Storm and Stress

“Volatility is an outcome revealed in markets: volatility is not causality; it is result.”

-David Kotok, Cumberland Advisors


Yesterday, Japanese equities rallied following a comment by a central bank aide who said that current circumstances would allow more easing by the BOJ, then sold off when another aide said it was too soon for incremental easing. 


A few hours later, the EUR gapped lower and S&P500 futures reversed and gapped higher as Draghi said downside risks have opened up and hinted at incremental policy action come March.  


Oil then rallied hard on a rise in inventories and the SPX held its gains alongside a 4th month of contraction in the Philly Fed Index, a rise in rolling jobless claims to their highest level since April of last year and SPX earnings for 4Q16 tracking at -4.0% YoY.     


The 2016 equity casino is officially open.  


Storm and Stress - casino


Back to the Global Macro Grind ….


With oil higher, commodity and EM equities and currencies gaining overnight and Chinese officials vowing to “look after” stock investors, the central bank intervention trade is hoping to extend yesterday’s 1-day Viagra reflation rally another day.


A new movie, this is not.  Manic price action in markets and reactionary policy responses out of central banks are not outcroppings of improving fundamentals.


Keith likes to say:  Play the game that’s in front of you. 


In other words, investing in the market you want rather than the one you have is a nebula for negative alpha. 


Policy aimed at hitting a misestimated potential growth target (or some unrealistic growth rate that, on paper, allows sovereigns to meet forward liabilities) represents negative policy alpha.    


While the illusion of growth can be maintained for a period, sustained real growth can’t be printed and the accumulation of latent risk eventually manifests in prices. 


In the Chart of the Day below we plot daily price moves >1% in the S&P500 by year.  The bubble size corresponds to the average VIX level for the period. 


2014 marked the peak in policy induced complacency (implicit in the transition from explicitly “lower for longer” to “data dependence” is elevated uncertainty & the removal of a structural policy anchor on volatility) and with the Fed now attempting divergent policy action into a slowdown, volatility won’t be re-interred anytime soon. 


In fact, if all you did was draw a line connecting the bubbles in the chart below and adjust gross/net exposure and asset allocations counter-cyclically as we predictably traversed the sine curve, you would have crushed it.   


So, what’s driving the crescendo in investor angst?  Is it China …. Is it oil? … elevated geopolitical risk? 


In a sentiment update note from the road on Wednesday my colleague, Darius Dale, highlighted the above as consistently offered narratives attempting to explain the swoon in financial markets. 


Attempting to assign definitive causes to events is a natural cognitive trapping.  In viewing markets as a complex system, it’s less that those explanations are not true (in isolation) but that they are all true.     


As Kotak notes “the yin and yang of data flows and interdependency influence the Sturm und Drang (Storm & Stress) of human behavior” … a cauldron of reflexivity where data, prices, expectations and behavior mix to both birth and propagate volatility. 


The yin and yang of expedited price moves in commodities comes with duration sensitivity (i.e. the implications are different based on the time horizon taken).


Lower oil represents a diffuse benefit to domestic consumers. However, the flow through to reported growth is hostage to the prevailing trend towards higher savings and the benefit to non-energy consumption can show up on a variable lag (not to mention that aggregate income growth – which represents the capacity to consume – is and will continue to decelerate from here) . 


On the flip side, the nearer-term concerns are both acute and highly visible as domestic producer profitability gets crushed directly, related sectors feel the follow-on effects, credit markets and spreads get stressed, and commodity export economies come under increasing pressure (with impacts ranging from higher current account deficits to revolutionary social unrest). 


Further, to the extent commodity deflation is a function of a strong dollar, the cost of trade for import heavy countries rises, driving current account deficits higher and potentially stocking local inflation.   


The impact to growth in developing markets can be equally severe given the proclivity for capital flows to reverse alongside policy tightening in developed markets. 


When portfolio capital starts to exit, asset prices deflate and credit gets tighter, investment and consumption both decline.  The currency depreciates, driving local inflation higher at the same time that aggregate demand accelerates to the downside. If demand is local and the debt is denominated in foreign currency, the debt burden on business is amplified.  Declining demand in the face of a crashing currency and elevated inflation can leave policy makers handcuffed. 


With $9 Trillion+ in non-bank dollar denominated debt outstanding outside of the U.S., the prospect for a resurgent wave of defaults is certainly real and rising. 


Domestically, the earnings/profit/industrial recession won’t be ebbing in the next few months and expectations around a reversal in domestic monetary policy may be rightly placed - but let the data breath a bit. 


Central Bank rhetoric follows the data flow and market prices on a lag and actually policy action lags the rhetoric. 


When volatility rises we compress the measurement parameters in our TRADE, TREND models to more dynamically manage the risk of the probable range – it’s our way of objectively measuring and managing the stress of a roughening storm. 


