https://www.zerohedge.com/news/2018-02- ... xt-painful
"Everything Changed In 2011... What Comes Next Is Painful": Deutsche
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here was Citi lashing out on Valentine's Day at the concurrent plunge in bonds and the USD:
So somehow we have embraced the theme that was with us through January. On a day when inflation beats in the US (incidentally retail sales missed): stocks are up, yields are up and the USD lower does not add up.
Then on Friday, Deutsche Bank's George Saravellos doubled down, while at least attempting an explanation:
We are well into 2018 and our feedback from recently attending the TradeTech FX conference in Miami is that the market is still struggling to understand or embrace dollar weakness. How can it be that US yields are rising sharply, yet the dollar is so weak at the same time? The answer is simple: the dollar is not going down despite higher yields but because of them. Higher yields mean lower bond prices and US bonds are lower because investors don't want to buy them. This is an entirely different regime to previous years.
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[The recession-recovery path post-2008] starts, as usual, with a selloff in risk assets and a rally in bonds (1 & 2), but as the crisis deepens and QE gets deployed (3), the action moves (and stays) on the off-diagonal where both bonds and equities rally. Unwind of QE now becomes essentially a de-risking move -- it goes against the grain of recovery.
Currently, we are heading towards point 4, beginning to catch sight of the bifurcation point (5) from which the market could either sink into the “stagflationary” trap (6: everything: stocks bonds and currency, sell off) or move to the 1st quadrant if the Fed and Congress manage to engineer a turn around and we get catapulted towards what looks like a traditional recovery. This is the biggest challenge for the Fed at the moment, which is further complicated by the ongoing rise in volatility. This complication, which appears to come naturally in this context, is further amplified by the Fed’s negative convexity exposure to inflation.
the market's current growing confusion at the divergence of the stock-yield-USD action, is the direct result of the gradual policy unwind...
After years of calm and predictable markets, suddenly there seems to be many things going on at the same time. As recently as early January, the incoming vol supply could not find a buyer as vol selling and carry trade remained the dominant themes. This changed practically overnight as rates broke through significant technical levels, which triggered a spike in gamma, which quickly spread across all market sectors. With every new installment of stimulus unwind, it seems as if things are moving in reverse, but not to where we left them, rather towards what appears to be an unknown and unfamiliar destination. This is proving to be a highly unconventional tightening cycle and recovery.
... which takes us to his prediction of what comes next. The simple answer: "pain."
After years of forced hibernation, brought about by suspension of traditional trading rules by the central banks, the markets are facing a painful process of re-emancipation. This is causing considerable confusion and anxiety.
Finally, for those "confused and anxious" about the catalyst for the next cycle of pain, look no further than volatility, and specifically where it goes from here - its trajectory will determine the fate of not only the market but also the economy, to wit: "In the subsequent months, a particular pattern of volatility, in terms of its breakdown across different assets, will determine the mode of risk rebalancing. In that context, volatility will play a decisive role in determining the success and timing of the recovery and a particular economic trajectory."