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Elevated Volatility Amid Elevated Uncertainty

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SubscribeTHIS IS NOT INVESTMENT ADVICE. Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.Barring the passing of a significant stimulus package in the United States, it is expected that there will be little to drive markets outside of their recent ranges until the election. You may recall that last week we highlighted that the VIX (the US benchmark volatility index) had closed above 20 for 158 trading days, the longest streak since during the global financial crisis. Despite rising stock prices, implied levels of volatility are elevated across many asset classes relative to the past 15 years. Implied 3 month volatility for the S&P500 is in the 80th percentile. Implied volatility for the Chinese Yuan and Mexican Peso (a proxy for emerging market currencies) are both in the 90th percentile. Oil and high yield bond implied volatility are both in the 80th percentile. What this means is that the market is expecting a bumpy road over the next 3 months and the cost to protect against falling asset prices is high. More simply, there seems to be a lot of fear priced-in. Despite all this, the Russell 2000, a small-cap stock market index more likely to resemble the business environment in the United States, has rallied nearly 13% since September 23rd outperforming the S&P500 by nearly 6 percentage-points. It’s worth repeating the old Wall Street adage once again, “The Market climbs on a wall of worry.” There seems to be plenty of worry in the markets but does anyone think that the stock market can rally furiously again in the 4th quarter? Contrarians, take note.Our chart of the week shows the countries that are expected to make the largest contributions to global economic growth in 2021. Source: BloombergIf you would like to receive the Weekly Macro Summary directly to your mailbox every Sunday, please subscribe. It’s free.Atlanta Fed GDPNow is currently tracking at 35.2% for Q3, unchanged from last week.New York Fed GDP Nowcast stands at 13.79% for Q3, down from 14.0% last week.US Core CPI rose +0.19% m/m, in line with expectations. +1.7% y/y.Source: Morgan StanleyUS September headline PPI rose 0.4% m/m (+0.2% expected), core PPI same (+0.4% vs +0.2% expected).US Retail sales +1.9% m/m (+0.8% consensus), core retail sales +1.5%m/m.Source: CitigroupSource: JP MorganUS Industrial Production for September was weaker than expected -0.6% m/m (0.5% expected. U.S. NFIB small business sentiment rises to 104.0 from 100 in August. Low point was in April at 91. Source: Morgan StanleyChina credit data was broadly stronger than expected this week.Source: Macquarie China's Exports +9.9% y/y in September.Canada’s manufacturing capacity utilization ratio is now at 75.8%, about 4% below last year’s levels.US MBA Mortgage Applications fell 0.7% last week, but are still 36.6% higher from a year ago.Source: Mortgage Bankers AssociationInitial Jobless Claims 898k this past week versus 825k expectedSource: CitigroupU.S. had 1.5mln Business Applications in Q3, a 77% increase from Q2Source: U.S. Census Bureau Bank of England further explores Negative Interest RatesFed Vice Chair for Supervision Quarles gave a speech titled, “What Happened? What Have We Learned From It? Lessons from COVID-19 Stress on the Financial System”. Offered 3 main lessons. “Short-term funding markets proved fragile and needed support – the commercial paper market and prime and tax-exempt money market funds, as key examples.” “The Treasury market is not immune to the problems of short-term and dollar funding markets.”“The regulatory framework for banks constructed after the GFC, with the refinements and recalibrations we have made over the last few years, held up well.”US Federal Reserve Vice Chair, Clarida: “flow of macro data received since May has been surprisingly strong, and GDP growth in the third quarter is estimated by many forecasters to have rebounded at perhaps a 25%-30%  annual rate.”Reserve Bank of Australia Governor Lowe indicates that the RBA will making a shift toward focusing on actual, rather than forecast, levels of inflation in its policy decision making framework. The move is similar to the one that the US Federal Reserve made recently with their transition toward Flexible Average Inflation Targeting. How effective further easing will be Impact on financial stability What is happening internationally The IMF released a comprehensive study on the pandemic’s impact on public finance. According to the IMF:Source: Goldman SachsWhat’s going on with China’s Yuan? We feel the story is not being covered widely enough. The onshore Yuan (USD/CNY) has appreciated by slightly more than 5% year to date making it one of the best performing currencies in the world versus the dollar.  