Market Madness

Think less about low volatility, and more about the exits

3 interesting charts from the latest BOE Financial Stability report

http://www.bankofengland.co.uk/publications/Documents/fsr/2014/fsrfull1406.pdf

Vol is almost as low as it was pre-crisis…

low implied vol

Although higher vol is priced ahead…

Vol curve

But the difference now – there is more money in less liquid assets…

less liquid asset classes

Ukraine etc.

It’s all about Ukraine. Or rather, the spillover effect of a rise in geopolitical tensions onto volatility; of potential restrictions in gas supply to Europe; and of the macro economic impact of a deteriorating Russia.
The facts today:

* Russia unexpectedly raise rates in an extraordinary meeting, up 1.5% to 7%. The 1wk auction rate had been unchanged for 18mths {fifw NSN N1UOGK6JTSEX <go>}

* Russian stock exchange falls most in 5 years, down 10% {fifw NSN N1UQ3O6S9729 <go>}
* The Central Bank sold up to $10bn of reserves to support the Rouble, report newswires, quoting Moscow FX dealers
Key questions ahead:
+ What’s your preferred safe haven? Gold climbs over 1% but what if ultimately Ukraine has to sell its gold reserves to meet debt repayments, if neither an EU nor Russia bailout is agreed? The Yen is up 0.5% today, but the Swiss Franc has barely moved.
+ What can history tell us? The Georgia/South Ossetia/Abkhazia war was over in 3 weeks but that was August 2008 and the backdrop had Lehman liquidation looming. The previous Ukraine gas pipeline shutdown in 2009 may be more instructive
+ Where could positions become unstuck if there is flight to cash? There has been much focus this morning on the FT story that the rally in S&P has been driven by borrowed money, with margins at record highs  http://on.ft.com/NMnk29

Wibbly Wobbly Stocks

The new year has just begun and we already know it’s not been the easiest start to the year for many. In the next 48 hours we will see if the ECB take action over stubbornly low inflation, but more importantly, will the US jobs data show that January really was some kind of one-off weather affected stumble? Or will it confirm something more persistent than just a soft patch in the US data?
Either way, you’d have to agree with the technical guru Tom DeMark’s claim that “the next two to three days are extremely critical”… even if you don’t think a crash is around the corner!
U.S. Stocks May ‘Unravel Quickly’, Tom DeMark Tells CNBC
By Trista Kelley and Andrew Cinko Feb 5, 2014 2:22 PM GMT
Tom DeMark, the chief executive officer of DeMark Analytics LLC, said in an interview on CNBC that U.S. stocks have reached an “inflection point” that resembles the period prior to the 1929 stock-market crash.
“So far, everything’s aligned,” he said. “We think the next two to three days are extremely critical.”
“If we were to get, just as an example, today were to be an up close,” he said. “And then tomorrow, we close down, and we follow a lower opening the next day and trade a little weaker. We’re probably going to unravel quickly.”
“If we get a down close today and tomorrow we open lower and trade lower, we’re probably going to unravel. We’re watching very carefully because that sequence is very important.”
The Standard & Poor’s 500 Index could plunge to about 1,100, according to DeMark. That would be a 40 percent tumble from its record of 1,848.38 on Jan. 15.
To contact the reporter on this story: Trista Kelley in London at tkelley2@bloomberg.net