really – just another unverifiable hypothesis.

Another possibility is that with the end of QE looming, there is a sudden uncertainty regarding the appropriate clearing levels for markets.

I saw a few reports this afternoon noting that this price action was seen 3 days before the 1987 crash. How’s that for putting fear back into the markets? Note a major difference: back then, the Fed had started tightening about a year before. Reducing QE is not a tightening event, and also unlike then, bond yields are falling rather than rising.


  • BoE kept policy unchanged as exp
  • UK RICS House Price Balance declined to 30 vs 36 exp and 40 prev
  • German Current Account declined to 10.3Bn vs 13.8Bn exp and 21.7Bn prev
  • US Jobless Claims were stable at 287k vs 295k exp
  • Australia’s September employment change saw -29.7k lost jobs versus +30k expected. This was the largest decline since April 2011. If the Australian Bureau of Statistics not changed the method applied in September, the loss would have been 172k jobs. The unemployment rate declined to 6.1% from 6.2% since the participation rate declined to 64.5% from 65%. JPM: This is despite growth in the working age population of 1.8% annualized. A resumption of the weak trend in participation (not just on revisions), which is now back at the lows for the cycle, is therefore flattering the unemployment rate.


  • Fri: Canada Employment, USDA report
  • Mon: US Holiday, China Trade Balance, Australia Business Confidence
  • Tue: France CPI, UK CPI, German ZEW, US NFIB Survey,
  • Wed: Draghi Speaks, UK Employment, US Retail Sales, PPI, New Zealand PMI, Consumer Confidence, RBA FX Transactions
  • Thu: EU CPI, US Jobless Claims, US Philly Fed, NAHB Survey