Month: February 2018

Hopes for a resurgent Q4 GDP may be stymied as the US trade balance dropped to a new post-Trump wide deficit in December of -$53.1bn (worse than expected $52.1bn) as trade imbalances with Europe and China both worsened.

December also brings the annual revision and final data for 2017. For 2017, the goods and services deficit was $566.0 billion, up $61.2 billion from $504.8 billion in 2016.

Exports were $2,329.3 billion in 2017, up $121.2 billion from 2016. Imports were $2,895.3 billion in 2017, up $182.5 billion from 2016.

And finally, the trade deficit excluding petroleum at $49.84b in Dec.

 

Full Breakdown:

Exports

Exports of goods and services increased $3.5 billion, or 1.8 percent, in December to $203.4 billion.

Exports of goods increased $3.4 billion and exports of services increased $0.1 billion.

The increase in exports of goods mostly reflected increases in industrial supplies and materials ($1.5 billion) and in capital goods ($1.2 billion).

The increase in exports of services mostly reflected increases in  travel (for all purposes including education) ($0.1 billion) and in maintenance and repair

Imports

Imports Imports of goods and services increased $6.2 billion, or 2.5 percent, in December to $256.5 billion. Imports of goods increased $6.0 billion and imports of services increased $0.3 billion.

The increase in imports of goods mostly reflected increases in consumer goods ($3.2 billion), in automotive vehicles, parts, and engines ($1.1 billion), and in capital goods ($0.8 billion).

The increase in imports of services mostly reflected increases in travel (for all purposes including education) ($0.2 billion) and in charges for the use of intellectual property ($0.1 billion).

By Nation

The December figures show surpluses, in billions of dollars, with South and Central America ($3.7), Hong Kong ($2.5), Brazil ($1.1), Singapore ($0.9), and United Kingdom ($0.3). Deficits were recorded, in billions of dollars, with China ($34.0), European Union ($17.2), Mexico ($6.1), Germany ($5.7), Japan ($5.5), Italy ($3.7), South Korea ($2.1), India ($2.1), France ($2.1), Taiwan ($1.6), Canada ($1.4), Saudi Arabia ($0.6), and OPEC ($0.5).

The deficit with the European Union increased $3.8 billion to $17.2 billion in December. Exports increased $1.2 billion to $25.1 billion and imports increased $4.9 billion to $42.3 billion.

The deficit with China increased $0.6 billion to $34.0 billion in December. Exports increased $1.1 billion to $11.9 billion and imports increased $1.7 billion to $45.9 billion.

*  *  *
Not exactly what President Trump was hoping for.

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Liquidity in the “most liquid equity futures contract in the world” has evaporated.

As Nanex’s Eric Scott Hunsader exclaims, “Liquidity has flatlined… just incredible…”

As Jason Diomedes (@TradingWits) writes ominously, this liquidity flush is the “equivalent of 1987 crash when equity market makers stopped answering their phones.”

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With all the jawboning of the last two weeks having failed, all it took to erase US Treasury Secretary Steve Mnuchin’s dollar massacre was the biggest VIX spike in history and the biggest Dow points collapse ever…

 

 

Treasuries and gold are down (in price) as the dollar jumps.

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Last July, Morgan Stanley’s Chris Metli, executive director of the bank’s institutional equity division, wrote an article – posted here – looking at what would happen “if the VIX goes bananas” which previewed yesterday’s results with eerie accuracy.

And, a little over six months later, the VIX did finally go bananas. Here is Metli’s Post Mortem of what happened.

Post Mortem

by Chris Metli of Morgan Stanley

With a 4% drop in cash equities and even greater decline in futures, the VIX finally went bananas rising 20 points to the highest level since Aug 2015, and the weighted average 1-month VIX futures rose 96%.  This creates more supply from systematic funds for the rest of the week and nearly bankrupted the inverse VIX ETPs with NAVs down 96%.  To summarize the price action and implications:

