Posted in Featured, Newsclips, Samples

Dollar Falls Back to September Lows

  • Bloomberg – Dollar Slide Deepens as Euro Strength Caps Stocks
    Economists bump up 2018 outlook for euro-area growth to 2.2%

    The dollar remains under pressure after capping five straight weeks of declines, even against a backdrop of solid U.S. growth. Traders appear to be more excited by potentially hawkish policy shifts from central banks in Europe and Japan, the improving political outlook in the euro area, and the synchronized nature of global expansion that’s also propelling emerging-market economies. The single currency — which already has momentum after last week’s progress toward a German government — got a further boost as economists polled in a monthly Bloomberg survey bumped up their 2018 outlook for euro-area growth to 2.2 percent. That’s close to the decade-high 2.4 percent pace estimated for last year.


We discussed the speculative positions in currencies in our latest CoT update.
  • Financial Times – Dollar slides to 3-year low as euro gains on Merkel coalition deal
    Investors eye tighter monetary policy from the ECB, momentum from stock rally ebbs

    The dollar index is trading around its weakest levels in more than three years as the euro and pound add to gains from late last week, spurred by political developments in Europe. The benchmark, which measures the US currency against a basket of peers, fell as much as 0.7 percent to 90.279, taking it down over 2 percent since the start of the year. The euro is at its highest level since late 2014 as the dollar wilts, up by as much as 0.8 percent on the session at $1.2296. The sustained rally comes after German Chancellor Angela Merkel unveiled a coalition deal between her conservative bloc and the Social Democrats.

  • The Financial Times – Does the euro breakout have momentum?
    Bond bear market and US tax reform impact also in focus

    The euro is up almost 3 per cent in the past three trading days, storming past $1.22 on Monday,to hit its highest level in three years. After testing $1.21 three times this year that level was finally breached on Friday, setting the stage for Europe’s single currency to find a higher trading range against the dollar. The triggers were the clearing of two hurdles to further euro appreciation: the breakthrough in the German coalition talks and US inflation data that failed to give the dollar momentum.


The falling dollar is on everyone’s mind as the greenback approaches a major low from September. Gold and emerging market equities have been among the major beneficiaries of a weaker dollar since December. Treasuries have shown looser ties to changes in the dollar since fall. 


Key developments in Europe have sent the U.S, dollar tumbling back to its September 2017 lows. Stronger growth expectations for Europe and improving odds of a unified German government helped push the euro higher. The German decision to include the yuan in its reserves sparked a sharp rally in the Chinese currency. And discussion of a potential reversal of the Brexit vote caused the British pound to surge higher. The chart below shows these forces have combined to send the U.S. dollar sharply lower. The dollar is now -3.8% since October 26. 



The next chart shows the twelve strongest 60-day correlations to the U.S. dollar from a range of U.S. and emerging market industry groups, commodities and Treasury yields. Gold is a standout with the strongest (negative) relationship with the dollar. Over the past 3 months, a number of key emerging market industries have seen tighter relationships with the dollar. Though Treasury yields still show a positive correlation, that relationship has weakened from the near-linear one seen in 2017. 



The next chart shows gold’s remarkable surge during the latest dollar downdraft. Gold has risen 7.3% since December 12. 



Emerging market equities have surged higher along with risk markets broadly. Several of the industry groups with the strongest ties to the dollar have outperformed. The chart below shows rolling 60-day correlations between MSCI emerging market industry groups and the Bloomberg U.S. dollar index. Energy, financials, industrials, materials, and utilities were all among the strongest correlations. After a period of unusually low correlation to the dollar in fall, these negative relationships have strengthened to more typical levels. 



Emerging market health care, materials, financials, and energy have accelerated higher during the dollar decline that began December 12. The chart below shows total returns since the October 26 peak for the Bloomberg, U.S. dollar index. Emerging market health care is up 23.3% since then, materials +12.7% and both energy and financials +10.4%. 



