A Perma-Bull Turns Bearish: “I’m Worried”

The discrepancy between FX vol and equity vol is perhaps the most important indicator for markets. That’s my story and I’m sticking to it, dammit.

The FX vol/equity vol ratios are near records across markets:

(Goldman)

Or, to visualize it another way, we’re seeing nothing in the S&P 500 implied vol term structure. No kink at the front end to reflect Trump policy uncertainty:

(Goldman)

How long can this possibly hold up? Not long, I would contend. Then again, it’s held up for longer than I would have anticipated and you can’t very well expect elevated implied vol when realized vol is subdued. The damn VIX seems comfortable at a 10 handle.

Well, at least one FX trader agrees that this is probably an exceptionally precarious scenario. Below, find the latest from Bloomberg’s Mark Cudmore, a sell-described “perma-bull” who is now just plain “worried.”

Via Bloomberg’s Mark Cudmore

The market is full of counterintuitive price action. This should erode confidence and equities may see a sharp reversal lower soon.

• U.S. stocks hit yet another record yesterday. It seems a weird time to suddenly turn bearish, but I’m overwhelmed by a large sense of concern as I gaze across markets
• Equity investors seem to be in denial of the threat to the global economy from Trump’s proposed protectionist policies, and instead solely concentrated on stimulus we’re not seeing yet
• In contrast, FX analysts only see possible dollar support from a potential border tax and ignore the dollar negatives that would come from stimulus widening the current account deficit
• All analysis seems to be based on U.S. policy in isolation and assuming that no other country can or will react to Trump’s policies
• Trump wants to specifically raise taxes on imports from China and Mexico. So, in trade terms, mainly cheap clothes, food and oil, leaving expensive or luxury goods alone. That looks like a focus on eroding the consumer’s purchasing power. The U.S economy depends on the consumer, yet the administration calls the policies pro-growth
• The most export-dependent economies in Asia — South Korea and Taiwan — are outperforming their peers so far this year as a trade war beckons
• European bond spreads are widening rapidly. The move is led by Italy due to concern over this week’s constitutional ruling, even though that decision actually significantly reduced the probability of the anti-EU Five Star Movement gaining power
• These contradictions don’t seem to matter though, since stocks are ignoring the stress in other assets anyway, with equity volatility measures plunging. Bonds, FX and emerging markets are less convinced by the wonderful world of equities
• In recent years, I’ve been chided for being eternally optimistic, or a perma-bull, when it comes to markets. I’ve seen the ever-present fear that has pervaded markets as a positive. But now complacency abounds and it seems to hinge on not much more than hope and a prayer — I’m worried