• Some of the selling on Monday likely reflected investors anticipating systematic supply on Tuesday – this means the $30 to $35bn QDS estimates for sale Tuesday (detailed below) may net down to $15 to $25bn.  This is still enough to have negative impact on markets though and will be compounded by dealer short gamma positions.
• Anticipation of further supply later in the week from both annuities and risk parity funds could bring in more fast money sellers Tuesday.
• The near bankruptcy of the inverse VIX ETPs will be a very negative headline, and the several billion dollar loss for holders, largely retail, will scare some out of the market or force liquidations of other products to raise cash.
• Institutional vol sellers will likely cover exposures as well in the coming days and weeks.  While these positions will not take losses on the same scale of the VIX ETPs (because they are generally scaled more conservatively) unless there is a quick snap back many investors will likely take down risk, supporting implied volatility in the process.
• On the positive side, much of the short gamma exposure in the VIX market has been wiped out, leaving less risk of a further volatility spike from here.
• Investors were not in panic mode despite the selloff, as this move has ‘only’ wiped out one month of P/L.  As noted earlier in one sense this is good as it might slow discretionary supply, but it also highlights that discretionary investors are still very long risk and could easily turn sellers.
• Who are the incremental buyers here?  Macro funds betting on the vol unwind that has now happened could cover and turn buyers, but for real support the market needs deep pocket asset allocators to step in.  Vol target supply will eventually wane as volatility peaks and/or leverage comes down, but they likely remain sellers for the next several days.
• Net-net: more supply likely pushes markets lower Tuesday and potentially Wednesday, and buyers will need to see signs of slowing supply and stabilization to come back in.  Short-dated implied volatility has likely peaked, while the back end of the vol curve likely rises over the next week and realized volatility will continue to move higher.  This is unlikely the turn of the cycle as the selloff is largely technical and positioning driven, and likely not large enough to feed back into the real economy and become fundamental, so dips will be bought after the systematic supply and vol unwinds abate.

QDS came into Monday expecting nearly $5 to $10bn of equity supply from systematic funds, principally annuities as they tend to react quickest to recent increases in realized volatility.  That supply likely contributed to the move lower, but it was then compounded by dealers having to hedge their short gamma exposures.  QDS estimates that in total dealers likely had to sell $11bn of S&P 500 futures on the way down today.

The selling was exacerbated by a lack of liquidity – as the MS Futures team has noted, available size in ES futures has been deteriorating this year (left chart below) and it dried up sharply Monday afternoon with average available size at the top of the book falling to ~75 contracts between 3:30 and 4:00 pm versus typical levels between 500 and 1000 seen last year.

After this violent move lower, QDS estimates that annuity funds will now need to sell between $30 and $35 bn of equities on Tuesday, and a similar amount Wednesday.  Realized volatility has moved through most funds’ target ranges, so this is the point of max pain, but further volatility from here could still add to the supply picture for later in the week.

As noted in previous pieces, risk parity funds were likely not sellers yet.  But that is now at risk of changing since despite the rally in bonds today, it was likely overwhelmed by the selloff in equities, and realized volatility for risk parity portfolios is now starting to rise.  Timing and sizing this flow is not as clear as for annuity funds, but if the actual deleveraging follows QDS models, there could be $10 to $20bn of supply in both equities and bonds later this week.  The flight to safety in bonds will certainly help slow any deleveraging and keeps the tail scenario of stocks and bonds falling together off the table, but near-term they could still be modest sellers given the increases in volatility across asset classes.

 

The VIX market saw the net buying pressure on record.  For background on the risks that materialized Monday see If the VIX Goes Bananas, this is What it Might Look Like from July 2017.  Details and implications:

• The ETPs had to buy 282,000 VIX futures to rebalance their short gamma… needless to say this is the largest VIX buy in history, dwarfing Friday’s previous record of 78,000.  Dealers hedging their short gamma exposures likely contributed to VIX futures demand as well.
• Most of the rally in VIX futures happened after the 4:00 pm cash close, not leaving a lot of time for investors or the issuers of the VIX ETPs to react.
• This move was incredible particularly because VIX and VIX futures were already elevated – and the amount of volatility to buy exceeded QDS estimates (below shows what QDS estimated coming into Monday) and speaks to the size of the short vol exposures in the market:

• Whether the inverse ETPs continue to exist tomorrow is up for debate at time of this writing (contact us for details), but for the broader market the implication is clear:  the inverse ETPs have effectively delevered down to zero, going from short 230,000 VIX futures to short just 4,000.  (note exact numbers will need to be updated to reflect creations / redemptions reported overnight).

• On a positive note this means there is much less risk going forward of further vol to buy from rebalancing of these products.   On a negative note holders of the inverse ETPs lost $3.4bn as the products went nearly bankrupt and this removes a steady source of volatility supply over the last year.

The VIX move of 20 was massive relative to the SPX selloff of 4%, pushing the rolling 1-month beta of VIX to SPX to all-time highs.  Prior to 4pm the VIX futures move had been relatively modest versus the move in VIX, but that rapidly changed post close as VIX futures rallied nearly 80% as much as VIX spot – a rare occurrence as the ratio is usually 40-50% – as the massive 280k futures that had to be bought had an impact.

Prior to the VIX futures explosion post cash close, the bid to the front of the term structure and massive steepening of skew was reflective of the pain dealers likely felt from the move lower in spot, forcing them to cover their short vol positions with short dated options (impacting VIX more than longer-dated vols) – as noted previously skew was too flat given the large short downside vol exposures dealers were sitting on.  Demand to cover short convexity risks also drove VVIX (the implied volatility of VIX to a record high of 177%, outpacing even the large move in VIX.

