Fed No Longer the “Only Game in Town” for Stocks

US equities are beginning to behave more normally. The average pairwise correlation across S&P 500 stocks has plunged (top-left chart), which tells us that stocks are starting to move independently from one another and are no longer driven to the same extent by...

Don’t Expect the Summer Doldrums this August

After such a tumultuous start to the year, it would be understandable if the market was even more diligent than usual in switching off this summer. Markets around this time are generally perceived to be quiet anyway, but the lack of liquidity most likely contributes...

Complacency sees Vol Sellers Return in Numbers

Short volatility positions are back at extreme levels once again, showing the growth of complacency among market participants. The more dovish than expected Fed has allowed volatility sellers to become more emboldened, and speculative VIX future positions are back up...

Watch the Real Yield Curve

A real yield curve is an indicator of risk appetite. Persistently negative real yields are often a precursor to extended levels of leverage and credit bubbles. When they start to rise they point to tightening financial conditions which stresses firms’ equity, causing...

Credit Spreads and Equity Volatility to Rise

(from our Tactical report of 1st November 2016) Equity volatility and credit spreads are almost perfectly correlated. In part this is because equity is a perpetual option on the solvency of a firm. When credit becomes stressed, equity volatility jumps as well. You can...

Higher Volatility and Credit Spreads Ahead

All of our leading indicators for credit spreads and volatility point to wider volatility and higher credit spreads over the next two years.  The credit cycle is long in the tooth, and the best predictor of future credit spreads is the lagged growth in lending. For a...

Where Japan Rate Vol Leads, Others Follow

Volatility in general is still falling, with both equity and commodity volatility lower than their 2005/06 trough.  However, we are seeing signs of life in interest rate volatility.  US rate volatility has recently pipped up, and this has been led by a sharp increase...