Every credit guy I speak to seems to be getting long or is very long volatility. Equity guys seem to be long complacency. Bond markets always smarter. EM markets tend to be as well in a reactionary way. EM equities as measured by the EEM ETF are -7.8% in 26 days straight down from a breakout move in April. The Dollar after reasserting itself last week was bludgeoned in the last two days for no obvious reason ( a Greek deal, really???). And on we go...
Do you really want to own the Russell after a 5% move to near all-time highs as rates are adjusting(see our trade idea)? Note this is an adjustment not a credit event. The corresponding moves across EU yield curves are parallel. The bond market is leading the Fed (and ECB). Also note the spread tightening between Germany and the USA back to levels where they traded before the ECB front ran their own announcement in early January and the spread between US-Germany went from 130 to 190bps. We are at 148 today and probably going to 130 before we determine whether this is a move ultimately to 110 where we belong on a long term basis. In that environment you have to assume the Euro is closer to 1.20/USD.
Back to stocks, you have to be short the Russell here to defend against this rates move. If nothing else this is a hedge for your portfolio, or if you are playing this tactically, you are short the Russell hedged against the SPX. This is the trade as we trace higher on rates which despite a pullback this AM from intraday levels, we are carving out new territory on the charts.
All of this before a massively important Payroll number tomorrow. Stocks are not ready for any wage gains in this number. This sets up the Dollar whipsaw action for on any print north 240K jobs or a wage gain of +0.3% or better.
OPEC meets tomorrow and may hold the keys to another volatility spike if they change the direction of their production outlook chatter - OR actually does make a change. Oh, and Chinese equities were down 9% on CSI futures today before rallying back 10% into the close…How's that feel? China is behaving well, "China like" and this is often a reason for the chorus of market pundits to say the sky is falling. We argue that liquidity is nothing less than insane - but unlinked to global markets right now. This doesn't stop the vol triggers in the market from weighing the impact overall.
Volatility is +9% today and +24% from where we danced around 12 on the VIX recently... Was it too low at 12? ...YES. Is it too low at 15.20? ...Probably for at least the next three weeks until we determine the next move higher in rates and see where the FED, ECB play their next cards.