As we mentioned above, U.S. Treasury yields have seen their positive correlation with the dollar weaken recently. A nearly linear relationship between Treasury yields and the dollar was a theme in 2017. The next chart shows that while the 60-day correlations are still positive, Treasury yields are much less likely to fall with a weaker dollar. 



The last chart shows that indeed the Treasury curve has flattened since the October 26 peak for the dollar. Short end yields have marched steadily higher since then, while both 10-year and 30-year yields have been more range-bound. The 10-year yield has only recently broken above range highs and is now 9 bps higher versus October 26. The 30-year yield is 12 bps lower. 




The weaker dollar has been a boon for emerging market equities, especially those in the healthcare, materials, financials and energy industries. These have all see strengthening ties to the U.S. dollar after a period of unusually weak relationships in late 2017. How the dollar handles a retest of key September 2017 lows will be critical. The latest CoT data may have some say in this. Treasury yields have seen their ties to the dollar weaken as we moved into 2018. A stronger dollar appears less likely to pull yields lower.

Posted in Newsclips, Samples

Earnings Update

View PDF



Last week (webcast, conference call) we noted that Q4 earnings expectations are very high. Through Friday only 26 of the S&P companies have reported, so it is still early days in the earnings season.

The chart below shows an index of earnings guidance offered by companies. Its construction is noted on the chart. This measure is showing the most optimism since 2010.


The next chart shows Q4 2017 year-over-year operating earnings estimates. It is a blended chart which starts with 500 bottom-up estimates. Once earnings season starts (gray vertical lines) the estimates are replaced with actual results.

Analysts expect 11.5% growth (blue line). The fact that estimates rose as earnings season approached is very unusual.


As the chart below shows, estimates typically fall until earnings season starts (vertical gray lines) and then bounce higher.

However, see the blue line on the right side of the chart below. Q4 2017 earnings estimates were actually rising before earnings season even began.

Expectations are so strong for Q4 that analysts have broken from their usual pattern of lowering estimates prior to earnings releases. Will this optimism be realized? We will find out as companies begin reporting.


The next chart shows year-over-year expectations for Q4 revenues.


How strong are revenues expectations for Q4 2017? The next chart shows revenues from the last three years (12 quarters). As the blue line on the right of the chart shows, Q4 expectations of 6.3% growth were only exceeded by Q1 2017 (red line).  


Posted in Newsclips, Samples

T-Bills Show Little Concern Over Government Shutdown Threat


The table above shows the yield of Treasury bills that mature between now and early March.  If Washington D.C. were to shut down, the federal government is not allowed to prioritize payments. That means even though it has the money to pay 90+% of its bills after a shutdown, either everyone gets paid or no one gets paid. If the government was allowed to prioritize, it would violate the separation of powers as Republicans would have different priorities than Democrats.

So if the government were to shut down, maturing Treasury securities would not get paid. A premium would open between the Cash Management Bill (CMB) maturing on January 18 and standard issue 3-month bills maturing on January 25. The graphic above shows no real premium. Prior shutdown threats saw similar spreads widen to as much as 20 basis points, versus .1 basis point now.

The Treasury market is putting the probability of a shutdown at close to 0%.

Posted in Newsclips, Samples

Cryptocurrencies Take A Hit

  • The Wall Street Journal – Uproar as South Korea Plans Cryptocurrency Crackdown

    Government attempts to tighten control over cryptocurrency trading are sparking a fierce public backlash in South Korea. A petition on the official website of South Korea’s presidential office had collected more than 200,000 signatures by Tuesday morning, hitting a threshold that would compel a government response, which could mark the opening of an investigation. The petition, which was launched Dec. 28, had until Jan. 27 to reach the signature goal. The grass-roots backlash comes after several weeks of concerted attempts by South Korean regulators to clamp down on bitcoin trading—floating ideas including taxation, increasing regulatory scrutiny and even an outright ban on cryptocurrency exchanges. On Monday, South Korea’s government delivered its strongest statement to date about the dangers of trading bitcoin, warning the public to exercise caution. “Cryptocurrency is not a legally recognized currency,” the statement said. The remark came after South Korea’s justice minister said last week that the government was preparing a bill to ban cryptocurrency trading on exchanges, sending prices of bitcoin, the world’s most traded virtual currency, to fall more than 16% in two hours on South Korean exchanges. Hours later on the same day, a presidential office spokesman walked that back, saying that abolishing cryptocurrency exchanges was only “one possible measure” that didn’t represent a “final” decision.

