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On The Bright Side, Positioning Is Cleaner
If you're looking for a reason to fret about an extension of last month's equity selloff, positioning shouldn't be your top concern.
As summer wound down, a months-long grind higher in stocks on small daily moves led to a steady buildup of exposure from some systematic cohorts. Discretionary positioning was already elevated (on some measures) after climbing steadily during the post-pandemic rally.
Over the same period, rock-bottom realized vol made for a somewhat disconcerting juxtaposition wi
A bond hedging friend and I both think something is amiss in the financial markets. I do not see how the US $ (DXY) can continue to grind higher and commodity prices contine to be elevated. Something has to give. The Fed has been pretty up front about tapering soon. Meanwhile the ECB and BOJ continue to look at ways to supply liquidity. (BOE is in the Fed’s camp but is smaller than the other 2 central banks). China will also be growing more slowly with their real estate debacle just starting to metastasize- they are easing. If we get a break in commodities, watch the curve flatten more, and the inflation narrative is going to go right out the window. If that happens the vol control universe will be the least of our worries.
Why would dollar strength and commodity appreciation be mutually exclusive?
With the expectation of higher interest rates, the dollar strengthens (appreciation relative to other currencies). With the expectation of scarcity of commodities, their prices go up in all currencies. If the dollar is strengthening, perhaps the prices don’t go up in dollars as much as in other currencies, but there’s nothing that limits that appreciation besides an increase in supply or a decrease in demand.
With all the newly printed monies slushing around and making their way into the plumbing of the world economy, commodities can keep appreciating. In the game of international musical chairs, whoever is able to tighten last gets the most oil : )