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Calm Before The Storm - Coming Out Of The Voldrums

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Implied volatilities - the market's best guess at short-term-future uncertainty - collapsed last week across every asset class from FX to equity. For now, as Bloomberg's Richard Breslow notes, markets seem comfortably calm amid the real storm of macro, micro, and geopolitical risks, but many of the same 'calm' markets are at critical technical levels putting them all "in play."

 

 

 

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Also sprach Draghi: an ECB meeting for all and none, but as Bloomberg's Richard Breslow explains, the bottom line is that he said little, promised less and the markets survived just fine. There was little clamoring for, nor palpable financial condition stress requiring, immediate action -- and he obliged. He bought himself full optionality for December at no cost. Under the circumstances, it gives an interesting twist to the moniker Super Mario.

 

So in this brief window of opportunity, asset prices will be able to sort themselves out without some new central bank push. It’s worth watching where the natural forces of markets take things. And what technical levels hold or give way.

 

There was no announcement of a QE extension. Lots of people warned that could lead to bond mayhem. Result? A bull flattener led by core Europe. Periphery yields shrugged the whole thing off. Spain’s 50-year offering went off without a hitch.

 

Earlier this week, bund yields “spiked” to the 200-day moving average, before falling back. Watch this level (currently 9.4bps). There’s either a core scarcity issue or there isn’t. Do we really need the ECB to tell us how many bunds are out there?

 

In fact, as a reminder, keep an eye on the 200-dma for every major sovereign 10-year. All are in play.

 

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Which is even more concerning given Peter Tchir's "Scariest Chart fro Bond Yields"...

 

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While the market seems to fixate on VIX and the implications of VIX for the equity markets, the Treasury VIX often languishes in obscurity, but for only the 3rd time in its existence (it was created January 2013), it has closed below 3.95 (the red circles on the chart).

 

Each of the last two times that the Treasury VIX closed below 3.95, 10-year Treasury yields headed sharply higher.

 

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Equities are interesting because they’re not interesting. Not flying, but most certainly defying all rumors of their imminent demise. They’re in well-defined ranges. Wait for a breakout to get excited and play the range. It’s worked over and over. And that’s with talk of taper, BOJ on hold and the Fed teeing up December. Impressive.

 

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People are bulled up on oil. WTI is trying to hold above $50 -- A feat it has struggled with. That’s the pivot and it’s close. If it can stay up here, should the dollar go bid, it would be a powerful sign.

 

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The dollar looks strong against the majors, sideways versus emerging markets. Tells me this isn’t a dollar move.

 

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As countries back away from deeper negative rates, they’re getting the weaker currencies they wanted in the first place. Monetary policy fantasists might want to take note

 

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