Heisenberg Report

Flies In The Ointment.

Listen, the Nikkei fell again on Friday, and that is totally unacceptable.

As you know, Thursday was a rollercoaster for Japanese equities which, thanks to a harrowing late afternoon decline following a move higher in the morning, were subjected to the largest one-day swing in a year.

Well on Friday, things were more orderly, but the Nikkei was down more than 0.8%. Here’s the two-day chart:

That yellow highlight shows where it all briefly went to pieces on Thursday.

Of course this is just nit picking and coal mine canary hunting. The Nikkei is still sitting near its highest levels since late 1991 and the MSCI Asia Pacific has risen for six weeks in a row and has gained in 16 of the past 18 weeks. In short, everything is still going pretty well:

Be that as it may, there were some things to worry about on Thursday – we documented them pretty extensively here.

On Friday morning, Deutsche Bank’s Jim Reid has got some thoughts on the new “flies” in the market’s “ointment”, and he’s going to write about them on his way back to London using a brand new iPhone X.

The upshot: what you’ll read below is actual history, folks. These are excerpts from the first global research note ever written entirely on an iPhone X.

Via Deutsche Bank’s Jim Reid

After a few days in the US, today’s EMR is exclusively written on an iPhone X (the first global research note to be?) secured on a street corner in Manhattan. Luckily it seems to work. To fund its purchase I’ll be doing viewings today in London at £10 a go. Contact me for details! In terms of a review the good points are – fast charging option (new power adapter and cable extra needed though), wireless charging, face recognition unlock (which worked in the pitch black this morning) and a screen that covers the whole of the phone. The big negative for me is that it’s narrower (than the 7 plus) and thus slightly more difficult to type with fat fingers. So any typos in the EMR from now on will now be blamed on this. Another negative is that it doesn’t predict where markets are going. Maybe next year’s upgrade will.

So what did I miss apart from screaming twins? Well in a low vol world, yesterday was fascinating and a small shock to the system. Equities, bonds and spreads were all weaker which can happen when everything is expensive but perhaps markets had given up on the short-term possibility of it.

Since the ECB’s dovish taper two weeks ago, the general perception was that one of the last chances to see vol in 2017 outside of the US tax plan had gone. As such we’ve seen carry trades get yet another lease of life with the assumption that they’ll be low risk into year end.

However this week has seen some flies in the ointment:

  • the US YC had hit the flattest for 10 years,
  • there has been more widespread expectation that US tax reform may get pushed back,
  • the Saudi anti-corruption drive has unsettled some,
  • the oil price rise is starting to influence carry expectations,
  • EMFX has been weak,
  • a couple of high profile US HY ETFs have fallen to 8-months lows with heavy volumes yesterday,
  • Japanese equities saw a 3.6% swing yesterday (largest for a year) and;
  • European bond yields rose unexpectedly.