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“Everyone’s On The Same Side Of The Boat Again” – Traders Panic-Buy Into Jobs-Driven Rate-Hike-Hope

Thursday, October 6, 2016 11:47
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Levered long financials… Treasury curve steepeners… Fed Funds selling… USD buying… Dump defensives… Dump ‘low vol’… As one veteran trader scoffed this week, “Janet better not disappoint this time, everyone’s back on the same side of the boat again.”

Rate hike odds are soaring (for Nov) and along with them, the USD…

This is what she will be hiking rates into…

But despite the weakening growth estimates, steepening yield curve bets have sparked utter panic buying in levered long financials (RBC notes: for a quick glimpse into how “real” this positioning scramble has become within equities for a higher rate world—XLF saw 600k calls trade yesterday against a 47k avg / day over the past month.  This was the most XLF calls traded in a single-session since March ‘14)

“Defensives” are being dumped at the fastest pace in 7 years…

And so-called “low vol” funds are collapsing relative to the market (as RBC previously-stated with regards to this farce: you cannot create a product that claims to make a ‘risk asset’ into a ‘low vol’ one without repercussions to the ecosystem)

Finally, bond-stock correlations remain elevated…

But, with both dropping,“risk-parity deleveraging” continues.

RBC’s Head of Cross-Asset Desk Strategy, Charlie McElligott explains…

…when rates sell off in a “leveraged short convexity” world (back on envelop $3.7T of AUM w leverage between risk-parity, risk-control and structured products with vol targeting “dials”), and where cross-asset correlations are forever tied to the same inputs (CB volatility suppression and the level of the US Dollar), you see “wonky” and “lunging” unwinds.

Roughly translated – this won’t end well.


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