  • Financial Post – Blockchain frenzy fuelling company name changes, new coins, reverse takeovers and soaring stock prices
    More than 30 public companies have made blockchain-related announcements over the past 13 months and have seen a median stock price increase of 265%
    Glance is one of more than 30 public companies that made blockchain-related announcements or added the word “blockchain” to their name over the past 13 months. Those companies experienced a median stock price increase of 265 per cent, according to an analysis by Autonomous Research. The trend has drawn widespread comparisons to the dot-com bubble of the late ’90s, when companies that added .com to their names saw a median share price increase of 118 per cent, according to the same analysis. Everyone knows how that bubble ended for most of those companies, but executives participating in the current blockchain mania would also like to remind you that a handful of winners such as Inc. and eBay Inc. survived the bust and thrived.
  • Comment

    The charts below show the drawdowns of several major cryptocurrencies. Bitcoin is down over 35% from its previous peak, marking its biggest drawdown since early 2015. Meanwhile, ethereum is “only” off 9.88%. Ripple appears to be the biggest loser, down over 51% from its peak.





    The volatility associated with holding Bitcoin has been a theme of ours over the past year. As we have pointed out:

    Defining a bear market as a 20% drop, the chart below shows just how often owners of Bitcoin would have to endure a bear market. While Bitcoin once made it 124 trading days (roughly six months) without a bear market during this span, this was far from the norm. More often than not, Bitcoin would enter bear market territory at least once every couple months.

    While this is not a game for the faint of heart, it is worth noting that these cryptocurrencies have snapped back from these losses very quickly almost every time.


Posted in Newsclips, Samples

Barron’s Roundtable Is Bullish

  • Barron’s – Bright Outlook for the Economy and Stocks

    The members of Barron’s 2018 Roundtable arrived at our annual gathering in a jolly mood. And why not? U.S. stocks returned an impressive 20% last year, and are off to the races again this year, propelled by expectations of good economic growth and robust corporate earnings. Our panelists, who spent Jan. 8 talking with the editors of Barron’s at the Harvard Club of New York, generally expect more of the same in the months ahead—more gains for equities, large-cap and small, as the global economy enjoys the most coordinated level of growth since the Eisenhower administration, notes Epoch’s William Priest. Few things these days, on Wall Street and elsewhere, merit that comparison. Helping the economy and profits, say our investment experts, is a spanking-new tax law that will lower corporate rates and encourage companies to repatriate cash that had been sitting overseas, including in enterprises established expressly to hide the dough from the tax man. No more; as the money flows home, expect fresh investment stateside; more mergers and acquisitions; and, yes, more dividend payments and stock buybacks to fatten investors’ wallets.

Posted in Newsclips, Samples

The Rally In Crude Oil

  • The Wall Street Journal – Five Potential Risks to the Oil Rally

    As sentiment on oil has turned positive, hedge funds and other speculative investors have amassed a record number of long positions—bullish bets on oil. If sentiment sours, these investors could quickly unwind their positions, driving prices down. “The rally may have gone too far too fast, and with current long positions being excessive, a temporary downward correction seems possible,” said ABN Amro’s Mr. van Cleef.

  • Comment

    We detailed the “speculative rush” in our CoT energy webcast on Friday. 



