Gold Hangs Above 2016 Low Despite BTC (Now in BitCon Futures), Brexit Deal,Tax Bill, and Fund Pukers

The only thing that truly trends is humans extrapolating their rates of return emotionally. Everything else will regress to the mean at some point.  

Investors are being given a gift and do not see it. Every rally in stocks should be used to lighten exposure to a crash  and every corresponding dip in gold should be bought from a balanced portfolio approach.  You should be peeling back equity exposure on every new high and adjusting your risk into something that is stable, holds buying power, and is liquid. That is the point of investing. Your home, your art, and your bitcoin will not fit those guidelines. Gold and silver do.

Do you think the millennials will be buying your 401k shares in 5 Years? Don’t be naive. No one went broke banking profits. And the Fed is handing you an opportunity retire with enough money now as they have moved the housing bubble back into the stock market. It took 10 years. Do you have another 10 years to wait if we crap out again? Protect your profits now. 

 

Admittedly the title sounds like a Gold Bull rationalizing a losing position, as so many gold salesmen do, and we are long and are not selling you Gold. We are also swing trading from the short side. So it is what it is.

It"s jobs day and noone really thnks that matters to Fed policy anymore,  Brexit breakthrough agreed, and shutdown avoided for now. A couple points before getting to the reason for our title. Let’s first count the ways in which Gold has had to deal with bad news these past 2 months. 

Counting the Ways Gold is Bashed

Fund liquidation, Trump Tax Bill, Bitcoin, Brexit deal, Venezuela default (bearish for gold as they had to sell), and the usual short side players with deeper Fed sponsored  pockets than the longs woth which they do battle. These are a few of Gold’s obstacles these past couple months. And yet here we are $100 above last years lows. 

Kicking Gold Today’s Edition

The Brexit deal and Govt shutdown avoidance alluded to above, along with the end of year puke-age and Trump’s Tax Bill (as we have written about here extensively) have all been major negatives for Gold the past few weeks. And yet gold sells off (again) before the news comes out.. strange... 

To be fair, we are seeing more longs with end of year hopes dashed selling these last couple days. There are some shorts getting in now however. Just not enough to spur  a sustainable  a rally we think. 

Banks and The Fed in Bed Again And Gold Suffers for It

Post 2008 banks have been on the outs with The Fed as risk managers. The Fed had mandated more risk be cleared through exchanges. And they have succeeded somewhat.

In doing so, the border collies that run our monetary system have herded much derivative risk into a larger basket. TBTF became Bigger and more centralized (like Fannie Mae..).Their reason is this basket is more easily watched, and since they regulate exchanges, can be “advised” on policy.

But along comes an existential threat not just to global fiat backed governments, but to the US Banks that are their overlords. And boom! They have a common enemy. And that Enemy is Bitcoin.

Gold is suffering real collateral damage now as the banks pitch their new wonderful product to replace gold.. and it’s having an effect. 

BTC Futures: Regulation and Repression to Follow

Note the complete banking industry turnabout to hailing BTC as the new gold on the coincidental heels of new futures contracts approved by the CFTC. Banks and brokers have a new product to sell you folks, and they are actually calling it a store of value, a new gold, if you will. This is in complete contrast not just to BTC behavior (volatile and a wealth generating currency, but don’t call it money yet), but to gold itself (low volatility, wealth preserver, money but not currency)  Line up suckers for a new product to be castrated, regulated, and repressed by banks through exchanges with government blessing and oversight. People not long  Bitcoins will be buying futures on margin while banks long BTC  will be hedging and killing their much shallower pocketed but greedy clients. Let the fleecing begin in the NEW GOLD.  JPM Calls BTC “New Gold”; Spoofing Starts Monday

Love Michael, Hate it When he’s Right

Michael Moor has been spot-on in handicapping market moves given price triggers. Read UPDATE: “Bear Trend with a $1700 Target” Has Problems for more. He saw for different reasons than us, a large bull move fermenting last month. He gave a level where that was negated. That level was breached. Now,to our chagrin, he’s called this sell-off from the $1272 area very nicely. In the process, he stopped us from buying dips for now. But we wish he’d see the end.. for our sake! 

