|COMMENT – Low FX vols reflect tight ranges…blame it on QE/NIRP|
|Nov 27 2019 08:25 by Divyang Shah|
| The year is almost over but for the two major currency pairs of EUR/USD and USD/JPY it has been a year of largely going nowhere. Just take a look at the yearly range on EUR/USD and USD/JPY going back all the way to when Nixon suspended the convertibility of the dollar in August 1971 and the Smithsonian Agreement later that year. The two charts below show the low range on EUR/USD and USD/JPY since. FX markets that go nowhere special and are stuck in a range provide little incentive to go long vol with it being more attractive being long vol if you want to play for a break. These ranges have persisted despite a range of factors that would suggest ammunition for dollar bulls/bears…US/China trade war, S&P500/tech continued rally, Fed tightening and now easing, short- and long-term rate differentials. There are a lot of factors to choose from but we think it all boils down to central bank policies. |
Maybe the unconventional policies from global central banks, along with a lot of forward guidance, has simply helped to kill volatility more generally. Buy and hold investors have been forced to go from the safety of traditional safe assets of government bonds into higher yielding riskier assets. Those that had traditionally engaged in hedging FX risk are now more inclined to hold that risk for the sake of earning an added few basis-points. The rebuilding of record shorts on the VIX and the record low implied vols on EUR/USD are symptoms of an environment where selling vol helps supplement returns.
FX vols and vols in general are likely to remain low until 1) monetary policy outlook and policy actions becomes less predictable; 2) the universe of safe assets with a positive yield starts to rebuild; and 3) global reflation efforts start to show results. These factors are clearly linked as CB’s adoption of QE/NIRP policies impact the latter and the trend remains toward more central banks joining the ranks. The RBA seems like the most likely to join the ZLB and QE bandwagon next year as it too will find the need to shift from traditional conventional methods of trying to lift inflation. /kl C
More positive then Negative Comments regarding U.S. China trade talks today,Nothing new just rehashing same story line. But hey until markets stop responding why stop mentioning it, Spoos + 7 handles cash Indices,SPX,NDX another new all time what is different today is that Russell finally touched a new year to date High so even Small caps enjoying ” the tide lifts all Boats” Market
Today’s Economic data housing starts Much better then expected Biggest 2 month increase in 12 years(BBg) Richmond Fed and consumer Confidence missed and lastly Goods trade balance better the expected per Bloomberg near 1.5 year highs. Recall that Trump and and most high level Advisers view winning the trade war by Shrinking the Deficit. Today report showed Imports lowest in roughly 2 years and Exports not as bad as forecast = smaller deficit. I looked at quarterly chart of this metric and i was interesting
Lets see,remember this is goods only deficit doesn’t include services.All three of the last recession showed an decrease in the Deficit,a move higher in this graph,but trend for years has been down or a bigger deficit.I for one believe that the U.S. needs to continue to run a deficit with rest of World to facilitate global trade not out of control deficit but not one close to zero either.
Commentary from Trading Economics:
The US goods trade deficit narrowed sharply to USD 66.5 billion in October 2019 from USD 70.5 billion in the previous month and below market expectations of USD 71.3 billion, the advance estimate showed. That was the smallest goods gap since September 2017 as imports fell 2.4 percent due to a sharp decline in purchases of vehicles (-5.9 percent), consumer goods (-4.8 percent), foods, feeds & beverages (-2.9 percent), and industrial supplies (-1.9 percent). Increases were seen in imports of capital (0.5 percent) and other goods (3.5 percent). Meanwhile, exports dropped at a softer 0.7 percent led by lower sales of consumer goods (-4.0 percent), foods, feeds & beverages (-3.0 percent), vehicles (-2.4 percent), and capital goods (-0.8 percent). On the other hand, exports rose for industrial supplies (1.0 percent) and other goods (4.7 percent). Goods Trade Balance in the United States averaged -20736.32 USD Million from 1955 until 2019, reaching an all time high of 1492.20 USD Million in June of 1975 and a record low of -79790 USD Million in December of 2018.
Its bordering on ridiculous the reaction in Stocks when bullish China trade headlines emerge that tell markets nothing new, Why Fight it I guess. Yesterday evening at 7:49 ish these headlines, Especially the Red highlight caused spoos to jump 10+ handles and very strong volume, and ten has and bonds to sag a bit.
