MAJOR ALERT!!!!! Volatlity is blowing up (negative convexity) - the Muscial Chair game may have started

Action:

 

Capital preservation is #1 priority – best hedge historically:

 

FX – Long JPY vs. everything

Commodities – Gold offers protection

FI – Long 10Y and 30Y US

 

For the longest time we have argued the market itself is the bigger risk – the reason for this can be found in everyone pursuing the same strategy: Robot-advisors, Risk Parity, ETF's and selling "naked" volatility.

 

All of it comes down to a simple rule of thumb – as long as market is not down more than 5-6% over two-three days market is/will be fine and volatility will tail-off – however should the market be down more than 6-7% on consecutive closes it will mean same everyone needs to start hedging….

 

Risk is allocated is relative to volatility (VaR) where less volatility means more risk but now the opposite is occurring. Rising volatility = rising risk = hedging = selling of market.. hence over next two days if we close @ this levels..(Because most managers recalibrate daily tomorrow is even more important) .

 

S&P Futures trades at  2680/2700 and NAS-Futures @ 6600 ish  in time of writing – that translate to a big violation  of this simple rule. (IF market down >6-7% è need for hedging)

 

Below is charts as of 21:35  CET w pct drop…

 

 

S&P is down more than 8.5% (and down on the year!)

 

 

 

NASDAQ is down 7.78% from top

 

Meanwhile volatility is higher than US Election and getting closer to BREXIT!!!

 

 

OUR Q1 Bubble theme gives some background on the mechanics

 

The next "event risk" is to listen to central banks – last week they all false believed they were moving to Nirvana with higher inflation and growth, reality is now testing this.

 

Overall remember:

 

China is slowing dramatically – credit impulse – low in growth projected in Q3- and Q4 this year.

 

The Tour de Cycle race looks like this:

 

·         China business cycle has peaked (H2-2017)

·         US business cycle peaking Q4/q1-2018

·         Europe business cycle will peak in Q2

·         Japan has just started its upside cycle lagging all of above by 9-12 month.

 

Hence valuation risk is mainly in US and China, while Europe + Japan offer relative value…

 

 

 

 

PS: Since starting writing this market (NASDAQ is down another 60 points!

 

Safe Travel,

 

We will try to keep you posted on risk and the above. '

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Economist

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Please visit our website at www.saxobank.com

 

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