UPDATING OUR LEVELS

1-Our macro trade system says we should be out If the market is here come December 31.

2-The VBS indicator has yet to be triggered for a longer term volatility expansion. So according to that indicator we are still in a trading range, hard as that is to feel when you are long as we are. 

 

Point being; Nothing has Changed

We made the observation that funds like to get in above the 12 month MA for punts. They did and they are now puking. We have a long position based on this and are swing trading around it. 

We secondly stated that volatility would be expanding in 90 days. We are 45 into that and things are starting to percolate. We did say November would be one to remember. So that was a bit premature.

We believed a $50 move one way was coming which would cause  a spike in volatility and a follow up move anywhere between $50 and $200.

All of this is in play and lining up from our original statements to today’s activity.

The only thing you have to ask yourself is will you be in a position to buy gold if it drops another $50 and then another $100 from there. Because that is what gold is for. It is to be bought when it gets cheaper. We will be buying to hold for 12-18 months at least as we roll equity profits into wealth preservation vehicles. We will also be trading it from both sides of the table. But this is what we do professionally. 

You should be peeling back equity exposure on every new high and adjusting risk into something that is stable, holds buying power, and is liquid. Your home, your art, and your bitcoin will not fit those guidelines. Gold and silver do.

On combination, Michael says we may have another $30 or so of downside coming. This would trigger the VBS indicating a $50-$200 move relatively quickly in one or the other direction. 

Which brings us back to our original post a month ago declaring volatility is soon to expand in about 90 days. We also stated then a $50 move in either direction will yield another $200 in continuation or reversal of that first move. 

VBS Trading Algo Levels for Gold Oct 25th

Notes From a call today on potential gold trades.

1. It looks like we will be seeing a move of $50 to $75 in either direction in the next 90 days. 


2. That move could be slow and orderly, or fits and starts, that is not handicappable  or important to the system


3. If a move like above occurs, then we will most definitely get a signal to be long Vol. on a risk reward basis as the monthly indicator will expand


4.  Directionally, our first play would be to go with the direction at time of the trigger. Our second would be to stop and reverse at a predetermined level.


5. this is a longer term play than usual for the VBAS so we will most likely express the position traditional way via long straddles. 


6. Direction would then be expressed by NOT hedging gamma on daily break evens but more like every 2 weeks, and then only half of accumulated deltas. In this way we would remain long/ short in direction of the trend.

Monthly:

1. Buy straddles or hedged call spreads on a monthly settlement above 1305 or below 1191 [Edit- now $1338 and $1192 per chart below]


2. early entry- put on 1/2 position on a day signal as described above.


3. exit everything on 3 bars if not profitable. 


4. Gamma hedging TBD.

Monthly chart updated today. Gold has dropped approximately $35 thus far from that call. A $75 drop from Oct 25th"s level would be in shouting distance of $1192 and likely trigger the indicator of even higher volatility.

The plan is: Gold drops $50 from that post date, triggering the VBS for expanding volatility. 

At that point one either goes with the trend, or waits for a quick exhaustive selloff and reversal for a major rally. In simple terms: of Gold trades $1192, it will not sir there long. We will sell if it hits there, initiating a short. But that is only to keep our finger on the pulse. Having a position in a market heightens your radar and forces you to respect your discipline. Doing so will tell us if being short is wrong. This will in turn mean being long is right. And we will reverse hard. 

So, here’s to a market dump to $1193 and what could be the beginning of a new run higher. Yes, VBS also implies lower is equally possible from $1193, but given the seasonal nature of Gold and it’s tendency to make lows at end of the year as funds sell, we’re optimistic that the buy low and sell high rule of investment will replace our current swing trading behavior of selling weakness and buying it lower. This as we described all part of trading around a core long position. We’d love to start swing- trading from the long side with a core long position. Stay tuned.

