Brace For Turbulence: Why One Bank Sees A Volatility Explosion In The Next 10 Days

Thursday, January 24, 2019
By Paul Martin

by Tyler Durden
Thu, 01/24/2019

By now the fundamental pros/cons picture of the market is familiar. In the “positive” category, Nomura’s Charlie McElligott notes that three key bullish drivers du jour are:

i) the reloaded PBoC liquidity/China stimulus cannon, where Beijing’s injection- and stimulus-/easing- spree extended into this week’s deployment of the new term lending facility, a targeted version of the MLF tool which funds small businesses cheaper than the regular MLF, while also allowing 1Y funding to be rolled over twice—making 3.15% for effectively a 3 year loan (vs 3.3% at the traditional MLF window)—a de facto / stealth “rate cut” as perceived by some, which too still leaves room for further RRR cuts coming down the pipe in 2019;
ii) ongoing “dovish” pivots by global central banks accelerating in light of the (China-linked) disinflationary impulse— overnight the Bank of Korea followed the BoJ and cut its inflation forecast overnight; this comes after ECB’s Draghi stated that significant stimulus is still needed to support inflation last week, Fed Chair Powell in Dec noting that inflation has “…continued to surprise to the downside” and all while UK consumer prices fell to two year lows in the background—While the SNB, BoJ, BoK and others have too recently acknowledge no plans to change from current “easier” footing
iii) “Glass half-full” Equities EPS reception as the low-bar of negative earnings revisions are being bought—positivity around PG and UTX prints and today’s very bullish reception to STMicro, +8.8% despite weak sales guidance, all helping squelch terrible PMIs and provide calm.

More importantly, we have several key concerns in the “negative” category, among them the following:

i) more global growth gloom against Nomura’s backdrop that Chinese data will “max out” to the downside likely out into 2Q19, including: The Euro-Area wide PMIs missing forecasts once again, specifically with German Manufacturing (contracted for the first time in four years) and French Services and Manu (both lowest in at least four years and contracting) looking particularly grim. Japan Mfg PMIs also crashed in horrible fashion, touching the ‘50’ line for the first time since Sep 2016 when the Nikkei was ~25% lower than current levels, while Japan Machine Orders crumbled -18.3% YoY as foreign orders disappeared.
ii) it is getting far more difficult from here for the Fed to “pivot more dovish” unless US economic data significantly worsens first, which is a “pick your poison” scenario as either will finally trigger the “recession is coming” signal of UST yield curve steepening.
iii) In the background, the Fed “QT” continues unabated—the good news, there is a “soft-patch” coming in 1Q19 of “less lumpy” Fed weekly roll-offs where in-particular the risk-asset sensitive MBS-portion should provide an easier backdrop vs a few of the shock balance-sheet tightening impulses experienced in 2018—but the “change of change” in balance-sheet (quarterly dispersion of the WoW change in SOMA size) again will “pick-up” into Q2, likely resulting in a new step-wise jump in Rate- and Equity volatility.

The Rest…HERE

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