geopolitics germany

‘Maybe Volatility Is The Answer.’

"All this combines to suggest a volatile fourth quarter. Year-end themes remain elusive."

Bloomberg’s Mark Cudmore is confused. Or maybe it’s not that Mark is confused, maybe it’s more accurate to say that Mark is confused for you.

See there’s a lot of uncertainty out there. Of course you wouldn’t know it to look at volatility. Recall what Deutsche Bank’s Kocic said on Friday evening:

Practically every week, there is a new issue that eclipses the previous one, and we lose interest in past issues, before there is any semblance of resolution. But shocks, if they are predictable, lose their spell and gradually become facts of life. Predictable political shocks feed back into their source. Due to their antagonistic character, they gradually erode the ability to make consensus and reduce the ability to legislate, making further reforms at least questionable, if not highly unlikely.

To a certain extent (or maybe to large extent), that contributes to dissensus. And when no one can agree on anything, no one does much. When no one does much, you get suppressed vol. So it’s unclear whether the events in Catalonia, the difficult coalition building process in Germany, the still-tumultuous situation in Italy, or even the ever-present threat of nuclear war will be able to break the calm where “calm” is simply low cross-asset vol. (with the possible exception of FX). Indeed, to the extent those events contribute to dissensus without triggering full-on crises, they may serve to entrench the low vol. regime even further.

But in his daily missive, Cudmore suggests all of the worries could finally conspire to usher in the return of volatility. What you’ll read below is essentially Mark’s laundry list of concerns, but also note what he says about the return of the “Trump trade” – essentially, that’s created more uncertainty because we can’t know, ahead of time, whether the rotations that accompanied it (more here) are for real or whether we’re going to be right back where we were at the start of September in a matter of weeks. More below…

Via Bloomberg

The fourth quarter is often a period where traders push themes aggressively into year end. That may not be advisable this year, at least any time soon. Maybe volatility is the answer.

  • There are few trends that investors can hold onto with certainty. The coming weeks are filled with potentially contradictory catalysts suggesting the confusion can intensify
  • September saw a reversal in many of 2017’s established trends. Were they just corrections or were they genuine trend turning points? The evidence isn’t conclusive and it’s hard to have conviction in the direction of any of the fundamental drivers
  • The Fed wants to hike but inflation data is hardly supportive. The reaction function now dominates, which means that the 2018 path depends on the make-up of the FOMC. With Chair Janet Yellen’s term expiring in the new year and Vice Chair Stanley Fischer retiring this month, that will leave four of the seven board seats to be filled. A fifth, Randal Quarles, is still waiting to be confirmed by the senate. On top of that, the Richmond seat, a voting position in 2018, is vacant
  • Potential U.S. tax reform is front and center again, but will a bill pass? The criticisms are building. And separately, Trump now appears to have undermined his own infrastructure plan by saying public- private partnerships don’t work
  • In Europe, the formation of the next German government is in doubt while Spain is fighting break-up attempts. The ECB is facing a dilemma of how to taper QE that’s reaching its practical limits when inflation doesn’t seem to warrant such a move. When do markets worry about Italy’s 2018 election again?
  • There’s still very little clarity on what a Brexit deal will look like, or even if there will be one. The same goes for a possible transition deal. And will the BOE really hike amid slowing growth and inflation that may have peaked?
  • In China, we need to await the Chinese Party Congress for clarity. Once Xi Jinping’s power is consolidated, will that shift the focus more to deleveraging than growth?
  • The North Korean situation has not only not been resolved, but Trump has – – at least on the surface of it — indicated he thinks negotiations are a waste of time, thereby increasing the probability of military conflict


  • There’s nothing technical to cling to. The dollar downtrend hasn’t broken, U.S. yields haven’t left their range, emerging markets and the euro have shown minimal corrections. It’s still too early to say if any of those trends will turn or not
  • All this combines to suggest a volatile fourth quarter. Year-end themes remain elusive

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