Previously:

• 
  

  Gold Spoiler? Tax Bill Revives Trump Trade



• 
  

  Gold’s 2017 Unwind: Are We There Yet?

  
  


• Why We"re Buying Physical Gold with a $1700 Target - SKG
  

About the author:Vince Lanci has 27 years’ experience trading Commodity Derivatives. Retired from active trading in 2008 after netting $90MM in an Energy arbitrage strategy he devised for a NY hedge fund; Vince now manages personal investments through his Echobay entity and advises natural resource firms on market risk. Over the years, his expertise and testimony have been requested in energy, precious metals, and derivative fraud cases. Lanci is known for his passion in identifying unfairness in market structure and uneven playing fields going back to his first anonymous Zerohedge post on Silver. He remains a contributor to Kitco, Zerohedge, and Marketslant on such topics. Vince contributes to Bloomberg and Reuters finance articles as well. He continues to lead the Soren K. Group of writers on Marketslant. 

Bloomberg reports:

Progress

An early-morning breakthrough on Brexit first-round negotiations takes the process toward the next stage of forging the U.K.’s post-exit relationship with the European Union. The thorny issue of the Irish border was effectively parked while outline agreements on citizen rights and the divorce bill were achieved.  Leading Brexit campaigner Nigel Farage labeled the deal a “humiliation.” Gilts dropped and the pound remained relatively unchanged in the wake of the deal. 

Bank rally

Shares in European lenders are soaring this morning, with the Stoxx 600 Banks Index climbing as much as 3 percent, after Basel III capital rules will see “no significant increase” in provisioning for the institutions. The final batch of post-crisis regulations announced yesterday will see requirements decline for some large banks. The agreement and culmination of intense lobbying removes a regulatory risk which had been hanging over the sector for almost a decade. 

Markets rise

Overnight, the MSCI Asia Pacific Index added 0.6 percent, while Japan’s Topix index closed 1 percent higher following data showing the country’s economy expanded faster than expected. In Europe, the surge in bank shares is lifting the Stoxx 600 Index, which was trading 0.9 percent higher at 5:45 a.m. S&P 500 futures added 0.3 percent, the 10-year Treasury yield was at 2.389 percent and gold continued its recent slide. 

Shutdown

Congress sent President Donald Trump a bill extending federal funding for government spending to Dec. 22, avoiding a shutdown which was scheduled to begin today. Lawmakers, who already have a busy schedule coming into the year end, will seek to resolve issues on spending limits in the next couple of weeks which would allow for agreement on a longer-term budget.

Active Bond Traders Have Never Been More Short Treasurys: Is A Squeeze Imminent?

Yesterday, when discussing Crispin Odey"s letter to clients and what appears to be his "Hail Mary" trade, we pointed out that according to his latest client letter, the billionaire hedge fund manager has effectively bet everything on a plunge in bond prices, with a whopping 135% net short in gilts and JGBs.

We noted that, in light of recent shifts mostly among the CTA and hedge fund crowd, he is hardly alone in his mega bearish outlook on bonds.

Sure enough, according to the latest JPMorgan survey (for the week through Oct. 2) the bank"s clients as a whole have dramatically soured on Treasuries, with 44% holding a short position relative to their benchmark, the most since 2006, or before the financial crisis, and up from 30 percent in the prior period. Among those who actively place bets, such as speculative accounts, a record 70% were short, while an unprecedented (and impossible) 0% responded that they were long: in other words, everyone is on the same side of the boat.

As Bloomberg commented on the dramatic move, "the shift shows how a confluence of factors is weighing on the minds of bond traders as the fourth quarter begins. The Federal Reserve will start unwinding its balance sheet this month, and Chair Janet Yellen has signaled that stubbornly low inflation won’t deter policy makers from tightening. Meanwhile, in the betting markets, former Fed Governor Kevin Warsh, seen by some traders as having a more hawkish tilt, has the highest odds to succeed Yellen."

In the eyes of William O’Donnell at Citigroup Inc., the selling pressure may have only just begun.

