Thursday, March 16, 2017

"Do Algos Dream of Electric Crashes?"

From Risk Reversal:
Yesterday marked the 105th consecutive trading day without a one percent drop on a closing basis. Here’s how that ranks among other streaks (from BoA/ML on Tues, h/t Zerohedge):
As you can see, the current streak is working its way up the historical list. Just a few more calm days and the current streak can pass one of 110 in 1995 and one of 112 in 1985 to become the longest such streak in 50 years!

Obviously, this lack of fear in the market flies in the face of what’s going on on the ground, with an FOMC and other central banks about to raise rates and remove accommodation in their most significant form since the Great Recession. Political upheaval in Washington, with tons of uncertainty on tax, healthcare, infrastructure spending, immigration and trade policy. And of course geopolitical uncertainty overseas as the EU is under threat from Brexit and upcoming elections in France (they dodged a bullet in the Netherlands) and then Germany, as well as a US President and his special advisor that have called into question the need for transatlantic military alliance NATO.

So how is the market able to to shrug off all of this and climb a wall of worry? For some, most of the reasons listed aren’t huge threats. NATO was a cold war era alliance, the EU was designed to fail eventually, the populist part of the new President’s campaign was always a con and the policies actually being implemented are classic market friendly deregulation and tax cuts. No big deal for markets, no reason to panic. And most importantly, just how scared should we be that rates are about to rise? And more importantly, how far will they go?

Here’s an interesting chart from Pimco (h/t @billsweet):