    • Barron’s – Oil Could Hit $80 a Barrel This Year

      Tightening global supplies and rising demand for crude oil helped prices for the commodity start the year with a bang—hitting their highest levels in more than three years—and many analysts believe the market has the fuel it needs to continue the rally to as high as $80 a barrel. “The reason that oil will soar is the oldest story in the oil world: Low prices created strong demand and growth, and now that demand is leading the way,” says Phil Flynn, senior market analyst at Price Futures Group. Oil futures suffered hefty declines in 2014 and 2015, as a global glut in supplies and the Organization of Petroleum Exporting Countries’ unwillingness to significantly curb production amid fear of market-share loss sliced the per barrel oil price roughly in half.

Posted in Newsclips, Samples

CoT Webcasts for January 12, 2018



  Commitment of Traders Analysis For January 12, 2018

On January 12, 2018, the Commodity Futures Trading Commission (CFTC) released the Commitments of Traders (CoT) statistics for Tuesday, January 9, 2018.

Click on the open button above for some charts and a few short webcasts noting some the data we found interesting from our new interactive CoT report

We also created a post with printable pdfs of the some of the most popular charts and tables.  

Posted in Newsclips, Samples

A Bond Bear Market?

  • Barron’s – This Bond Bear Market Doesn’t Look Too Fierce
    Investors may be rattled, but falling prices probably won’t stop them from buying new Treasuries.

    The bond bear market has finally arrived, according to Bill Gross. The 73-year-old Pimco co-founder, who helped invent modern bond trading, tweeted on Jan. 9, “Bond bear market confirmed today,” citing “25 year long-term trendlines broken in 5yr and 10yr maturity Treasuries.” Bond investors are rattled, as 2018 has kicked off with dropping prices and rising yields, with the rate on the 10-year U.S. government note climbing to nearly 2.6%—the level Gross has designated as the threshold marking the end. “Bonds, like men, are in a bear market,” he reiterated in a market commentary, referencing the recent spate of sexual-harassment allegations.

    • – $1 Trillion in Bonds Have Left the Negative-Yield Zone This Year
      Inventory of sub-zero debt falls to lowest since July
      Positive yields reflect inflation expectations, QE unwinding

      As the global bond market comes to terms with the unwinding of quantitative easing from the U.S. to Europe, it’s cutting inventory of the assets that bear the hallmark of a decade of distortion: negative-yielding debt. In the first eight trading sessions of the year, the pool of bonds with sub-zero yields has shrunk by about $1 trillion to $7.3 trillion, the smallest since July, signaling an uptick in growth and inflation prospects that’s helping to normalize bond markets around the world.

Posted in Newsclips, Samples

Trump’s Approval Rating

  • The Wall Street Journal – Stock Market Roared During Donald Trump’s First Year, Boosted by Earnings and Tax Cut

    U.S. stock markets soared to records during President Donald Trump’s first year in office, benefiting from a mix of pro-business policies, steady corporate earnings and a rebound in global economic growth. The S&P 500 index has climbed 23% since Mr. Trump entered the White House, the best performance for the index during a Republican president’s first year in office. Only first-year stock-market gains under presidents Franklin D. Roosevelt and Barack Obama exceeded those under Mr. Trump’s maiden year in office. (Stock-market gains during the first year of Bill Clinton’s second term also exceeded those during Mr. Trump’s first year.)


While stocks have roared ahead due to regulation cuts and pro-business policies, note that there is absolutely no relationship between Trump’s approval rating and stock gains.
This chart argues that the theatrics in Washington are shaping people’s opinions of Trump more so than his policies. Not even a rising stock market has helped him much.

Posted in Newsclips, Samples

More On Low Volatility

  • The Financial Times – Gavyn Davies:  Ultra low market volatility – friend or foe?
    A pre-eminent question for 2018 is whether these low volatility levels are reflecting excessive complacency (and possibly extreme leverage) among investors. A sudden spike in vol, for whatever reason, would almost certainly be accompanied by a significant drop in risk asset prices, possibly causing financial instability as it did in 2008. Central bankers have quite rightly started to worry about these issues, and many market practitioners believe that ultra-low vol is a major danger signal for markets. These “contrarian” investors suggest that over-extended asset prices are ignoring the state of economic or geopolitical “fundamentals”. Jeffrey Frankel states the pessimistic case very well here.
  • The New York Times – Is the Stock Market Too Quiet for Its Own Good?

