Rising Volatility Spurs Reduced Positions Across All Assets This Week

02/06/2018 5:00 pm EST

Focus: CURRENCIES

Robert Savage

Partner & CEO, CCTrack Solutions

There are some cracks in the view that the Friday mayhem will continue. Some see it as Fed reaction functions, others as inflation fears overstated, as it’s the key for inflation fears in much of the world, not wages, writes Bob Savage, CEO of Track Research Monday.

Jumping off a cliff always has an assumption of liquidity below. So it goes for investors today looking for pools of cash rather than anything else. Risk-parity is back in the spotlight for blame as both global bonds and equities along with inflation-linked asset classes like commodities and property drop.

The key factor for reducing positions across all assets is the rising volatility (witness VIX over 17% - back to Nov. 2016 highs).

First it was month-end, then it was the FOMC sounding hawkish, accelerating Friday on the U.S. wages and stronger NFP, and Monday, without further stories other than good global Service PMI reports – it’s all about positions.

The estimates are that there are $3 trillion in funds chasing risk-parity programs and likely more run internally at pensions and insurance. This isn’t a secret, but an asset allocation tool based on volatility and correlations. When equities and bonds coalesce to trade alike, instead of apart, many think positioning first, central banks second, politics third.

On the day, the biggest event isn’t likely Service ISM reports but Draghi as he has a chance to talk down investors from the risk-off cliff.

The difference between U.S. rate moves and EU ones is that inflation nags the first while growth the second. Better to have Draghi’s problem than Powell’s for risk.
The politics come in third today even with Macron losing 2 by-elections Sunday – still he has 309 for 577 seats, and while the German SPD extended its talks with Merkel by another day.

The UK seems mired in Brexit politics still but the British pound (GBP/EUR) drag has been lifted into the BOE this week.

Today, there are some cracks in the view that the Friday mayhem will continue apace – some see it as Fed reaction functions, others as inflation fears overstated – witness the reaction of oil to higher bond yields – as it’s the key for inflation fears in much of the world not wages. Oil looks wobbly and may be the center for keeping the risk mood calmer over time.

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