*CHINA, US DISCUSSED CORE MATTERS CONCERNED IN PHONE
*CHINA, U.S. HELD CALL TODAY; AGREED TO CONTINUE PHASE-1 TALKS
CHINA, U.S. AGREE TO KEEP COMMUNICATIONS ON PHASE 1 DEAL:XINHUA
*CHINA, US AGREE TO KEEP CONTACT ON REMAINING MATTER IN PHASE 1
*CHINA, U.S. REACH CONSENSUS ON SOLVING ISSUES: XINHUA
*CHINA, US TOP TRADE NEGOTIATORS HOLD PHONE CALL NOV. 26: XINHUA
*CHINA, U.S. TRADE NEGOTIATORS TALK ON PHONE: XINHUA
Currently Spoos and Nasdaq little changed, Bonds and tens have a caught a bid following Gilts? +44 ticks Yields -4.5bps so far today Bunds up a bit trading near session highs U.S. Yield curve 5s 30s flattening for the sixth consecutive day, Traders more interested in Curve plays that outright trades for now
Yesterday evening Fed Powell broke no new ground with this comments, one piece of Information that is being flagged up is that he pledged to get inflation back to 2%. What that means is no Rate hikes in the near future and easy Policy for near future.
Just hitting wires is Comments from kelly-anne Conway some sticking points remain in Phase one talks just ridiculous
Comments from IFR news:
With every inability of S&P500 to correct/weaken only adds to the pain for those sitting on the side-lines underweight especially ahead of year-end. The Fed is out of the picture (rate expectations are flat) and US/China trade is also less of a risk (neither side wants to rock the expectations boat) leaving equities to trade higher. It does feel like the market is not only preparing for the Thanksgiving holiday but also getting ready for year-end already. /kl
Quiet Market never sell one is an adage that is holding up today. Momentum pushing prices higher. A bit of Optimism Regarding US/China along with a bit of Short Covering and Growth/Value stock spread turning around lately.
Index of the 50 most Shortened stocks in Russell 3000 on pace for biggest up day in 2 months
below is a daily chart that shows the main U.S. Average Dow, Spx, Ndx and Rty with a Horizontal line indicating the announcement of the latest FED Bill buying program. Pavlovian response in Stocks Some type of QE = buy stocks .
A touch of Risk On due top optimistic comments regarding trade deal
“The two sides have basically reached broad consensus for the phase one agreement,” Gao Lingyun, an expert at the Chinese Academy of Social Sciences in Beijing who is close to the trade talks, told the Global Times on Monday, noting that the two sides are still moving closer to reaching a phase one deal soon, unlike the “contradictory information” in the media reports (Forex Live)
More Good News Regarding China China to Raise Penalties on IP Theft in Trade War Compromise– China said it will raise penalties on violations of intellectual property rights in an attempt to address one of the sticking points in trade talks with the U.S.(BBG)
Holiday Week trade accordingly. Economic Calendar is heavy on Wednesday with GDP, Chicago PMI .PCE, Crude Oil, and Natural Gas All data points shoved into one day, No economic Data on Friday. Stocks, Dollar drifting higher so far today, treasuries, and Bunds a bit heavy. Dollar small bid Euro down a touch, Oil steady and Nat Gas down 4.3% continuing a pattern of Lower Mondays for third consecutive week. Dax +.4%, Italy’s Mib +.8% Spoos +7 handles, Nasdaq +26 handles. Gold trading risk off -.3% as is silver -.6% and Copper steady. Nothing of Note on Todays Calendar, Fed Speak Shows Powell making some remarks are 6:00 PM should be a nonevent.