Even though Feb and March VIX futures caught up late day, longer-dated VIX futures lagged and June VIX futures are actually still trading below 10 year medians.  This is typical behavior in a sharp selloff – the cheapest dollar price / shorter dated options get bid first, and only after investors begin to expect the higher vol environment to persist for longer do they buy longer-dated options to hedge.    Given that today’s move up in vol and skew was led more by dealers repricing risk than end user demand for puts, longer-dated volatility should reprice higher in the coming days.  Shorter-dated vols are already off their closing levels, retracing some of the post cash close bid.

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A meeting last night among House Republicans must’ve born fruit, because the caucus announced late last night that they would hold a vote late Tuesday on a bill to keep the federal government open through March 23. The vote would avert the second government shutdown this year.

The measure would fund most government agencies and contain a year of defense funding as well as two years of funding for community health centers, the Republican representatives told reporters. But without a concurrent deal on immigration that includes enshrining DACA protections in law, it’s difficult to say whether the bill will muster the votes to clear the Senate, where it would require 60 votes to circumvent a Democratic filibuster, per Reuters.

As CNN explains, the full-year defense-spending plan – a long-sought objective of Mark Meadows and the rest of the House Freedom Caucus – is being added to the plan to give GOP leaders a chance to muscle the bill across the finish line with Republican-only votes – a necessity for defense hawks who have grown increasingly uneasy about the Pentagon relying on short-term resolutions. 

“We have to break this logjam some way,” said Rep. Greg Walden, the Oregon Republican who chairs the House Energy and Commerce Committee, of the fifth short-term funding measure.

Freedom Caucus Chairman Mark Meadows said he supports this strategy, and several GOP lawmakers said they expect it to pass the House with zero Democratic votes.

 

 

The bill also includes two years of funding for community health centers, a bipartisan priority.

But the same sources who told CNN they expect the bill to pass the House also noted that it probably has no chance in the Senate. One thing it would accomplish, however, is help House conservatives pressure their Senate counterparts to act on the defense funding.

“It’s the only way we can get to 218 votes when the Democrats won’t give any votes” on the continuing resolutions, said Michigan Republican Rep. Rep Bill Huizenga.

Asked by CNN what happens when the Senate strips out the defense spending, Huizenga said “we’ll cross that bridge when we get to it.”

In a statement that, perhaps inadvertently, sums up the state of negotiations between Republicans and Democrats since September, when the first continuing-resolution battles began percolating, Missouri Senator Roy Blunt said the two sides are “close” to finally resolving a host of issues from immigration, to disaster relief, to lifting spending caps that would open the door to a long term spending bill.

“We have the same level of high optimism on that we’ve had since October,” said Missouri Republican Sen. Roy Blunt, a member of the GOP leadership team, with a grin. “Which is everybody’s almost in agreement, and that’s the story that does not appear to change, nor does it appear to come to conclusion.”

Worst case, senators said Monday, the chamber will strip the defense funding from the House bill and move a short-term bill that includes a handful of other priorities.

“I would expect it would not include defense,” Blunt said. “I think it may include a few other things. Maybe community health centers, maybe some sort of disaster – I think there’s a series of a half a dozen things, any combination of which might go on and I expect at least one or two of them would.”

According to CNN, one member of the GOP Senate leadership said that, if they can secure a deal on raising the spending caps, it would open the door to include a provision to raise the debt ceiling in the spending bill.

“There’s a chance,” Texas Republican Sen. John Cornyn, the second-ranked Republican in the Senate, told reporters of the possible inclusion of a debt-limit increase in the short-term funding bill. “If we can get an agreement on caps, there’s all sorts of good things that are gonna happen, including that.”

Of course, negotiations on spending caps, immigration, disaster-relief, Obamacare and many other legislative priorities have been “close to a deal” for about four months now.

Let’s see if this time, lawmakers actually deliver.

 

 

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Still shocked by the VIX surging over 50? Well, here’s some good news: it could be worse, much worse. In fact, as Natixis’ William Imbrogno calculates this morning, the VIX spike – the largest in history, and still rising – should correspond to a 15% market crash.

Here is the note from the director of equity derivatives flow at Natixis:

The VIX spike was the largest in history and should correspond to a 15% market move, the drop of 4% on the SPX should correspond to an increase in the VIX of 5 points.  

Showing the asymmetrical impact of the short squeeze on volatility given the dominance of Algo’s, vol control, CTA’s  and short volatility strategies.

Perhaps this is a strong case to reduce the reliance on systematic automated strategies in favour of active management?

 

 

Yes, “perhaps.”

Or then again, perhaps it just shows that when the market is going up, nobody cares how or why – whether it’s due to the Fed, algos, quants, machines or Joe Sixpack.

However, when it all goes terribly wrong, the fingerpointing immediately begins, with the first culprit – naturally – the robots, algos and quants. After all one must defend, distract and scapegoat away from that ultimate bubble blower, the Fed, at all costs.