“The crowd of longs between seven years and 30 years in U.S. rates is both heavy and also now slightly underwater,” with yields near or above their 2017 averages, O’Donnell, a strategist, wrote in a report Tuesday. “It leaves us thinking that any additional positioning stress via higher rates may one day turn a trickle of selling into a torrent of secondary market supply under the right conditions.”

Of course, with everyone "on the same side of the boat", a far likelier outcome is a massive squeeze as even the smallest deflationary event spark a scramble for the exits. One example, from the other side, can be seen in the week through Dec. 12, when 39% of clients were short, which at the time was the most since 2015. On Dec. 15, the benchmark 10-year yield reached 2.64%, the highest in more than two years. It hasn’t returned to that level. Subsequent record positions in early 2017 per CFTC Committment of Trader readings led to even bigger slides in Treasury yields, in turn leading to a near record long exposure just week later, only to lead to a move higher in yields.

Indeed as Bloomberg concedes, "at the moment, Treasuries don’t look like the screaming “sell” they did when 10-year yields approached 2% last month. Now at 2.34 percent, the yield is approaching the most oversold level in months, based on relative strength index analysis."

That leaves traders eyeing 2.42% , a high from May and also a key retracement level based on Fibonacci analysis.

“Short-term oversold conditions suggest that this support band should hold, at least initially,” O’Donnell said. But there’s “still more upside for yields and USD, which should keep bears’ hopes alive for a re-test of 2.60% before the end of the year.”

With few active traders left who can add to the short pile up, look for yields to glide lower once again as the next Tsy short squeeze materializes in the coming weeks.

Odey Sees "Terrifying" Outcome Between Arrival Of MiFID, End Of QE

There is a dark cloud of tangible desperation over Crispin Odey"s recent monthly letters, and not only because he went "all in" on central bank failure exactly one year ago... and failed. With his fund down 10.6% YTD, and down 31% LTM, he knows he may have 1 Hail Mary left, two tops.  Which explains why as of August 31, the Odey Asset Management founder - who back in May asked rhetorically "why do i remain stubbornly bearish" - has bet it all on red, or inflation, and as his Top 10 position breakdown shows, he had a net 135% short in gilts and JGBs. As for the rest of his book, with just 25% of his top 10 position net long (ex gold), Odey"s view on risk assets remains the same: a crash is coming, the only question is when.

It is here that things get more interesting, because while traditionally Odey has bashed central banks for perverting and manipulating asset prices, this time he appears to have found another variable to help him goalseek his cataclysmic conclusion that it is all about to crash, and in his latest letter, Odey now says Europe"s upcoming research rule overhaul will result in less trading, less price discovery and less efficient markets.

He is referring, of course, to MiFID II, which Odey writes in his latest letter, will cause the cost of capital to rise "as information is going to become harder to come by" leading to investors with different levels of information and resulting in those with less access to analysis trading less. As previously discussed, the revised "Markets in Financial Instruments Directive" starts on Jan. 3. and forces firms to separate the cost of research from trading-related expenses incurred with investment banks.

It"s not just the impact of MiFid however: just as information flow is being curbed among the sellside, the Federal Reserve will be accelerating its balance sheet shrinkage. “For asset prices, a change to QE would be far from a happy solution,” Odey wrote in the August Swan Fund letter. “What is terrifying is that MIFID II is arriving when, thanks to QE and the sight of endless cheap money, companies’ shares are at their most expensive. Hindsight is going to have a field day.”

Maybe. Or maybe in hindsight it will be Odey"s endless war with central banks that will be his undoing.  Or perhaps Odey"s luck - we use the term loosely when it comes to the (former?) billionaire - is finally changing: having posted a miserable series of monthly losses, "In August-17 the EUR class returned +1.9% against the MSCI Daily TR Net Europe (EUR) return of –0.8%."

His full letter is below:

Manager"s Report

Sidney Homer in ‘A History of Interest Rates – 2000 BC to the present’ had to deal with the period before interest rates existed. What was the natural rate of return given by nature? How many eggs from a chicken? Economists started life as alchemists. All governments dreamt of creating gold out of base metals. All kings wanted interest rates to be lower so that growth could be stronger.

