After last week’s event risk miasma largely disappointed in terms of chaotic markets movements (except for in offshore yuan), this week, the calendar is lighter, with a good portion of it back-loaded, and as former fund manager and FX trader Richard Breslow notes, it would be entirely consistent with how this year has gone, for this to be the one where we get rocking.
Perhaps less news will prove to be more. We still operate in a world where traditional economic numbers are the noise. And the information you will never see previewed on the economist survey pages drive the real price action. Nevertheless, it certainly feels like a lot of assets are in play. Even with so many technical charts looking confused and range-bound.
Various measures of implied volatility are creeping higher. So slowly that it is sometimes hard to notice. But you should. To my mind, vols don’t rise unless there is a perception of two-way risk. Despite all of the good reasons for traders to stand down, it feels like a good number of nerves are frayed. The VIX doesn’t count because it always strikes me as backward-looking rather than usefully predictive.
The dollar is trying ever so hard to get out of its summer range. The traders I speak with tend to be long. And unusually nervous. It’s as if they feel they have worked so hard, been so patient and just can’t bear for it all to again be snatched away in the blink of an eye. Analysts are more negative than not, but seem to be looking for ways to temper their forecasts. Maybe that’s why these two groups keep meeting in the middle.
We’ll see how the positions pan out, but underneath it all, the U.S. numbers last week were better than portrayed. The Fed is on the move. And no one will convince me that the ECB and BOJ weren’t ultimately dovish. Emerging-market currencies are demanding you choose among them carefully. As a class, they look uninspiring.
A lot has been made of recent predictions of higher interest rates. I’d find it a compelling notion if I thought it was happening anytime soon. If I were facing rollover risk, it would be on my worry list. As a trade, there’s nothing alluring about it. Bund yields aren’t going anywhere until political risk in Europe is alleviated. That includes Brexit as well. JGB vigilantes will only be able to accomplish what the BOJ allows and the leash remains short. Ten extra basis points won’t make Treasuries pale as an alternative. Especially if the dollar remains bid. And as long as U.S. equities remain this strong, being long bonds is a must-have hedge. Small risk for a lot of protection. Even if you think yields will rise, what’s the rush?
It isn’t true that the major central banks have committed any policy mistakes with their most recent moves. Including the BOE. But the chance of geopolitical mistakes hasn’t receded. Which further argues for keeping it simple and liquid.