This volatility is to low
This volatility is too high
This volatility is … holy cow … the SNB just removed its currency floor?
Investors in the big trading banks are spending the week discovering that financial institutions are the Goldlilocks of the volatility world after the likes of JPMorgan, Goldman et al released some disappointing fourth-quarter earnings despite an uptick in vol. With banks having spent much of the past five years moaning that volatility was too low to eke out trading profits, it turns out that in the fourth-quarter volatility was just a bit too high to make money. Or not quite the right kind of volatility. Or whatever. Read more
If you think retail FX and spread-betting shops have a problem with one-way client risk, then don’t even dare to look into the Wild West stuff going on in crypto land. It’s the Bank to the Future Biff Tannen version of 1985 in Technicolor (Oculus Rift form naturally).
As we’ve noted before, Bitcoin markets are a hotbed for unscrupulous market practices. Everything from HFT, front-running, rebating, preferential order flow, poor margining, naked shorting, and now the truly popular one — active “collusion” by big players. It’s all there.
What’s really cute is that a lot of the time the cowboys think they’re being truly innovative with these strategies. (Michael Lewis obviously hasn’t penetrated their radar.)
On which note, unconfirmed reports come our way of the latest bearwhale scheme being hatched — this time being organised by a particular bearwhale called Benji — to corner the market with the cunning use of the “shake out the weak shorts and cause a short-squeeze” strategy. Read more
There is a ripost to our one chart bear case for US stocks.
The latter was an eye catcher from Jeffrey Gundlach, showing that since 1871 the longest run of consecutive yearly gains for the US market was six. The current bull market has just entered its seventh year.
True, says Lukas Daalder, chief investment officer for Robeco Investment Solutions, but only if you are a prisoner of the calendar. Look April to April, instead… Read more
Sources on the ground tell us that queues have been forming outside money changers in Geneva since at least last night.
Here’s the latest scene of Swiss folk eager to cash in their money’s worth by way of Twitter user @Halders1:
Live markets commentary from FT.com
Unlikely sources for insight on interest rate expectations: The IRS, Department of Justice, and the New York Mets. In December, it was widely reported that a deferred compensation arrangement the Mets baseball team owed retired slugger Darryl Strawberry would be auctioned off by the Internal Revenue Service in order to satisfy tax liens against Mr. Strawberry.
The Mets in the mid-1980s had invested $2.5m into annuities that would pay Mr. Strawberry after he stopped playing Major League Baseball. Read more
FT Alphaville’s Retail FX correspondent explains the move:
The raw from Saxo is here for those who want it, via Reuters by way of Hempton:
Due to today’s exceptional market movement in CHF crosses, we have been filling client orders and positions in an extremely illiquid market. Once we are better able to establish true market liquidity, all executed fills will be revisited, and will be revised and amended to more accurate levels. This may result in a worse execution rate than the originally filled level.
As we have already pointed out about Thursday’s unprecedented Swiss franc move following the SNB’s announcement about removing its 1.20 euro level floor and introducing a -0.75 per cent interest rate regime, the real story to pay attention to is what exactly motivated a price surge to that level.
Was it a), that the SNB simply under appreciated the scale of the undervaluation it had been engineering in the franc? Or was it b) that the SNB under appreciated just how thin FX market liquidity is in the market these days?
So as to not sit on the fence, we’re going to take a view and speculate that it’s actually all down to option two. Read more
Elsewhere on Friday,
- The myth of the special German saver.
- “SNB have effectively done for central banking what the Ferguson Police Department have done for community policing.”
- And, how the SNB’s “wimp-out” will make life harder for monetary policy in other countries.
- Saxo mightn’t like where you traded yesterday. So it’s going to “revisit”, “revise” and amend “to more accurate levels”.
- Why below target inflation is a big problem. Read more
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Asian markets have been roiled by Switzerland’s central bank scrapping the Swiss franc’s currency ceiling. Equities were sold off while currencies and bonds rallied, with investors eyeing the Australian and New Zealand dollar as attractive alternatives for parking cash. Read more
The Swiss franc gained about 23 per cent today against the Polish zloty. That should be good news for Polish manufacturers, but a few commentators have noted that it’s bad news for Polish mortgage borrowers who have loans either denominated in francs or indexed to the franc.
And it seems like there are a lot of them: 46 per cent of total home loans are tied to the franc. Bloomberg quotes a currency strategist saying that the weaker zloty “might fuel concerns about financial stability in Poland.” Read more
The Swiss National Bank made G10 FX a lot more fun to watch today. One interesting thing is how the options markets responded.
