Swap spreads

Expect Nasty Volatility & Shocks This Summer

Expect Nasty Volatility & Shocks This Summer

With the stock market heading no where for the last 4 months of this year, it is high time we took a step back and view things from a systematic angle. As we approach the "sell in May and go away" phase of the year, equity returns are looking more vunulrable to adverse shocks, and flares in volatility.

YTD, the S&P 500 is almost unchanged, down marginally. Bonds (quality) and commodities (short USD) have been the best performers for the last 4 months. Vol of vol (VVIX) has remained elevated but is not yet deemed to be at alarming levels. What's in store for us may be a surprise. Or actually maybe not.

When we piece this puzzle back in a way BofAML calls the "3P's of Positioning, Policy & Profits", we can come to the conclusion that the risks are skewed south, and things could turn uglier very promptly. Therefore, it may be wise to expect very moderate returns from equities. One may wish to overweight cash, bonds, and gold while avoiding equities and non-IG corporate credit.

What The Smartest Minds Think Of The Current Rout

What The Smartest Minds Think Of The Current Rout

2016 is shaping up to be like the latter half of 2015 but with a lot of additional dynamic forces warping and twisting the financial markets. Higher than average volatility has been the common theme so far but we're also noticing an incredible rapid shift in cross asset correlations. All this means that the current market environment is extremely rough, giving traders (ourselves included) a hell of a hard time.

It is no surprise that this is indeed the case. Policy uncertainty amongst central banks, oil prices that are stick in a moribund rut, very idiosyncratic technical flows that have caused traditionally lower beta assets to trade like mad donkeys, and of course the deep polarization of sentiment across the board.

It is on this note that we turn to JP Morgan's quantitative desk for answers, albeit nebulous. The desk analyzes markets in a less traditional manner, approaching this landscape with mathematical and technical tools most retail traders have zero access to.