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Stocks And The ‘Restriking Of The Fed Put’

"In our view, Fed put is currently moving deeper out of the money. This is effectively a withdrawal of convexity and risk assets are reacting with what at the moment appears as a reinforcing loop."

Two weeks back, after explaining what the "hierarchy of vulnerability" for markets will likely be going forward in the event the proximate cause of market turmoil continues to be geopolitical in nature (e.g. trade war jitters), Deutsche Bank's Aleksandar Kocic outlined how the Powell Fed is attempting to reassert policymaker control over the normalization process. Essentially, Kocic framed things in terms of curve dynamics where the post-crisis period has been dominated by abnormal "explosive rates dynamics" or, more simply, shocks manifesting themselves at the back end. To wit: For more than seven years after 2008, bear steepeners and bull flatteners were dominant modes of the curve -- while short end hardly moved, back end articulated response to market shocks. These two modes of curve response were effectively a referendum on success of stimulus. The explosive process does not present a problem as long as the front end is in a “sleeper” mode, but as soon as it starts moving – when rate hikes commence – the risk of the long end getting unhinged becomes a problem. Kocic ties this to the "breather" discussion as articulated last month. To wit: Every violent bear ste
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