Now for 10 years we have enjoyed what they could never achieve. We have enjoyed rates of interest which were below the natural rate thanks to QE. It has allowed economies to grow so that we are now at the point where that growth threatens to be met by an inelastic labour supply.

It has so far proved disappointing for productivity globally which hovers around zero percent. But that reflects that QE has not been helpful for allocating capital. Take tertiary education in the UK. Over 20 years the university student population has grown by 650%. When student fees were increased by 300% to £10,000 p.a. in 2012 the thinking was that this would turn students into consumers. That they would demand value for money and more appropriate courses. But it hasn’t. Why? Because students still see the loans as free money. They have understood QE very well. The misallocation of resources continues but now when the student finds there is no job at the end of his / her degree, the sense of injustice leads them leftwards politically.

QE is no longer the easiest option. But, for asset prices, a change to QE would be far from a happy solution. We are now approaching MIFID II’s implementation and it is apparent that the effect of pricing research is that information is going to become harder to come by. Markets work off free and abundant information and views and multiple pricing points. MIFID II looks designed to ensure that individuals trading in a market will have different levels of information and as always the one with less information will start to trade less.

Less trading, less price discovery, less efficient markets. The cost of capital should rise. What is terrifying is that MIFID II is arriving when thanks to QE and the sight of endless cheap money, companies’ shares are at their most expensive.

Hindsight is going to have a field day.

Finally, for those wondering, here is Odey"s P&L since inception.

The Best And Worst Performing Assets In The First Half Of 2017

The first half of the year may have been forgettable for a majority of the smart money and hedge funds, with nearly 80% once again underperformingttheir benchmarks due to months of P&L crushing short squeezes, but it was a buoyant time for equity markets and virtually all asset classes, for one simple reason: a record central bank liquidity injection of over $1.5 trillion YTD. Of course, that central banks had to flood markets with so much liquidity as the global economy is allegedly recovering is the main reason why nobody actually believes in said "recovery", and neither do the central bankers.

They did succeed however in generating outsized returns for the first 6 months of 2017, and as Deutsche Bank"s Jim Reid writes, the first half of 2017 has been an overall positive half year for our sample of assets. Reid continues below:

Indeed with measures of volatility for a number of asset classes at historically low levels, 32 out of 39 assets in our sample have delivered a positive total return while 35 assets have done similar in USD terms. In summary, equity markets have led the way with 9 out of the top 10 positions in our leaderboard. The peripherals stand out the most with the Greek Athex (+40%), IBEX (+24%) and Portugal General (+22%) all delivering decent double digit returns. European Banks (+20%) have extended a rally which started this time a year ago following a torrid start to 2016. EM equities (+19%), Stoxx 600 (+17%) and the S&P 500 (+9%) have also seen a more than solid start to the year. For bonds, in USD terms returns sit in the +2% to +9% range with the peripherals outperforming.

It’s worth noting that given the Euro has rallied some +9% this year, in local currency terms European Bond markets are actually mostly flat to modestly down for the year. Meanwhile for credit, returns for European indices are +9% to +13% in USD terms (and 0% to +4% in local currency terms) while returns for US credit are +3% to +6%. Finally, similar to the below for June and Q2, Oil stands out for the biggest underperformer in H1 with Brent and WTI down -17% and -14% respectively with the market still questioning the effectiveness of the major producer supply curb.

In terms of the month of June itself, it has been a mixed one for our sample of assets. Markets have had a few themes to contend with. The first is the underperformance of Sterling assets in the wake of a surprise UK election result. The second was the sharp decline in the price of Oil and the third was the big spike in volatility – particularly for rates - in the last week of the month following a chorus of hawkish central bank speak. The end result was this for our sample: 20 of our 39 assets ended the month with a positive total return in local currency terms and 24 in USD hedged returns. It is however worth noting that the range of returns was relatively small. Indeed in USD terms, 29 of our 39 assets ended the month with a total return in the +2% to -2% range.

