Chart of the Month – Interest Rate vs Equity “Fear”: Two different worlds

Interest Rate vs Equity “Fear”: Two different worlds

SRVIX vs VIX “gap” is once again getting very extreme.

The current gap has been mentioned during multiple conversations with HF managers recently. They also confirmed that equities are not realizing much volatility nor is much “exogenous” risk being priced in for now, as suspicious as it may sound….

The latest turbulence further to the implosion of Archegos is so far just an isolated event, but there is a general trend pushing risk managers to look through the portfolios and the average order book, simulating scenarios in a new way.

Yields have put in a “big shooting star candle”.

Will we get a pause in yields and rates vol?… Most believe that SRVIX vs VIX gap isn’t sustainable.

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Chart of the Month – “Something’s gotta give”

CHART OF THE MONTH

“Something’s Gotta Give”

Something’s Gotta Give is a 2003 American romantic comedy starring Jack Nicholson and Diane Keaton who find love for each other in later life, despite being complete opposites.

Why is the USD so weak recently despite the 10-year interest differential between the US and Germany indicating the opposite? This spread which historically has been a good indicator has increased since November as US interest rates have gone up more than their German counterparts.

The USD dollar could be weak because of expected increasing budget deficit and a weak perception of the Trump administration. The EUR could be strong because of stronger than expected European economic activity, foreign investors’ interests in buying European assets and or market expectations that the ECB will soon move towards reducing its monetary accommodation.

The USD is now clearly oversold by any technical indicator but German interest rates are probably one of the most missed priced asset as a result of quantitative easing.

So something will have to give! Being long the USD while shorting 10-yr German bund and buying 10-yr US Treasuries could be the way to play this convergence.