    A rare calm has settled over the stock market. Whether it turns out to be the one before the storm is a compelling question after a year of conditions so placid that investing has begun to look deceptively simple. In all of 2017, the Standard & Poor’s 500-stock index experienced no decline greater than 3 percent, the first time that had happened. And a widely followed volatility index known as the VIX closed below 10 on more than 40 days in a six-month period through late November, according to Citi Research. Before that, the VIX had not closed below 10 on more than six days in any six-month period.

Posted in Newsclips, Samples

Missing Bond Trading

  • The New York Times – What’s $27 Billion to Wall Street? An Alarming Drop in Revenue

    Twenty-seven billion dollars has gone missing on Wall Street. For more than a decade, the world’s top investment banks practically minted money from the buying and selling of bonds, currencies and other complex securities. For many banks, the business became their lifeblood. Now, a combination of tough regulations, new technologies, calm markets and changing customer behavior has left that type of trading a shadow of its former self — and much of Wall Street trying to redefine itself. Five years ago, fixed-income trading — so called because its keystone product, bonds, typically provides a fixed payout — generated nearly $103 billion in income for the top 12 investment banks, according to Coalition, a London research firm.

Posted in Newsclips, Samples

Fake Data?

  • The Financial Times – Chris Giles: 2018: the year of fake economic data
    Unreliable statistics are giving official number crunchers a bad name

    f 2017 was the year of fake news, 2018 is shaping up to be one of fake data. And just as fake news comes in many varieties — real news dubbed by the US president as fake, as well as nonsense gaining huge audiences on social media — so does fake data. Today, the Financial Times reveals the fake gross domestic product data routinely released from many northern Chinese regions. There, solid alternative evidence suggests the authorities have “smoothed” the economic growth figures. They artificially boosted growth figures between 2012 and 2016, masking a real downturn, and last year covered up a genuine recovery.

Posted in Newsclips, Samples

Will The Stock Market Ever Go Down Again?

  • – The Stock Market Never Goes Down Anymore
    S&P is at widest level to its 200-day moving average since ’13
    S&P trades at 3.4 times its book value, the most since 2002

    he New Year’s rally has pushed the S&P 500 Index to its best start since the administration of George W. Bush. Now it’s bumping against speed barriers that marked the upper limits of bull markets for decades. Up eight times in the first nine days of 2018, the S&P 500 has broken away from a trend line, its 200-day moving average, with a velocity unseen since 2013, the best year for equities in a generation. The benchmark now sits more than 11 percent above the level, putting it in the 92nd percentile of momentum, data going back 20 years show.

Posted in Newsclips, Samples

Rotation Out of Tech Likely Not a Sign of Impending Risk-off


Contagion risk caused by a moderate rotation out of technology appears quite low. Short volatility strategies are still thriving and the correlation of implied volatility (i.e. perceived risk) across major asset classes is declining.


Short volatility strategies have thus far gotten off the hook after another period of high (negative) correlation to U.S. Treasury volatility. The chart below shows the correlation between the S&P 500 Put Writing Index and mutual funds employing the shorting of volatility to U.S. Treasury volatility (MOVE Index).

Bouts of U.S. Treasury volatility tend to occur during rapid ascents in yield. Drawdowns by these short volatility strategies tend to occur when risks between equity and bond markets become aligned. But, not this time (so far)! Recent turmoil across technology stocks have also had little impact on these strategies.



Financial media is chock-full of potential contagion risks due to technology stocks’ recent missteps. The next chart shows the implied volatility for the NASDAQ (VXN) and S&P 500 (VIX) with their spread in the bottom panel. The more tech-heavy NASDAQ is again showing a rapidly rising divergence from the S&P 500 only seen for a brief period in April 2014 and earlier this year in June.



