Amid turmoil in Chinese FX markets (which has not ended well in the past), the need to hedge against the looming Brexit vote, and rapidly fading confidence in the ability of The Fed, BoJ, ECB to save the world; it appears what was an ignorantly complacent market has suddenly shrugged off the denial (perhaps face-slapped by Yellen) and is buying protection (in the form of VIX ETNs) with both hands and feet. As Bloomberg's Richard Breslow so eloquently notes, "markets are struggling to believe in anything."
As we detailed previously, VIX ETN shares outstanding have been soaring… (but the last 3 days have seen a 10% plunge – the most in 3 months)
And this week, trading in five of the most popular securities linked to moves in the Chicago Board Options Exchange Volatility Index surged to more than 4 percent of total U.S. stock volume, a level that before this week had never been reached once, according to data compiled by Bloomberg.
Which we suspect is about to get considerably worse as VIX futures speculative positioning is near its greatest short ever…
As Bloomberg's Richard Breslow explains, there's an absence of belief in anything…
This strikes me as a week when no one in the markets particularly distinguished themselves. Heightened intra-day volatility and horrendous liquidity conditions have sent loads of traders, human and otherwise, to the sidelines. Fear has trumped greed. It would seem that traders, or their employers, have decided that risk management will be ineffective for the duration.
Central bankers have only added to the confusion while doing nothing, as expected. Which is a result when you think about it. Four meetings and we know less now than we thought we did before they began.
Traders keep telling me that the changes in sentiment have been so rapid that it’s impossible to keep up. But that implies actual opinions in flux. At the moment, it’s more like there’s an absence of belief in anything. Every move in prices or economic numbers is taken as unforeseeable. Which isn’t really true and there have been some great risk/reward opportunities.
At the post-FOMC press conference, Chair Yellen didn’t exude any air of confidence. That hurt sentiment more than the dovish tilt or the lower dot plots. When she hedged on what the neutral rate of inflation might really be, she threw a monkey wrench into any Fed forecast believability.
The tone notwithstanding and even with futures pricing a one and done Fed, who’d be surprised if they don’t turn into rabid hawks again if a few events go their way.
BOJ Governor Kuroda also walked away from his meeting having accomplished nothing more than an impulsively stronger currency. Abenomics is staggering and the best we got was, people don’t fully understand our negative interest rate strategy. Moody’s Analytics’ current forecasts for the economy are depressing.
Former Bundesbank President and now UBS Chairman Axel Weber said yesterday that when investing, “our preferred assets are all the things central banks distort."
The new normal continues to look like the same old muddle.
One wonders if a los of faith will mean this char converges?
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