Thread by @HedgeQuartersHQ

PREPARE FOR HIGHER VOLATILITY:

Important 🧵:

We’ve had a bear mkt rally which has now failed and partially unwound. Brief Santa rally or not, the following chart pack tells a clear story of impending volatility:

#macro #stocks $SPY $QQQ

Financial conditions:

This chart isn’t a mirror image - it’s the GS Fin Cond index against the #SPX. I’ve been tweeting updates on this for 6 mths because when conditions tighten, #stocks roll. Once again the Fed and now BoJ have triggered the tightening needed for inflation 🧯

Yields:

10 year yields are on the rise again with added fuel from the BoJ pivot yesterday. As the benchmark the risk free rate, this is negative for #SPX in the near term

Yield curve & volatility:

Perversely, with long rates rising but the short end not, the yld curve is flattening atm. People may think that’s good given inversions signal recession, so flattening must be the opposite?

For #stocks, a flattening has preceded a VIX spike this yr:

FX Volatility:

Markets are linked. Part of HedgQurters risk mgt philosophy is to monitor for vol spikes in macro sensitive mkts as signal for equity vol which often lags. FX rebounding post BoJ surprise:

Bond Vol:

Similarly, early signs that bond volatility will rebound as it’s been asleep for the last couple months but bounces off the current level regularly. If so will bleed into stocks:

Credit Spreads:

Corporate Spreads have cooled over the last couple months but the high yield and BBB spreads are at levels where theyve found a floor and may be showing early signs of rebounding which would be expected with higher bond market volatility

Putting it all together:

Hawkish msgs from #Fed, the #ECB and now BoJ are stoking volatility in macro sensitive mkts. Yields are rising again, credit spreads are likely to follow and all this tightens financial conditions which the first chart in 🧵 showed are critical…

for the performance of $SPY, $QQQ and #stocks generally

A flattening yld curve driven by a rise in the 10 year yield has shown to precede equity volatility spikes

Time to hedge up.

hedgquarters.Com