What, No Nukes?

Tuesday was disappointing.

Although Trump renewed his Twitter war with the NFL by starting in on the Cowboys at 6:30 in the morning and although the President did have a few harsh words for Kim at a presser with Rajoy (“U.S. govt is totally prepared for all options in North Korea and a military one would be devastating”), there was a notable lack of bombast. No “dotard“, no “I’ll murder little Rocket Man in his sleep,” no “we’ll shoot down your planes,” and no “I’ll turn your entire country into a smoldering pile of ash.”

So that was a real bummer and the absence of nuclear war hyperbole made Tuesday a more boring day than it should have been considering we now live in a world defined by a game of nuclear chicken that pits a calculating despot against an unhinged, geriatric with the launch codes.

The Nasdaq did rebound a bit, but the Dow fell for a fourth consecutive day:

Yellen gave a speech that amounted to more vacillating despite what looks like a determination among the punditry to paint is as some kind of affirmation regarding the supposed “resoluteness” of the Fed with regard to staying the course. Yes, she did reiterate that the Fed can hike despite some weakness in inflation and yes that does seem to suggest they are worried about risks to financial stability from keeping accommodation in place for too long, but it’s not exactly like she strolled up to the lectern and delivered a hawkish manifesto.

“Fed Chair Janet Yellen’s comments Tuesday make her appear to be back on a two-part mission of starting balance sheet normalization and resuming rate normalization, albeit gradually,” Jefferies economists Ward McCarthy and Thomas Simons wrote in a note, adding that “if the FOMC wants to get its credibility back  it must follow through on the consistent guidance that was provided in last week’s SEP, comments by Reserve Bank Presidents Dudley, Mester, and George, and finally, Yellen’s comments today.”

If this was so hawkish then why did the dollar and yields give back the knee-jerk? Anyway, much ado about nothing…

The euro initially knee-jerked lower as Yellen hit the tape (policy divergence back in play), but then rebounded. Still, the common currency hasn’t shaken off the German election hangover and is sitting near a five-week low:

Notably (I guess) the banks got a boost from Yellen:

The tide seems to be turning for small-caps which, after underperforming for the balance of the year after the initial “Trump bump” was faded, are becoming “great again” (maybe breadth is improving):

Speaking of things everyone was worried about, the transports have had a good month:

Gold fell on Yellen’s “hawkishness”, then rebounded, then fell again. Here’s a hilarious chart that shows you what’s happened since the Fed:

If you haven’t already considered it, do note that vol-of-vol is at a record high versus the VIX, underscoring i) the extent to which rapid mean reversion on spikes is driving up vol. of vol., and ii) the idea that folks think we may be in for a rocky road ahead:

Speaking of havens, a new BofAML note shows pretty definitively that USD is no longer a hiding place during times of turmoil. To wit:

We highlight three key points: 1) the USD no longer displays dominant “safe-haven” behavior unless the risk-off is driven by China or Korea concerns; 2) the JPY comes closest to being a “safe haven” (relative to other currencies) across country risk factors, excluding Korea; 3) the CNH has been benefiting (albeit modestly) upon a rise in aggregate risk premium, as well as idiosyncratic Korea risk

Since 2014, the USD has tended to depreciate versus most currencies upon “risk off” episodes. Perhaps unsurprisingly, this coincided with the end of Fed QE and the emergence of more aggressive easing by the European Central Bank and Bank of Japan — and consequently the greater use of the EUR and JPY as funding currencies for carry trades. It is also notable that CNH has its highest ever positive beta with the GFSI (Chart 1) — while this beta is still small relative to other “safe havens” (due to its managed nature), it is consistent with the narrative that the CNH has become “safer” than previously, especially given the stabilization in its balance of payments.

A final observation on skew tells a similar story. Chart 2 shows the three-month risk reversal for these “safe-haven” currencies (relative to the USD and as a percentage of implied volatility). The average was consistently negative until 2014, implying the USD was the predominant “safe haven” (relative to other currencies) and consistent with the higher volatility associated with USD rallies. However, the average level of risk-reversal has compressed since 2015 and turned consistently positive since April 2017. Even the CNHUSD risk reversal has reached within touching distance of zero.

Finally, South Korean shares have fallen for six straight days, underscoring the notion that whatever you want to say about robust earnings growth and compelling valuations, there’s still the whole “madman across the DMZ” factor at play:

So here’s hoping for a more “exciting” Asian session and absent that, “there’s always tomorrow” in the U.S.

We hope…

rocket man pic.twitter.com/UKM6AKMAw7

— Trump Draws (@TrumpDraws) September 20, 2017