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Quant Qrash Slams Stocks, Batters Bonds

Tuesday, October 11, 2016 14:02
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“probably nothing”

A stunned universe of mainstream media dipbuyers were perplexed today as stocks AND bonds tanked. The reason is simple – what goes up (record levels of correlation between stocks and bonds driven by the idiocy of central banks)…

Must come down (levered long risk-parity funds forced to liquidate/delever as their models explode).

So stocks are sold, bonds are sold, and volatility is forced higher…

As RBC’s Charlie McElligott warned last week… this equity drawdown is probably a quick blast of systematic deleveraging:

US rate vol again picking-up (with 10s entering a new ‘higher’ range 1.75 / 1.85) / bear steepening evident with some monster blocks this morning–>as such, we see the same uptick in cross-asset vol we’ve been experienced over the past 2 months.  Nothing disorderly in equities today (bc the rates move isn’t disorderly either), but mechanical supply it seems is evident from the systematic community…again.

Dollar strength (which drives VIX btw), Crude strength and nascent signs of inflation pick-up all conspiring against USTs currently… in addition to THE buyer of USTs moving their “buy zone” to a higher range it seems (or at least letting things “shake out” to find a new level). 

As I said last Thursday in the “RBC Big Picture,” when USTs “…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.”  In simpler terms, leveraged allocation strategies which are primarily long ‘low historical volatility assets like USTs (alongside their longs in stocks, commods, EM) have to deleverage on rates breakouts higher.  At times, this can spill-over beyond rates….see all four “taper tantrums.”

Quants were also hurt as the lowest momo stocks have plunged in recent days…

Trannies remain green on the week but everything was down today…

VIX surged to 16.5, stocks dropped to the low end of the recent range…

S&P 500  Tumbled below its 100DMA – biggest drop since September 9th’s drop driven by Eric Rosengren’s hawkishness…

VIX surged back above its 200DMA

But crucially, stocks broke out of their wedge, with no bounce…

Oil “stability” did nothing to save stocks…

Banks and Energy were not worst today but the narrative of their leadership is starting to fade (Helathcare driven by pharma was worst)

Treasury yields were up across the board (with the long-end underperforming) as cash bonds returned from holiday…

The USD Index surged again on the back of Yen and Cable weakness…

Cable leading the way lower against the USD…

USD strength (and a lack of effective jawboning from OPEC) sent commodities lower…

Charts: Bloomberg


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