Via Jared Woodard of BGC, here’s a chart comparing the move in one-week implied volatility in the exchange rate between the Swiss franc and the euro — basically, the cost of hedging the risk that the franc appreciates plus the cost of hedging the risk that it depreciates — against the actual move in the EURCHF exchange rate: Read more
There’s plenty of discussion about why the oil price collapsed (read Izzy’s take on the changed structure of the market, for one), but consider a broader question: if markets can be so wrong about the price of one of the most widely used and heavily traded commodities, what else are they missing?
We ask because a halving in the price of other markets may not be cheered in the same way as cheap oil. We also wonder what it says about how orderly (or otherwise) big market declines will be, when they eventually roll around. After all, major currency pairs don’t move by a fifth in one morning…
To that end, here’s a reminder of what a 50 per cent decline looks like for a selection of markets, and the last time that level was hit. Read more
Or the risk of “lethal damage” if you’re into that sort of thing.
As said before, we’ve had 34 months and counting of negative PPI inflation in China with CPI at best lacklustre — coming in at 1.5 per cent in December. The risk is that, in a country charmingly wrapped in debt based uncertainty, we get outright deflation. Read more
Looking beyond the major currency pairs, remember that question of Hungarian debt denominated in Swiss Francs from a while back?
Well, a line from Citi’s reaction to the SNB ceiling removal explosion on Thursday catches the eye: Read more
A quick post to collate a few side theories on the reasons, justifications and consequences of the SNB move.
Simon Derrick at BNY Mellon is first to point out that the euro floor/chf celing was leaving an open door to safe haven flows from Russia by way of an open bid for euros. As he notes:
Compounding this was Switzerland’s role as a safe haven as the Russian crisis intensified. It was, therefore, not entirely surprising when the SNB decided a few weeks ago to impose an interest rate of -0.25% on sight deposit account balances at the bank and expand the target range for three-month LIBOR to -0.75%/+0.25%.
Your UKIP loving, separatist-nurturing currency now buys 1.3 euros, the most since 2008.
Live markets commentary from FT.com
I mean really…
This from JPM asks the right questions: Read more
Click through for the readable version:
For those who can’t click, that’s the SNB abandoning the 1.20 floor, cutting the deposit rate to -75bp and moving the target range for three-month Libor further to -125bp/-0.25bp.
Yeah… Read more
Lower oil prices are likely, on the whole, to be bad for Canada.
–Timothy Lane, Deputy Governor of the Bank of Canada, January 13, 2015
Unlike most rich countries, Canada is a net oil exporter. According to the US Energy Information Administration, Canada’s net exports of petroleum have more than doubled since 2005 to about 1.7 million barrels per day:
Elsewhere on Thursday,
- Hoping for a Syriza victory?
- Osborne’s “commitment to policy inflexibility in order to achieve policy flexibility.”
- Convergence in two global economics.
- How the Fed might stop worrying and learn to love moderate inflation. Read more
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Live markets commentary from FT.com
Jeffrey Gundlach, founder and head of the LA based bond management shop DoubleLine, was talking about infinite quantitative easing years ago and is one of the most prominent bears on the investment scene, correctly predicting last year’s fall in bond yields.
Tuesday’s presentation was a variation on that theme, with the investor warning that while lower oil prices help the US economy, watch out for the impact of the shale boom deflating. A few choice slides below, starting with one to keep in mind on the US stock market.
We always hesitate to use the word unprecedented.* Still, another year of gains for US stocks would be the seventh in a row and, well… Read more
UPDATE: The full, 263 point, opinion is out and here.
Do click through for the full statement on OMT (and QE by extension) from Pedro Cruz Villalon, one of the European Court of Justice advocates generals: Read more
Conventional wisdom says that businesses adjust their investment spending according to changes to the cost of capital. Intuitively, that makes sense: more projects become worthwhile as funding costs go down, while few make the cut when capital is expensive. (In reality, it turns out that interest rates, spreads, and volatility are all irrelevant for capex decisions, but let’s put that aside for now.)
If central bankers want to boost investment to encourage economic activity, conventional theory suggests they should lower interest rates. However, there is a limit to this process because you can’t lower rates below zero without imposing tyrannical controls. Hence the appeal of boosting inflation, which effectively reduces the real cost of capital (assuming risk premia don’t rise) by stealth even when interest rates have hit the floor. Read more
And I’m free, free fallin’…
Elsewhere on Wednesday,
- “Redrow Man might be ascending into a mirror-and-chromed hell but at least he’s going somewhere.”
- Rage and Reaganolatry.
- Russia: deja vu all over again. Only worse.
- Hold on, “some loosely affiliated guys punching hot keys in China were defrauding high-frequency traders out of millions of dollars”? Read more