Wednesday, December 14, 2016

Brown Swan Diving Into Pavement

A brown swan event is when you have your head installed in your own ass, and you don't see it coming. Unfortunately, corporate fake news will make sure they don't see it coming...

The all-knowing denialist three point stance:

The Dow scored a bearish engulfing key reversal today on non-existent liquidity (not shown). Overnight risk is "High"...

"But you said the end of Globalization was a buying opportunity"

Apparently no one on Wall Street predicted the Fed's third rate hike for 2017 coming. Therefore the dollar and short-term rates screamed higher throughout the day session, trying to catch-up with the Fed's new rate hike trajectory. 

Nevertheless, Financials which should have been well bid, rolled over, since they've now priced in 15 of the next three rate hikes. 

However, the real damage was in oil, Emerging Markets and China. No one told China that the U.S. was going into late-cycle fake reflation mode. Hence, the Yuan has been gaining ground alongside the dollar, which led to the largest outflows in a year during November. Suffice to say today's unexpectedly hawkish tone from the Fed only puts more pressure on Chinese exports and capital outflows...

The Offshore Yuan had been taking a breather from its path lower, but rolled over again in the past week. And quantitative tightening - the selling of foreign exchange reserves was the highest in November since last January's melt-down:

Right On. Risk On:
On the carry trade side, the USDJPY has rallied a ridiculous 16% in a matter of two months, hence it's a tad overbought...

Three limit down crashes ignored in 18 months, each coming closer than the last...

As we know, U.S. short-term rates, Financial stocks and JPY have been rallying as one since the November Fed meeting set the stage for today's rate hike...

Financials with JPY:

And on the risk parity side, today bonds and stocks both fell at the same time, which portends badly for risk parity strategies:

This article from September which links both Trump's fiscal policies to China's monetary policies, explains why...

Realized Risk #1: Positive correlation
"The ability of risk parity strategies — which typically rely on bonds moving in the opposite direction of stocks in order to appropriately diversify risk across the portfolio — to withstand the potential end of a multi-decade bull run in debt and simultaneous slump in equities has become a hot topic over the past year"

Realized Risk #2: The Trump reflation rally
"Head of Global Rates and Currencies has been pounding on the table that the potential for fiscal stimulus following the U.S. election — particularly if Donald Trump is elected — poses a huge threat to risk parity portfolios...To us, the focus on risk parity unwinds is here to stay even beyond the next couple of weeks."

Realized Risk #3: China quantitative tightening
What's more, the strategist thinks that 'quantitative tightening' — or the sales of foreign, typically U.S. dollar denominated, holdings by central banks (notably China) in an attempt to support their domestic currencies, which were at the heart of the last shock to risk parity portfolios in the summer of 2015 — might be back.

This chart showing U.S. rates with the average S&P stock is looking a lot like August 2015. In addition, this Friday is quad witching options expiration which also preceded the August crash:

And then there's high yield stocks with volatility:

Mind the gap 'n crap