Looking at the movers and shakers this month, there isn’t much of a theme to note at the top of leaderboard. In fact it’s a fairly diverse mix with the top 5 performers this month being Wheat (+19%), Greek equities (+8%), Copper (+5%), Shanghai Comp (+4%) and European Banks (+3%) in USD terms. For equities, it was a fairly mixed month with some volatility into month end helping to create some divergence. The Micex (-3%) and Bovepsa (-2%) were the notable underperformers reflecting lower Oil and political turmoil, respectively. The FTSE 100 returned -1% (and -3% in local terms) while the Stoxx 600 was also  -1%. The S&P 500 finished up less than +1% while EM equities were +1%.

For bond markets returns were subdued but in the case of Europe, mostly positive despite the big rates re-pricing in the last week. BTPs (+2%), Spanish Bonds (+2%) and Bunds (+1%) all finished with low single digit returns while Treasuries ended the month flat. Much like equities, Gilts (-1% in USD and -2% local) saw negative total returns over the month on political concerns and higher inflation. There were similar returns for credit markets suggesting little evidence of much spread tightening over the month. Generally speaking EUR credit outperformed US when looking at USD hedged returns. EU HY, EU Fin Sub, EU Fin Sen and EU IG Non-Fin all returned between +1% and +2% while equivalent US indices finished in a 0% to +1% range.

At the bottom of the leaderboard the most notable standout was the -5% declines for WTI and Brent Oil. That includes a late bounce in the last week or so. Prior to that, Oil had been down as much as -12% at one stage during the month. Elsewhere Silver (-4%) also had a bit of a month to forget as did Gold (-2%).

“This Market is Absolutely 100% Going To Crash”

By Chris at www.CapitalistExploits.at

Him: "This market is absolutely 100% gonna crash."

Me: "You sound so certain?"

Him: "Just look at the valuations."

Me: "Pricey valuations don"t always culminate in a market crash. There are other factors to consider."

Him: "Trump trade is over, and I"m now 50% hedged on US exposure and net long EMs. Plus, the dollar is finished. It"s gonna be ugly."

This conversation went on for some time. I was talking with a well known hedge fund manager (who will remain nameless) and the main topic was the US equity market.

His view is typical, but I"m not sure he"s correct.

Here"s the Dow:

A bull market ever since 2008. Overvalued? Sure, but wait...

Here"s institutional investor sentiment as reported in the FT:

"According to the survey , which questioned about 200 investors who manage almost $600bn of assets, just 10 per cent expect tax cuts to be passed before Congress breaks for a summer recess."

And here we are looking at the Sentix survey. In blue is the market bias or confidence and in grey the equity market:

The divergence is significant. In short, investors don"t believe in the current bull market. That may be a problem only if everyone is already long. They"re not.

Institutional money is bearish and retail participation at just 54% is a hair off all time lows of 52%. Going into 2008, this stood at 62%. This isn"t how bull markets end, folks. A pause in a rally? Sure, but no stock market crash.

It"s Always Relative

What is rarely discussed is that we live in a relative world, not an absolute one. Only if you"re dining at a steak house, do you have to eat just steak. If you"re sitting at a buffet table, you make your choices based on what"s on offer.

Let"s step out of the steak house and step up to the buffet table.

Let"s look at fixed income. Here"s the yield on the US 30-year:

And the German 30-year Bund yield:

I could toss in the Japanese bond yields and Gilts and you"ll see the same thing.

In fact, let me point out that the Government of Argentina.

Yes, Argentina - a country well known for repeatedly cocking up their finances and defaulting on their debt. Well, they just managed to pull off the sale of a $2.75 billion worth of 100-year bonds with a coupon of... get this... 7.125.%.

Surely, a country with a history of repeated defaults struggled to sell the bond? Nope. According to the FT, "the bond attracted $9.75bn in orders from investors."

3.5X oversubscribed, folks. Now, ain"t that something?