 

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Submitted by Bill Blain of Mint Partners

Pity Powell. Market Crash is a volatility driven VALUE AT RISK Event.

You have to feel sorry for new Fed Head Jerome Powell starting his new job yesterday: Powell is going to find he has three jobs: Inflation, Jobs, and managing Trump who might well think a falling stock market is a Fed Plot to discredit him. Does that increase the risk of a policy mistake?

Lots of interesting stuff going round this morning as market tries to assess what’s actually going on. Despite the spectacular success of the this morning’s UK Inflation Linked bond issue – (there’s a clue of what people are scared of), the risks across all asset classes are going to stay high for a least a few more days. Shake out continues. One scribbler source says he’s worried portfolio managers will use the volatility to simply dump any position causing them MiFID concerns – on the basis no one is going to spot bad news on a bad news day.  We’ve being ultra-cautious, but we’re seeing good bond flow.

It’s becoming clear this crash isn’t based on any one particular piece of news. Its as likely it was tipped into a sellathon by inflation expectations, the return of the Philips curve and wage inflation, rising and normalising interest rates, rising bond yields as much as hubris on Trump’s comments about his successes making stock markets rise.

This event is not about a correction or the amount of money that’s been lost on levered inverse VIX plays. It’s about the sudden, dramatic return of Volatility catching the market unaware and triggering a massive VAR event. That’s a lesson in complacency. The market is awash with stories – but we don’t repeat rumours in the Porridge. As four months of gains are reversed in four days, the current VAR shock sees Risk Managers shoving traders aside – that seldom ends well.

The attached graph from Martin Malone highlights the last 5 volatility spikes.

 

 

The other side of the coin is cash has to go somewhere. We still reckon the improving Global Macro Theme remains on track, thus risk assets like Stocks and Alternatives over bonds. That’s our view – for now.

You can’t help but wonder if this deepens into a full blown financial crisis in stocks and bonds, might it cause Central Banks to press the “Do Anything It Takes” button.. Lower rates? Reopen the QE gunnels? Right back into the distortions of the last 10-years and another nail in the forehead of market driven economies.

It’s a possibility. After all the market loves the Central Banking Put!

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President Donald Trump is finally making good on his promise to implement “extreme vetting” practices for immigrants, refugees and anybody else trying to enter the US.

Late Monday, CNN reported Trump is expected to sign a national security memorandum on Tuesday establishing a “National Vetting Center” that will help coordinate information between various federal agencies. The order will allow the Department of Homeland Security and other agencies involved in the process six months to establish the center, which administration officials said is intended to streamline vetting and improve the flow of information between various federal agencies.

 

While the agency is expected to focus on immigrants, refugees and visa applicants, it will reportedly also assist in deportation cases.

The memorandum Trump is expected to sign on Tuesday will not establish any new authorities or call for any new funding to establish the vetting center, which will be an effort between DHS, the State Department, Justice Department and intelligence agencies, a National Security Council official said.

It’s unclear how this effort will change the way travelers and immigrants to the US are vetted.

While the center’s efforts are largely expected to focus on visa applicants, immigrants and others looking to enter the US, the center will also look to streamline vetting of certain individuals who are already in the US, including those subject to deportation proceedings, according to the National Security Council official.

In an attempt to fend off a spate of lawsuits from federal appeals courts that have so far stymied most of his immigration-reform efforts, Trump will order the creation of an independent civil liberties panel to oversee the new agency. The center will also be overseen by a board that’s expected to include at least one cabinet minister.

Anticipating concerns from civil liberties groups, the memorandum will also establish a standing privacy and civil liberties panel, which will have some oversight over the National Vetting Center’s activities. The membership of that panel will also be determined during the six-month period.

The National Vetting Center is part of the Trump administration’s broader efforts to tighten immigration screenings, following Trump’s calls for “extreme vetting” during his presidential campaign.

Trump has repeatedly pointed to the need for tighter immigration controls, amplifying his calls in the wake of terrorist attacks — even when the terrorist in question was born in the US or was radicalized after entering the United States.

Despite his precautions, Trump’s order will almost certainly be met with an injunction from a liberal federal judge – probably one from the ninth circuit, if history is any guide. Trump is set to announce the policy Tuesday, but the exact timing of the announcement is unknown.

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For those traders who were desperately hoping that yesterday’s VIX selloff would mercifully end in the overnight session, or that – as JPMorgan’s Marko Kolanovic suggested some central bank would step in and bail you tout – we have some bad news: not only is the 116% surge in the VIX from yesterday accelerating, it is now above 50 as the vol eruption continues, crushing the world’s vol-sellers, and assuring that all those who were collecting pennies in front of a steamroller, end up, well, fully steamrolled.

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