But, the volatility found behind returns of major tech firms remains very low according to historical standards. The next chart shows implied volatility trends based on options for Amazon, Apple, and Google. We seasonally-adjusted since options activity has a defined rhythm. 



Concern of contagion is lacking with implied volatility across major asset classes near post-crisis lows. The chart below makes use of the CBOE’s indices of implied volatility (using options) for major ETFs. The average across available risk asset series is highlighted in dark gray.

The recent shedding of technology by investors may very well be a good old fashioned rotation instead of ‘risk-off’ reaction.


Posted in Newsclips, Samples

Supply Shocks Not as Dramatic for Munis as Expected

    • Bloomberg – Historic Week of Sales Faces Municipal Bond Buyers, Sellers
      Issuers crowd in as House, Senate GOP resolve tax bills
      Welcome to the biggest week of the year, perhaps to the biggest week of any year for some time to come. Estimates for the amount of municipal bonds to be sold this week range from $19 billion to $21 billion, or almost triple the average for a week so far this year. The figure could go higher. The Senate this weekend passed its version of tax reform, which includes prohibiting tax-exempt advance refunding. The next step is for the House and Senate to resolve differences between the two versions.
  • Summary

    Municipal bonds have not always been significantly impaired by supply shocks. Significant drawdowns are not likely given markets already pricing in a December rate hike. We continue to lean on alternative data (Google search trends) to assess value and credit ratings across each state’s municipal bonds.


    Investors have not shunned municipal bonds in the face of the Republican-led tax plan. The chart below shows 5-day rolling flows into municipal bond ETFs remain quite strong.



    The newswire burst with stories about the rush of supply by issuers to front-run the tax plan. The chart below shows the 5-day average of the 30-day visible supply as determined by Bloomberg and Bond Buyer. Visible supply has surged to the highest since 2000.



    However, municipal bonds have not always incurred drawdowns in response to these so-called supply shocks. The next chart offers the cumulative returns for each instance when 30-day visible supply exceeded 3 standard deviations from the 1-year average. The most significant losses occurred in November 2016 after the election and the Federal Reserve built the case for another hike.

    For December 2017, markets have already priced in hawkish rhetoric by Yellen et al calling for the 5th hike in this tightening cycle. We showed last week extreme underperformance by municipal bonds relative to the S&P 500, like the current situation, are followed by sizable rebounds.



    We continue to lean on Google search trend data within each state’s boundaries to assess excess yields to the S&P Municipal Bond Index. 

    For example, we measure the frequency of searches by individuals within each state for ‘unemployed,’ ‘foreclosure,’ ‘bankruptcy,’ and ‘payday loans.’ Higher frequencies of these particular searches likely indicate greater economic distress. We can assess the quality of government with words like ‘bipartisan agreements,’ ‘balanced budget,’ and more. We also include trends for the new economy including ‘artificial intelligence,’ ‘renewable energy,’ and ‘solar power.’

    The chart below shows each state’s excess yield (orange), fair value estimate (blue), and past six-month trading range. Residuals offer the degree to which each state is deviating from fair value estimates (green = cheap and red = rich).



    Additionally, we classify each state’s credit rates as determined by S&P using excess yields and the same Google search trends. The chart below shows the probabilities of each state falling within each credit rating from BBB- to AAA. Higher probabilities at lower credit ratings than current would raise flags.