This is a good opportunity to remind ourselves of something, especially when diving into the EM world. There are a few risks with a bond. There is duration risk, default risk, and the other is currency risk.

Memories are indeed short.

Here is the dollar against the Argentinian peso:

Summary

Equity markets may well be overvalued but realise that capital has to go somewhere and if, like us, you"re looking for asymmetry where risk is low relative to reward, then shorting the equity markets makes bugger all sense in this environment.

I"ve pointed out only two major markets here, albeit the two largest - bonds and equities. But viewing one market on its own is a really dangerous way to look at markets as they are all interconnected and a framework for all the moving pieces is needed. The bubble, in case you haven"t realised it, is in bonds.

Which brings me to my question for the day:

Cast your vote here and also see what others would do

- Chris

"Eight times in its 194 year financial history has Argentina defaulted on its borrowings, most recently in 2014 amidst its dispute with creditors from its prior episode of financial ruin in 2001. At its historical pace, the soon to be-issued 7.125s of 2117 (priced at $90 to yield around 7.92%) will default more than four times over before that so very-distant prospective maturity date." — Philip Grant of Grant"s Interest Rate Observer

--------------------------------------

Liked this article? Don"t miss our future missives and podcasts, and

get access to free subscriber-only content here.

--------------------------------------

Goldman Warns The Following Assets Are "Most Vulnerable To Substantial Repricing"

In an overnight note by Goldman"s Ian Wright titled "Calm before the storm", which looks at pricing of risk during the current low-vol episode, the GS strategist writes that in the run up to the inauguration last Friday of the 45th President of the US, investors have remained keen to discuss all things at the intersection of President Trump and markets. And yet, despite the uncertainty, volatility has been very low, which is why Goldman tries to estimate which assets appear the most fragile in the event that volatility picks up.

Goldman uses three frameworks (valuation, vol-adjusted move sizes, and return distribution tail widths) and its forward-looking overlay to assess which asset classes appear "most vulnerable to substantial repricing." This is what the bank found:

"We do not see any asset classes as particularly “stable” at this point in time. In our view, at an asset class level, both credit and FX seem the most vulnerable by most metrics. In addition, at an individual asset level, German and UK rates and the S&P 500 appear most vulnerable."

Some more details from Goldman:

Valuation: In our view, the assets with the most stretched valuation have negative asymmetry, i.e. more downside than upside; but this does not mean they will reprice down, as valuation alone is seldom a catalyst for repricing. Exhibit 1 shows the percentile of current valuations across assets relative to their historical distributions since 2003. The S&P 500, European HY and non-US government bonds appear the most stretched by this metric, but few assets appear particularly “cheap”.

Bund yields will largely depend on the reflation picture in Europe, as well as what happens to US yields; both of these we expect will drive Bund yields higher. In addition, should the resilience of UK data continue, Gilts have the potential to reprice meaningfully (even our base case has Gilts at 1.90 at 2017YE). Regarding the S&P, given the uncertainty around tax policy, there is potential for repricing both up or down. We think potential for disappointment is high given optimism and bullish sentiment. It is hard to see other equity markets not responding negatively amid a significant sell-off in the S&P, but in the case of a gradual move down, we think other markets could likely bear it.

Vol-adjusted move sizes: We measure the number of 3-standard deviation moves each asset has had, using recent realized volatility to measure standard deviations. Exhibit 2 plots the share of 3-standard deviation days that have happened in the past year in each asset class, as a fraction of the total across asset classes. FX and fixed income stand out as having had the most extreme moves recently. While this is based on backward-looking measures of volatility, we expect FX to remain volatile, both in function of monetary policy divergence and political risk.

Distribution tails: For return distribution shapes we look at what assets have the largest return distribution tails. Exhibit 3 plots the width of the bottom and top deciles of each asset class’s past 3m realized return distribution, normalized by their 1y standard deviation. Based on that measure both FX and Credit stand out as most vulnerable. This is unsurprising given this is related to our previous metric, but also shows the downside tail has been much more substantial for credit than the upward tail, more so than for any other asset class.