We’ll assuredly get more price volatility and relief bounces but we remain sellers of strength, for now.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.96-2.10%


VIX 22.24-29.83
USD 98.57-99.56


To poach the sign-off from our own Howard Penney …


Function in Disaster, Finish in Style.


Christian B. Drake 

U.S. Macro Analyst 


Storm and Stress - EL SnP

The Macro Show Replay | January 22, 2016


Cartoon of the Day: Laughing Bears

Cartoon of the Day: Laughing Bears - bears in car cartoon 01.21.2016


"BREAKING: Dip Buyers Face Exhaustion," Hedgeye CEO Keith McCullough wrote earlier today. "If you've been buying them the whole way down, you're out of business at this point."

real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Draghi Pushes Any “Action” to March!

Takeaway: The EUR/USD remains broken (bearish) across all three of our durations: TRADE, TREND, and TAIL.

The EUR/USD is currently trading down -0.50% to $1.0838 following this morning’s interest rate decision from the ECB in which rates were left unchanged (as expected), and any action to increase the size of the Bank’s quantitative easing program or issue any other “unconventional” programs were kicked to its next meeting on March 10th. The March meeting will also include the Bank’s staff forecasts for growth and inflation, the results of which could be a catalyst for the Bank to act.


Call Outs: Draghi reiterated the old Song and Dance. Today’s presser showed once again Draghi’s mentality to Extend&Pretend economic gravity. He continually cited the prospect of sustained low energy prices and the economic slowdown in China as contributing factors to the Eurozone's low levels of inflation.  As we show in the first chart below on inflation, we expect CPI to remain low in 2016 (sideways at best), and far from the Bank’s pipedream of 2.0%.


What does today’s market action mean?  Investors remain holding a massive short position in the EUR/USD.  [See second CFTC chart below]. Within a strong dollar and weak commodity market, alongside mute growth prospects for the Eurozone, we continue to think this short position has legs in 2016, as investors become increasing aware of the inability of QE to move the needle on inflation.  


Our mantra remains the same.  We maintain our macro theme of #EuropeSlowing, with our proprietary GIP (growth, inflation, policy) model signaling the Eurozone in #Quad3 (growth slowing as inflation accelerates)  and #Quad4 (growth slowing as inflation decelerates) in Q1 and Q2 of this year [third chart below].  We expect the Bank’s staff revisions to its GDP and CPI projections to head lower in its March meeting. 


What’s our policy outlook?  We expect there will be increased pressure that the ECB has to act by expanding the size of its QE program (to €75-95B/month), which could come as soon as the March meeting. We expect the ECB to continue to place significant weight on oil prices, Chinese data, and its staff projections, all of which we expect to deteriorate into March. 


EUR/USD Levels: The EUR/USD is in a bearish formation meaning it is broken across TRADE (3 weeks are less), TREND (3 weeks or more) and TAIL (3 years or less) durations.


Draghi Pushes Any “Action” to March! - 1. CPI


Draghi Pushes Any “Action” to March! - cftc


Draghi Pushes Any “Action” to March! - GIP


Draghi Pushes Any “Action” to March! - EURUSD 21

[UNLOCKED] Initial Jobless Claims | 26K From the Bottom

Takeaway: The 4-wk avg of SA claims is now at 285k after steadily creeping 26k higher from the 42-year low of 259k, struck in late October 2015.

Editor's Note: Below is a complimentary excerpt from a research note written today by our Financials team. If you would like more information about subscribing to our institutional research, please contact


[UNLOCKED] Initial Jobless Claims | 26K From the Bottom - main street


Seasonally adjusted initial claims rose 10k on the week to 293k, while the 4-wk moving average rose 6.5k to 285k. That's the highest level for the 4-wk rolling average since April of last year. Broadly, the trend in claims has been 2 steps backward, 1 step forward since the low of 259k were recorded on October 24th last year. 


Yes, initial claims are still very low by historical standards at sub-300k, but given the emergent weakness in a host of economic data series (Industrial Production, Chicago PMI as examples), the prudent question to ask is not whether labor is still good or bad in absolute terms, but whether it's getting better or worse on the margin. In that context, the trend of rising initial unemployment insurance claims that is now 3 months old is definitely disconcerting.


As a reminder, we are coming up on the 23rd month of a sub-330k claims environment. The last three cylces saw claims remain below 330k for 24, 45 and 31 months (33 months on average) before the economy entered recession. That puts us 10 months from the average, 1 month from the min and 22 months from the max. The cycle is converging with the end of its historical timeline.


The Data

Prior to revision, initial jobless claims rose 9k to 293k from 284k WoW, as the prior week's number was revised down by -1k to 283k.


The headline (unrevised) number shows claims were higher by 10k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 6.5k WoW to 285k.


The 4-week rolling average of NSA claims, another way of evaluating the data, was -6.3% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -7.4%


[UNLOCKED] Initial Jobless Claims | 26K From the Bottom - Claims2 normal  3


[UNLOCKED] Initial Jobless Claims | 26K From the Bottom - Claims4 normal  3

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.