“It’s harder to be in a relationship than it is to bounce from one relationship to the next.”
-Pink
And the bounce… Nasdaq +2.6% on the day and I’m quoting Pink at the top of the risk management morning!
Whether you’re single and looking for long-time love or more into the rebound game, either is totally cool with me. I’ve been happily married for a decade now but I’m quite promiscuous when it comes to positioning in Global Macro markets.
Pink, btw, is awesome – 30-50 market vol, not so much.
Back to the Global Macro Grind…
If you are in the business of having a long-term relationship with a single asset class, that’s totally cool with me too. It doesn’t mean I have to subscribe to that as a risk manager though.
Today is Day 3 for my Macro Team and I in Boston, Massachusetts. In terms of real-time active manager feedback during this epic cluster of equity market volatility, I couldn’t have picked three better days to be on the road.
What does an epic cluster of vol look like?
- SP500’s VIX Index is currently up +222% month-over-month and in the 99.7% percentile of the last 5 years
- Nasdaq’s VXN Index is currently up +93% month-over-month and in the 97.0% percentile of the last 5 years
- EM’s VXEEM Index is currently up +59% month-over-month and in the 85.0% percentile of the last 5 years
- EuroStoxx50 V2X Index is currently up +120% month-over-month and in the 87.7% percentile of the last 5 years
- KOSPI’s VKOSPI Index is currently up +87% month-over-month and in the 99.5% percentile of the last 5 years
- Nikkei’s VNKY Index is currently up +97% month-over-month and in the 91.4%% percentile of the last 5 years
And you wonder why I’m rocking out to Pink this morning…
Commodities and Fixed Income markets don’t have volatility in the area code of what you’re seeing as a highly correlated cluster of volatility in Global Equities, but cross-asset class volatility is definitely something to continue monitoring.
If you don’t have an internal risk management process that measures and maps the rates of change in VOLATILITY, across asset classes and single security exposures, let us know how we can help. We work with plenty of Institutional Investors on that.
In the last 3 days we’ve spent considerable amounts of time in meetings discussing “the vol of vol” (the volatility of volatility) and contextualizing causal research factors that could continue to perpetuate market volatility off its all-time lows.
What could continue to drive equity volatility higher?
- Inflation expectations
- A basing and strengthening of the US Dollar
- Global Divergences
As in any fractal pattern, there are plenty of factors shaping it. But these are 3 Big Ones we’ve been focussing on in client meetings for the last month.
Addressing those 3, briefly, one by one:
- On inflation expectations, we think the market got way ahead of itself from a positioning perspective into what we’re still calling for as a subtle Reflation Rollover here in the coming months
- On the US Dollar, I signaled “USD Exhaustion” close to those cycle lows we saw during #Davos and continue to remind clients that the 30 and 90-day inverse correlations between US stocks and USD is > 90%
- On #GlobalDivergences, that’s easily our most contrarian Macro Theme @Hedgeye right now (most are positioned for some kind of a perpetual “Globally Synchronized Recovery”, I guess)
If you disagree that Reflation’s Rollover Part II and/or #GlobalDivergences will matter, you’re on the other side of both me and Mr. Market right now:
A) Nothing has been pounded harder than the Reflation Trade in the last week … and
B) Whether it’s Asian or European Equity returns vs. Nasdaq for the YTD or divergences in bond yields, it’s there
As an example, look at one of the weakest economies in Europe (Italy) this morning:
A) Italian Retail Sales #slowed to -0.10% year-over-year in DEC from +1.4% in NOV
B) Italian 10yr Yield is down another -5 basis points this morning and is -6bps in the last month to 1.93%
In sharp contrast to that Italian Consumption Growth #Slowing data point, US Retail Sales were up +6.0% and +5.4% in NOV and DEC, respectively, and the US 10yr Treasury Yield is UP +28 basis points in the last month to 2.76%. #GlobalDivergences
Chinese, South Korean, and Japanese Equities have all broken to bad (i.e. Bearish TREND @Hedgeye) in our Global Macro Risk Management model and had no interest (overnight) in bouncing like the Nasdaq did into yesterday’s US close.
The German DAX, London’s FTSE, and Spain’s IBEX are all still signaling Bearish TREND @Hedgeye too. As a result, I think it’ll be harder to stay in a long-term relationship with every global equity market as global divergences continue to manifest in 2018.
Our immediae-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.63-2.86% (bullish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
Biotech (IBB) 105-120 (bullish)
Nikkei 202 (bearish)
DAX 125 (bearish)
VIX 12.10-36.41 (bullish)
USD 88.50-90.31 (bearish)
EUR/USD 1.23-1.25 (bullish)
Oil (WTI) 63.07-66.70 (bullish)
Gold 1 (bullish)
Copper 3.13-3.23 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