Posted in Newsclips, Samples

Expectations for Economic Growth vs Interest Rates Not Squaring Up


  • Bloomberg – Goldman, Barclays See ‘As Good As it Gets’ 4% Global Growth
    Most bullish economists predict fastest expansion since 2011
    It’s looking like boom time in the world economy again. As more economists publish their 2018 outlooks, those from Goldman Sachs Group Inc. and Barclays Plc are proving the most bullish in predicting global growth will reach 4 percent next year. That would be the strongest since 2011 and up from the 3.7 percent that Goldman Sachs estimates for this year. “The ongoing economic expansion has substantial momentum,’’ Barclays economists Ajay Rajadhyaksha and Michael Gavin wrote in a Nov. 16 report. “It is not overly reliant on any single geographical region, industry, or source of demand. It does not seem to have generated economic or financial excesses that pose an immediate threat.’’
  • Bloomberg – OECD Warns Markets Too Optimistic as Global Economy Peaks
    Asset prices ‘inconsistent’ with expectations for growth
    The OECD cautioned investors that asset prices have gotten too high for a global economy that is set to peak next year and a market downturn could put the expansion at risk. World output will probably grow 3.7 percent in 2018, the best in years, before slowing to 3.6 percent in 2019, the Organization for Economic Cooperation and Development said Tuesday in a semi-annual report. The U.S. economy is set to reach its peak next year, while the euro area, Japan and China will likely slow in both 2018 and 2019, according to the report.


Economists are showing greater uncertainty over economic growth for 2018, but remain steadfast in expecting a continued low inflation and interest rate environment. Greater dispersion in economists’ forecasts have typically led to higher U.S. Treasury term premiums. Will this relationship break down or are higher interest rates on the way?


Economists are increasingly providing differing outlooks for growth in 2018 just like the two opposing articles shown above. 

The chart below shows z-scores for economists’ forecast ranges (maximum minus minimum) of major U.S. economic and market measures. Higher values indicate large ranges, hence greater uncertainty. 

Forecasts are increasingly widening for consumer spending (orange), non-farm payrolls (yellow), and overall real GDP (light blue). Conversely, forecasts remain very tight for inflation measures like PCE (purple) and U.S. 10-year note yields. These forecasts are at odds with each other.



The bond market’s indication of uncertainty is found in implied volatility (MOVE index) and the term premium. The next chart shows the 90-day change in U.S. 10-year term premium (blue) and economists’ average forecast range across major economic measures (orange). Term premium typically rises with widening forecast ranges, reflecting greater uncertainties. 

However, term premium has yet to rebound, just like economists’ forecasts ranges for inflation and interest rates.



The chart below shows the z-score for the rolling count of news stories concerning each policy initiative by the U.S. government along with words of ‘uncertainty.’

Policy uncertainty measures have bounced in recent weeks, predominately due to tax plan legislation (blue). 



Uncertainty found in stories covering the Federal Reserve has remained ultra-low ever since core inflation began to drop in March 2017. Interestingly, the months leading up to past hikes have all seen greater uncertainty than what we are witnessing in November 2017. Markets are seemingly extremely comfortable in their expectations for the path of short-term interest rates. Powell is very likely to continue the status quo at the Federal Reserve, which also means a continued divergence between market and central bank expectations.



Lastly, we have been assessing an alternative market-based measure capable of better capturing economic policy uncertainty. Equities have failed to respond to Trump and other geopolitical-induced uncertainties while adhering to improving earnings, relaxing regulations, and concerted global economic growth.

This alternative is centered on dampening the economic growth and inflation components of TIPS breakevens. This may sound strange, but TIPS breakevens are greatly impacted by financial stress and liquidity concerns in addition to inflation expectations. TIPS breakevens tend to widen with U.S. Treasury term premiums when uncertainty is on the rise and economists’ forecasts show higher dispersion (i.e. greater ranges). We are interested in the remainder after subtracting the economic growth and inflation baked into commodities from TIPS breakevens.

The second panel in the chart below shows the spread in rolling 90-day returns for the Barclays US TIPS Duration Hedged Total Return index minus the Bloomberg Commodities ex-Precious Metals index. The commodities component is weighted by a comparison in daily return volatility over the previous year.

This ‘uncertainty hedge’ has better-tracked uncertainty measures in recent years. TIPS breakevens may indeed offer more clues away from just inflation. 


Posted in Charts of the Week, Samples

Bond Sentiment Update: Portfolio Managers And Economists Are Too Bearish

Every week JP Morgan surveys their fixed income clients, asking them if they are overweight duration (green), underweight duration (red) or neutral (not shown).