The Ifo Business Climate Index in Germany rose to 95.0 in November 2019 from a revised 94.7 in the previous month, matching market expectations. Companies’ assessment of the current situation was slightly better (97.9 vs 97.8 in October), while their expectations were also less pessimistic (92.1 vs 91.6(trading economics)
The Confederation for British Industry’s monthly retail sales balance rose seven points from a month earlier to -3 in November 2019, the highest level since April and well above market expectations of -10(trading economics)
No ‘phase two’ U.S.-China deal on the horizon, officials say– Officials in Beijing say they don’t anticipate sitting down to discuss a phase two deal before the U.S. election, in part because they want to wait to see if Trump wins a second term. “It’s Trump who wants to sign these deals, not us. We can wait,” one Chinese official told Reuters
U.S. Firms Pull Back on Investment– Capital spending by S&P 500 companies grew less than 1% in the third quarter, and would have fallen without Apple and Amazon https://www.wsj.com/articles/u-s-firms-pull-back-on-investment-11574591400?mod=hp_lead_pos4
Today’s trade, as expected pretty slow.We have seen some Trump comments but they broke no new ground,FCC voted to ban Companies from using Federal Subsidies to buy Huawei products,Markit Economics U.S. PMI data better then expected as was A revision to U of Michigan confidence.Shorter end of treasury Curve trades a bit heavy ,longer end small bid,Most products trading with below average Volume .Nat gas +3.7% as Mid-day weather continues to point to a cold start to December,As a reminder Nat GAs has gapped lower prior two mondays as Weekend forecast turned Warmer. Bitcoin not having a good day -5% was down 10% at one point two up days for bitcoin this month not good.Dollar responded to the Bullish Economic data trading higher looking to close higher for fourth consecutive day. Spoos a bit Higher Nasdaq a touch lower as Tesla after an embarrassing incident with there new truck down 6%,leading decliner in NDX.
Eurozone PMI’s, purchasing managers Index, come out on the Soft side taken together. Manufacturing was a bit better but services on weak side. Recap from itc-markets below
- -German Q3 GDP (final) in-line: 0.1% q/q, 1.0% y/y
- -French Nov Mfg PMI (prelim): 51.6 vs 50.9 cons
- –French Nov Services PMI (prelim): 52.9 vs 53.0 cons
- -German Nov Markit Mfg PMI (prelim): 43.8 vs 42.9 cons
- –German Nov Markit Services PMI (prelim): 51.3vs 52.0 cons
- –EZ Nov Markit Mfg PMI (prelim): 46.6 vs 46.4 cons
- -EZ Nov Markit Services PMI (prelim): 51.5 vs 52.5 cons
–Markit on GER Comp PMI: While still showing a degree of resilience, the service sector is growing only modestly and at its slowest rate for over three years. By contrast, manufacturing remains firmly in contraction, but many of the indicators here are at least moving in the right direction and it would seem the worst of the downturn is over barring any shocks.
– Markit on EZ Comp PMI: The eurozone economy remained becalmed for a third successive month in Nov, with the lackluster PMI indicative of GDP growing at a quarterly rate of just 0.1%, down from 0.2% in Q3 .Manufacturing remains in its deepest downturn for six years amid ongoing trade woes, and Nov saw further signs of the weakness spilling over to services, notably via slower employment growth
It was the Eurozone PMI release at 3:00 am That caused Bunds to catch a sustained bid ,The German releases at 2:30 caused a bit erratic move first down then up. Bunds +40 ticks near session highs, gilts higher +60 ticks and treasuries, JPY, and Gold following along. Dax moved lower on Data trading little changed though as I type. Spoos trading steady to higher, NKY closed +.3% Oil Steady after a pretty volatile three days of trading , Nat Gas small bid as Weather turning a bit colder for the first week of December .
Still no clarity on Phase One trade deal China’s president Xi said that China wants work with U.S. “basis of mutual respect and equality.” It looks like president Trump will sign the Hong Kong bill backing the protestors. Quiet Economic calendar today, no fed speak so market drivers will once again come from tweets and or tape bombs regarding trade. Just be aware that rate cut probabilities for next year are starting to creep up
Hedge fund Bridgewater has bet more than $1 billion that stock markets around the world will fall by March, say people familiar with the matter (WSJ).
Household debt service and Financial obligations ratio shows consumers not loading up on debt as they have done prior to past recessions. Data from Federal Reserve
take a look at the Move In crude oil on 60 minute chart. Price action took no prisoners on the way down dropping 5.7% from Mondays highs to Tuesdays lows. Worries about trade deal and Expectations for a hefty build in oil stocks gave confidence to the bears. Early Wednesday morning prices started bouncing a bit on the oversold conditions and they skyrocketed as stocks at Cushing ,the delivery point for Cl contract, dropped most in 3 months.Even though a Build was reported in nation wide storage, markets cared little as CL rallied 6% from Wednesdays lows to today’s high, Impressive price action this week