We disseminate a note each morning with 3 bulleted takeaways to contextualize our derivatives-centric models and screens. The point is to hash out observed consensus views with our own to 1) Find asymmetric pressure points and 2) Generate alternative ways to play our macro themes. Below is this morning's note. At the highest level we want to highlight the set-up for interest rates and many rate-sensitive markets right now.

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Rates, Rates, Rates – In our communication yesterday we discussed some derivative effects of 1) AT-Low in interest rate volatility expectations 2) An arguably bullish consensus bias on interest rates.

08/08:

  • “The cost of protection on Utes and Staples is HIGHEST relative to where it’s been in the last 12 months vs. any other sectors in the S&P 500
  • The cost of protection in Fins is LOWEST relative to where it’s been in the last 12 months vs. any other sector
  • Like we see in the record short position in the 5 year right now, consensus is positioned for lower vol and rates rising which is opposite our view.
  • With its weighting sensitivity to rates/fins, the all-time low in R2K “value” long-term hedging costs mirrors the set-up we mention above with financials in the S&P 500.”

The table below is very top-down. It’s a cross asset class view of volatility trends. The red color-coding is concentrated in fixed income and treasury vehicles (lower right), and the point we made yesterday is that we can see this rate view at the sector and factor level too. The other place where red is concentrated in this table is in the Russell 2000 and Financials.

Takeaway: Seeing a consensus view in multiple factors that is on the other side of our own is one of the reasons we gain confidence through this part of our process (derivatives, options, volatility modeling)

Rates | Yield Sensitivities | USD Context - Global Macro Volatility Trends

Another View (Yield Sensitivities) – For one more view of the same trend, we show output from a screen for the most extreme hedging costs in our global macro universe of markets (Well over 100 markets across geographies and asset classes with liquid options).

The table shows historical percentile readings for at-the-money hedging costs in each market if you were using with 6-mth put options.

Takeaway: While we’re not saying the call that "rates have peaked" is a recipe for higher rate-volatility, many of these yield-sensitive markets in the table typically catch a lot of volatility in a QUAD4 environment which we see as probable in Q4.

Rates | Yield Sensitivities | USD Context - 6MTH IVOL Percentiles

USD Context – We’ve pounded the table on the strong dollar outlook. As noted above, QUAD4 is most likely a U.S. reality in Q4.

The 6Mth move in the USD has unquestionably forced out crowded USD short positions. We see this in derivatives market open interest, volatility, directional volatility expectations in currency pairs, etc.

The bottom two charts show net (Longs – Shorts) speculative open interest in futures and options markets in 1) EM currencies (BRL, MXN, RUB, ZAR); 2) DM currencies (EUR, JPY, GBP, AUD, CAD)

Takeaway: With regard to Strong Dollar History in Quad4, are short USD positions as crowded as they were to start Q2? No. Is there plenty of room for more? Yes.

Rates | Yield Sensitivities | USD Context - G20

Rates | Yield Sensitivities | USD Context - G20 CFTC Table

Rates | Yield Sensitivities | USD Context - CFTC EM Currency Bets

Rates | Yield Sensitivities | USD Context - CFTC DM Currency Bets

Rates | Yield Sensitivities | USD Context - USD Quad 4 backtest