Nuclear tests on the Korean peninsula, a constitutional crisis in the US, a collision course between Washington and Ankara with regard to arming the Kurdish-controlled SDF in their quest to retake Raqqa – none of it matters for volatility. Which is something we (and everyone else) have discussed at great length.
The Comey headlines in the US should by themselves be enough to create all kinds of fireworks – we’ll see. Somehow we imagine the result will be the same as it ever was for markets which have taken the news largely in stride overnight.
And so, with the yen still sitting near 2-month lows through it all and with the European political deck (mostly) cleared, SocGen is out this morning with the following suggestion/observation: “sell the yen… the Fed has killed the bird, the demise of volatility remains the most striking feature of this market. ” More below…
Sell the yen (the Fed has killed the bird…)
Donald Trump fired FBI Director James Comey; and North Korea has said it is going ahead with another nuclear test. So despite a small bounce in oil prices and steadier industrial metals, a nervous session for North Asian equity markets dragged down the won and, after yesterday’s rise, US Treasury yields. Which has taken the dollar down a little. USD/JPY is still following TIIPS and after reaching the best levels since US yields were last this high, is having a pause. But EUR/JPY is trying very hard to break above 124 for the first time in a year.
The demise of volatility remains the most striking feature of this market. The VIX is still below 10, the CVIX is still falling, GBP/USD vol is well below its long-term average, and CNBC reports that the S&P index has been in its smallest range ever. If expectations about Fed policy are the biggest driver of vol, this represents a huge vote of confidence that the Fed rate cycle will continue to be mild. Global trends point in the same direction – softer-than-expected CPI data in Norway and China overnight are just two more dots in a line that leads to a mild global monetary policy cycle, even if a June fed rate hike is 90% priced in. We’ll stick with carry for now, even as we fret that in the (really) long term, this is very unhealthy.