Recap 7-19-12

Main Items:

  • US Philly Fed improved to -12.9 in July vs -8 exp and -16.6 prev.
  • US Existing Home Sales dropped to 4.37mm vs 4.62mm exp and 4.55mm prev
  • Regulators are focusing on at least four of Europe’s biggest banks in Libor investigations, “suspecting that Barclays’ traders were the ringleaders of a circle that included Crédit Agricole, HSBC, Deutsche Bank and Société Générale. -FT
  • Half of households whose head is between 65 and 74 have no money in retirement accounts, according to the Federal Reserve. – NYT
  • The ECB is pushing for an overhaul to the EURIBOR rate setting process. The rate may be set on actual lending rates instead of the present process where individual banks make submissions. Reuters


  • KPMG is warning of significant liquidity issues at some of China’s property developers.

Upcoming Data:

  • Fri: Canada CPI
  • Mon: EU Consumer Confidence, US Crop conditions
  • Tues: EU PMI, US Markit PMI, RichmondFed, Japan Trade Balance, Australia CPI
  • Wed:
  • Thurs:

Commentary & Links:

One consequence of policy rates at the zero bound is that realized volatility in yields tends to fall dramatically. However, the business cycle is not likely moderate in the absence of effective monetary policy, so equity volatility is unlikely to change much. Indeed, this appears to be the lesson from Japan. The chart below shows dates when the JGB cut to 25bps and then 0, along with the rolling 5y volatility across Yen denominated asset classes.

This appears likely to be a good template for fixed income and equity volatility in the G10 going forward, but it’s possible that FX volatility in today’s world is also likely to drop. This is simply because changes in interest rate differentials have historically explained a large percentage of FX moves. One could argue that rate differentials are simply a reflection of relative nominal growth expectations, but even so, the low growth levels that appear likely across the G10 argue for lower volatility.

Unfortunately, this suggests that the opportunities for Global Macro managers to add alpha in developed markets space is likely to diminish. Global Macro managers should probably put a stronger emphasis on anticipating the probability distribution around equity market returns rather than rate or FX markets going forward.