Bottom line: according to Goldman, if vol were to pick up, virtually every asset class, starting with US equities, European junk bonds, and especially FX, is a candidate for a sharp repricing lower.

These Were The Best And Worst Performing Assets In October And YTD

October was a month most investors will wish to quickly forget. As DB"s Jim Reid writes, for the most part October will likely be remembered as the month where ‘Hard Brexit’ concerns well and truly jumped into the spotlight and Sterling related assets suffered as a result. Politics was a fairly consistent theme during the month however with the US Presidential Election campaign also attracting plenty of attention. Earnings season has provided another distraction for markets while we’ve also had the usual focus on central banks including a number of speculative ECB stories. Add to that the ongoing OPEC related news and it’s certainly made for a busy October.

As DB adds, it was sterling assets which really stand out. Unsurprisingly the negative news flow had a big impact on the currency with Sterling dropping -6% during the month from around $1.30 to the low $1.20’s. Negative sentiment also hurt Gilts which in local currency terms dropped -4% however in USD hedged terms plummeted -10% and the most amongst the assets in the asset sample. It was a similar story for UK equities which were up 1% in local terms but -5% in USD terms. Given the moves for Gilts, Sterling credit also had a poor total return month despite the BoE purchasing scheme impressing with the initial pace of purchases in October. Indeed GBP corps, non-fins and fins were -8% to -9% in USD total return terms (and -2-4% in local currency terms) although GBP HY (0% local and -6% USD terms) did outperform.

It wasn’t just Gilts which suffered in bond markets however. With markets also reassessing inflation expectations, in USD terms BTP’s (-5%), EU Sovereigns (-4%), Bunds (-4%) and Spanish Bonds (-4%) all suffered. BTPs being also hit as the polls leaned slightly towards a rejection of the senate reform referendum in early December. Treasuries (-1%) outperformed but were still weaker during the month. Those moves had another obvious knock on in credit markets too although performance was reasonably resilient despite the rates selloff. US credit outperformed with indices finishing flat to -1% during the month while European indices were broadly -1% to -3% with ECB purchases still evidently having a positive impact and helping out-perform rates. Interestingly EUR higher beta HY and sub-fins outperformed more.

Speaking of financials, banks had a decent month. European Banks were +9% in local terms and +6% in USD terms no doubt supported by better than expected earnings to some degree, and also the positive correlation to the move higher for bond yields. Other equity markets were more mixed however. The FTSE MIB, Nikkei and IBEX were all +2% in USD terms while the DAX (-1%), S&P 500 (-2%) and Stoxx 600 (-3%) were more disappointing. It was a similar story for EM equities too which were little changed during the month, although the Bovespa (+14%) did top the table for the month. The other asset class to highlight is commodities. Oil traded around OPEC headlines and had looked on to course to end the month flatish before yesterday’s sharp plunge saw WTI and Brent finish -3% and -4% for the month respectively. It was the softs which outperformed with Corn (+5%) and Wheat (+4%) continuing the strong performance from the end of September, while Gold (-3%) and Silver (-7%) were down as Fed rate hike expectations for December crept above 70%. All in all, in local currency terms 17 of the 39 assets finished with a positive return while just 12 assets did in USD terms.

A quick refresher where we are YTD now. It’s the usual culprits which head the top of the leaderboard in local currency terms with the Bovespa (+50%), Silver (+29%), WTI (+27%) and Gold (+20%) leading while Russian equities (+18%) round out the top five. Sterling (-17%) takes up the bottom place while Italian equities (-17%) and European Banks (-13%) are still languishing. It’s worth noting however that these assets have bounced back from heavier losses earlier in the year.

Elsewhere the S&P 500 (+6%) has had a reasonable YTD while the Stoxx 600 (-4%) has struggled. Bond markets outside of Gilts are in the 1-5% return range while credit markets have had a strong year. European indices are up anywhere from 4-8% while USD IG indices are up 5-9%. US HY is leading the way however, returning +14% YTD.

Source: DB