China 10yr Bond Yield Differential to G4 countries (in basis points)Source: CitigroupCitigroup notes that Switzerland has met the objective criteria to be labeled a currency manipulator by the US Treasury. Bilateral Trade: “A significant bilateral trade surplus with the United States is one that is at least $20 billion over a 12-month period.”Current Account: “A material current account surplus is one that is at least 2 percent of gross domestic product (GDP) over a 12-month period.”Currency Intervention: “Persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly, in at least 6 out of 12 months, and these net purchases total at least 2 percent of an economy’s GDP over a 12-month period.”The global fixed income market currently has $16.5tln of negative yielding bonds. Digital currency proponents argue that this has catalyzed the recent rally in bitcoin.Source: BloombergUS oil inventories fell by 3.8mln to 489.1mln barrels China, the world’s top crude oil importer, took in 11.8mln b/d of oil in September, up 5.5% from August and 17.5% y/yOPEC’s Secretary-General Barkindo said this past week that OPEC+ alliance will ensure oil prices do not fall again when it meets to set policy at the end of November. In its latest primary dealer questionnaire, the US Treasury Department asked the primary market makers of Treasury securities the following question, “In response to increased borrowing needs, Treasury has increased coupon auction sizes for nominal coupons and FRNs, but has kept TIPS auction sizes unchanged since 2019. Should Treasury consider increasing TIPS auction sizes in the near-term to meet future borrowing needs and, if so, when and at what tenors (5-, 10-, and 30-year)?”JPMorgan reports earnings. Solid results with Q3 revenue at $29.9bln vs 28.2bln est.Citigroup reports Q3 revenue of $17.3bln in line with $17.2bln expected.Goldman Sachs Q3 EPS: $9.68 vs $5.60 expected, revenue was $10.8bln vs $9.4bln expected. AMC, the largest movie-theater operator, said in a regulatory filing on Tuesday that the company, “will require additional sources of liquidity or increases in attendance levels. The required amounts of additional liquidity are expected to be material.”Delta reports revenue of $2.6bln for Q3 down vs consensus $3bln.Source: WSJTaiwan Semiconductor revenue of $12.1bln versus $11.5bln expected,  up 29% y/y.LVMH posts 12% growth in Q3 for its fashion and leather goods business. Overall business revenue is down 7% to €11.96bln this yearChina is rumored to have imposed an import ban of Australian coal. The story has not been officially confirmed, but IHS reported that two China-bound cargoes have been diverted to India.Brexit talks have seen positive momentum since a large hiccup a few weeks ago in which the UK threatened to leave without a deal.  Countries are opening their borders to migrants from Hong Kong and Belarus for both humanitarian reasons and the opportunity to hire highly skilled and educated workers.Countries that are generally the least responsible for greenhouse gas emission are disproportionately economically impacted by natural disaster damage. Source: Quartz, UN Office for Disaster Risk ReductionRecovery of Key Economic Indicators in major countries relative to Pre-COVID, via Morgan StanleyUnited StatesEuro AreaJapanUKChinaThank you for subscribing to the Primary Dealer Review. If you have any questions or comments, please email me directly at  and I will get back to you.Do you know someone who would like to receive this publication? Please feel free to share the Weekly Macro Summary with them.This weekly summary expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. Further, the author makes no representation, and it should not be assumed that past investment performance is an indication of future results.Moreover, wherever there is the potential for profit there is also the possibility of loss.This weekly summary is being made available for educational purposes only and should not be used for any other purpose. The information contained herein does not constitute and should not be construed as an offering of advisory services or an offer to sell or solicitation to buy any securities or related financial instruments in any jurisdiction. Certain information contained herein concerning economic trends and performance is based on or derived from information provided by independent third-party sources.The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based.This weekly summary, including the information contained herein, may not be copied, reproduced, republished, or posted in whole or in part, in any form without the prior written consent of the author.© 2020 Primary Dealer. See , andThis site requires JavaScript to run correctly. Please or unblock scripts

SubscribeTHIS IS NOT INVESTMENT ADVICE. Please speak with a registered investment advisor or other qualified financial professional before making any investment decisions.Barring the passing of a significant stimulus package in the United States, it is expected that there will be little to drive markets outside of their recent ranges until the election. You may recall that last week we highlighted that the VIX (the US benchmark volatility index) had closed above 20 for 158 trading days, the longest streak since during the global financial crisis. Despite rising stock prices, implied levels...

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