This week’s survey shows 42% are underweight, just off the highest such weighting since September 2005. Subtracting the underweight percentage from the overweight, the bottom panel of the chart shows a 31% “net underweight” position. This is just off the -39% net underweight position on October 2, which was the largest net short since 2006. In other words, portfolio managers are extremely bearish on bonds.



A horizontal line in the bottom panel of the chart above helps denote each time the net position of the Morgan survey crosses below -25%. This is a fairly extreme level of bearishness.

So what happens to yields when managers become this bearish? The chart below shows the cumulative change in yields from the point when the net position first crosses below -25% until it hits 0%. The blue line shows the change in yields since October 2, when net positions last crossed below -25%.

Note that whenever this survey crosses below -25%, yields stop going up.



The black line below shows 10-year yields. The various colored lines are quarterly forecasts compiled by Bloomberg from roughly 70 economists.

Note that each subsequent period’s forecast is higher than the last. This means economists are almost always bearish. The further out into the future one goes, the higher their yield forecasts get.

Actual yields rarely cross above any of the forecasts. They did in March and again in July. Soon after that yields peaked and fell. 

Will this pattern repeat now that yields are approaching forecasts?


Posted in Newsclips, Samples

Venezuela is Alone in its Troubles

  • Financial Times – IMF crunches the numbers for possible Venezuela rescue
    Move could require $30bn a year or more in international help

    The IMF has had no official relationship with Venezuela since Caracas cut off relations in 2007 and has not conducted an on-the-ground review in 13 years. Officials insist no rescue is imminent and publicly say they are simply conducting normal surveillance, stressing that they have had no meaningful contact with the government other than occasional low-level responses to requests for data. But in recent months IMF staff have quietly crunched numbers for a potential bailout that, were it to happen, could be bigger financially and more politically complex than its much-criticised involvement in Greece. “The market needs to be properly prepared for this,” said a senior IMF official. “This is going to be Argentina meets Greece in terms of complexity,” added Douglas Rediker, a former US representative at the IMF.

  • Comment

    Venezuela’s situation is dire and the story above will raise eyebrows with the potential aid numbers. But Venezuela is a lonely blemish on the emerging market landscape. 

    The map below shows average total returns for emerging market sovereigns in the Bloomberg Barclays Emerging Markets Hard Currency Aggregate Index. Venezuela is the only sovereign with total return losses on average this year. 



    The next charts help illustrate how dramatically Venezuela has fallen behind its peers. With 2017 total returns now -10% on average, Venezuela trails the next worst emerging market sovereign by over 12%. 

    The chart on the right shows total return versus duration for each sovereign issue in the index. Venezuelan issues are highlighted in orange. There are only a handful of non-Venezuelan issues with losses on the year. Venezuela accounts for all issues with losses exceeding 5%. 



    As we noted back in December:

    Gustavo Diaz, an employee of Home Depot in Alabama, does more than anyone else to set the price of everything from rice to aspirin to cars in his native Venezuela, influencing the inflation rate and swaying millions of dollars of daily currency transactions via his website.  

    On, Mr Diaz and his two partners provide an unofficial, but widely used, benchmark exchange rate. This exchange rate is posted every day on his website and on his Twitter account which is followed by over 3 million people.

    As the chart below shows, the black market puts the exchange rate at 31,109 bolivars to buy $1, down 96% in the last year. The official exchange rate remains at 10 bolivars to buy $1.



    The collapse of Venezuela has taken place as its emerging markets peers are seeing the best economic growth since 2010. With nearby Caribbean nations likely to need billions in hurricane-related aid, Venezuela will be hard-pressed to raise the sums mentioned in the story below. Venezuela managed to sink despite a rising tide of emerging market performance, This uniquely poor performance further weakens Venezuela’s position as it hopes to find support from the international community. 

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Earnings Get Going This Week

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Through Friday only 32 S&P 500 companies reported Q3 2017 results. This week well over 100 will report. The blended chart below shows 468 median estimates and 32 actual results.


The next chart shows revenue growth rates.