Recap 2015-03-16


Now that oil is back to making lows… are we likely to get a replace of Dec/Jan price action? In particular, are we likely to see the combination of widening credit spreads and falling bond yields? IMO, it’s possible but not probable. One reason why the effect of the decline in oil prices was so strong before was due to the speed of the decline. The pace of the decline was a multi-sigma event that was not priced into the risk premiums across markets. A similar decline from here would imply a $20 oil price – possible but not probable.

Separately, I was wondering how the ECB QE program compared to the first Japanese QE program back in 2002. I used the 2s30s curve as a point of comparison because front end EUR yields are negative now even as Japanese yields were not then. The price action analogue is clearly not meant to be compared literally, but may potentially be instructive as to how they may evolve going forward:

In any case, there isn’t much of a benefit to thinking too many moves ahead… just something to keep in mind.

Also, there has been a lot of press on “intelligent” portfolios recently. Most of these algorithms seem to be based primarily on some combination of historical price data rather than economic data. In particular, momentum seems to be an explicit part of the strategies involved. Now, momentum signals are successful when the trend to volatility ratio is strong. That is one major reason quant funds have performed well over the past several quarters – witness with trends across global fixed income, currency and equity markets over that time period. But what’s worth considering is that given the lower returned that are now priced into almost all asset prices here, future momentum to volatility ratios are likely to fall dramatically. As an example, consider an asset with a trend of zero, i.e. prices just exhibit volatility around its present level. It is likely that momentum based strategies are unlikely to perform especially well. It is probably not a coincidence that returns from momentum based strategies wane just as they become widely available.

Interesting Links:

Here is one very good reason not to use small email providers with security loopholes:


  • US Empire Mfg declined to 6.9 vs 8.0 exp and 7.8 prev
  • NAHB Housing Survey declined to 53 vs 56 exp and 55 prev


  • Tue: German ZEW, US Housing Starts
  • Wed: UK Employment, BoE Minutes, FOMC, NZ GDP
  • Thu: US Jobless Claims, Philly Fed
  • Fri: Quadruple Witching, Canada CPI, Retail Sales
  • Mon: US Existing Home Sales, EU Consumer Confidence, JapanMarkt PMI, China HSBC PMI

2 thoughts on “Recap 2015-03-16

  1. hi, First off, thank you for your insightful posts. I am just curious on the DE/JP chart above. Why did you choose the starting period for Germany as begin 2014? Forgive me if I’m missing something, but I’m not clear how the two time periods line up on the overlay. thank you

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