Market Doom Loop Update: Risk From VIX ETPs, CTAs Flashes Red

It’s all about “loops” and “spirals” these days.

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Doom Loop Update: VIX ETP ‘Risk’ Remains High

According to the latest read on this, the potential for an ETP rebalance to cause problems is still near record highs.

You May Have Had A Better Week Than Some Quants

…it’s fair to ask if maybe the CTA crowd had a bad week. Because long Treasurys and short USD wasn’t exactly how one would have wanted to be positioned ahead of the “no apocalypse” risk rally that saw 10Y yields rip 18bps higher off the previous Friday’s lows while the dollar put in one of its best five-day stretches of 2017.

Are CTAs Behind The Bond Rally?

“The CTA performance index has ripped in the back half of August after 10s rallied below 2.25%,” Deutsche goes on to write, adding that their “rolling 1m beta analysis shows that CTAs have gotten very long the market.”

Death By A Thousand Cuts.

The bottom line is that between another powerful hurricane approaching the U.S. mainland, U.S. markets catching up with their global counterparts in terms of pricing in North Korea after the long weekend, the DACA decision which portends more bickering in Washington, and the looming debt ceiling debate (with the specter of a technical default showing up in today’s decidedly poor 4-week bill auction), it was death by a thousand cuts.

‘I Come Back To You Now’: Kolanovic Returns, Everyone Panics

“…at the turn of the tide.”

‘Things Are Starting To Reverse’: Goldman Warns On ‘Shock’ Risk

“Risky assets digested the increase in bond yields only reasonably well – 3-month equity/bond yield correlations stayed positive (Exhibit 3) and credit spreads buffered part of the increases (Exhibit 4). But correlations are starting to reverse.”

‘They’re Still Extremely Leveraged’: ‘Crowded Unwind’ By CTAs Could Exacerbate A Rates Selloff

“However, a large beta of CTA returns to the Bloomberg Treasuries Index suggests that CTA positions are still extremely leveraged”…

Why We’re Vulnerable: CTAs’ ‘Oversized Loss’ Betrays Extreme Positioning

“Recent oversized loss in response to a relatively minor sell off suggests a substantial overweight: A 20bp rise in rates has produced comparable losses as a 50bp sell off across the presidential elections in November.”

‘The Real Fun Is Just Beginning’: Quants Stare Blankly At Worst Losses In 10 Years

It’s been a long time coming, but the week(s) of reckoning have finally come for CTAs and the risk parity crowd. Of course the “serious people” reading this will say the “day of reckoning” bit is hyperbolic. After all, we haven’t seen a sustained vol. spike of the sort that would probably be required to…

A Nightmare On Wall Street – Updating The Feedback Doom Loop

Remember “Investigating The Market’s ‘Nightmare Scenario’”? Of course you don’t. That post is from May and you’ve been drunk slept since then. But it was an important piece. Essentially, it outlined the potential consequences of the feedback loop that’s embedded in markets thanks to the proliferation of VIX ETPs and systematic strats that lever up…

Investigating The Market’s “Nightmare Scenario”

Right, so one thing people are becoming increasingly concerned about is the extent to which modern market “innovations” could end up backfiring in spectacular fashion in the event the current low vol, BTFD regime were to suddenly slam into reverse. I wrote about this a couple of days ago and this is probably a hyperbolic,…

Hellz Yeah! European Stocks Explode, US Set To Rally As Market Celebrates Macron

The final tally was Macron 23.75%, Le Pen 21.53% and to say markets are relieved would be an understatement. One peculiar thing is that it seems completely lost on everyone that Marine Le Pen did indeed make the second round. So it’s not exactly like populism just fell flat in Sunday’s vote. Rather, the enthusiasm…

“This Is No Different” From 1987: Is Marko Kolanovic Right?

“When an institution allocates to a momentum strategy in the hope of cushioning itself from stock market downdraughts it is really commissioning someone to sell stocks on its behalf into a falling market.”