高盛-交易觀點匯報0818 2024 Connecting You to GS Thoughts from the Floor

**ConnectingYoutoGS..ThoughtsfromtheFloor..

FICCandEquities|17August2024|7:22AMUTC

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ThemesresonatingwithglobalclientsatthemomentandGSviews/thinkingonthetopics.Reachoutiftherearecomments,opinionsand/orideasyouwanttodiscusswiththepeoplebelow.

1)ConnectingyoutoGS:WhatdoweexpectfromJacksonHolenextweek?WhatdowethinkontheEquity/Bond

correlationfromhere-Havewefullymovedfromaninflation-togrowth-focusedregime?CantheFedcut50bpsin

SeptemberifPayrollsmovebacktothe3maverage+U3remainsunchangedat4.2%?HowispositioningintheJPYCarry-tradenow+cantheBoJeverhikeagain?Whatsignaldoyoutakefromthevolatilityofpastfewweeks-ApurgeofconcentratedpositionsinSummerlowliquidityorasignofmarketvulnerabilitytotheverycrediblethreatofa

recession?

2)TradesweLike:ResettingCrashProtection:Thereboundinrisk-assetssincetheearlyAugustlowshasNOTbeenmatchedbyanytangibleturninclient-sentimentordramaticparticipationfromthelong-sideand,forthosestillcautious/bearishabouttheimmediatemarket-outlook(electionuncertainty,growthconcerns,deterioratingUSLabormarket,

peakearnings,geo-politicaloverhang),weareapproachinglevelsinanumberofmarketswhereitmightbeopportunetore-set‘crashprotection’.Moreover,wehavetransitionedtoamarketmoreconcernedaboutdownsiderisksto

growthandRealisedEquity/BondcorrelationshaveflippedbacktoNegativeforthefirsttimesincetheSVB-episodelastyear,actuallythemorenormallonger-runrelationship.Despitethis,ImpliedCorrelationmarketsstillofferanumberofopportunitiestore-settradeswithconvexitytoa‘NegativeGrowthShock’bysellingthisCorrelationatattractivelevels.

Trades:

i)Risk-ParityHybrid->MarketspriceImpliedUSEquity/USYieldsImpliedCorrelationtoomodestlyvsRealisedandvspreviousepisodesof‘NegativeGrowthShock’concerns:BuyaDec-24DualBinarySPX<97%vs5ySOFR<ATMF-0.3%for10.5xmxleverage

ii)FX–XJPY->TheFXversionoftheNegativeEquity/BondCorrelationtradeisAUDJPYdownside-AUD+JPYarethefurthestawayfromtheextremesofthelast6weeksinvol-adjustedterms,andhistoricallytendtomovethemost

(AUDdown,JPYUp)in‘NegativeGrowthShock’regimes:Buya13-Dec24DualBinaryAUDUSD<2.5%OTMSvsUSDJPY<2.5%OTMSfor11.75xleverageorBuyaDec24DualBinaryAUDUSD<97%vs5ySOFR<ATMF-

0.3%for11.75xleverage(h/tMikeCahill+DanDooling)

iii)Equities–3mnthITMDownsideRKOs->Giventherepricehigherindownsideskew,SPXin-the-moneyknockoutputsstilllookveryattractiveasadownside-Equityimplementation,orarisk-offhedge,structuredinawaythatofferstheabilitytogetpaidifthemarketralliesalittlebitmore,ORifwechoplowerintotheUSelection:BuyaSPX3-month105%PutwithRKOat85%for~6.5xleverageorBuyaSPX3mnth102.5%PutwithRKO(observedonceadayonly)

at85%for~8.5%leverage(h/tLeeCoppersmith)

ThoughtswelcomeAdam

1)ConnectingyoutoGS:

US:WhatdoweexpectfromJacksonHolenextweek?

MikeCahill+LexiKanter(FXStrategy):“ThefullschedulewillbereleasedonThursdaynight,August22,at8pmNYtime.Sofar,weknowthatFedChairPowellwillbespeakingat10:00amEDT,BOEGovernorBaileywillbespeakingat3:00pmEDT,andECBBoardmemberPhilipLanewillbeparticipatingontheSaturdaypanel.

ChairPowell'sspeechwillbetheonlyeventbroadcast,butthereareusuallyaseriesofsidelineTVinterviewsacrossmajorbusinessnetworks.Theseareoftenthemostrelevantfornear-termpolicynews.WewillprovideamoredetailedscheduleofannouncedinterviewsinourFXMorningNotesonFridaybeforetheconferencebegins.

WeexpectPowell(andthesidelineinterviews)willreiteratethattheFedisnowclosetocuttingbutthedegreeofeasingwilldependonincomingdata(particularlyPCEinflationandtheAugustemploymentreport).WemightalsohearsomereassurancethattheFedispreparedtoactswiftlyshouldtherebeamoreseveredownturnineconomy.Takentogether,thismessageshouldallowforrisksentimenttocontinuetorecover,withaslightgrindhigherinyieldsoffthebackofthebroadlypositiveactivityandinflationdataoverthepastweek.ThiskindofbackdroptypicallyweighsmostonJPYandCHFandwethinkCHFfundingisagoodwaytopositionwithpolicysupportformorebenignoutcomes,recentlyrecommendinginvestorsgolongGBP/CHF.”

Source:GIR

RonnieWalker(SeniorUSEconomist):“Thisyear’sconferencerunsfromAugust22ndtoAugust24th,andthethemeis"ReassessingtheEffectivenessandTransmissionofMonetaryPolicy".Thefullagendaandthetitlesofpresenters’papersaretypicallyreleasedonThursday(August22ndthisyear)around8pmET.

ThemaineventwillbeChairPowell’sspeech,whichisslatedfor10amETonFriday,August23rdandwillbetelevised/streamed.OurbaselineforecastfortheFedisthatthecommitteewillcut25bpattheSeptembermeeting.

Whilethere’sstillsomedispersioninviewsacrosstheFOMC,FedspeaksincetheJulymeetinghasshownthattheCommitteeis

1)Increasinglycomfortablewiththeinflationoutlook(Musalem:“inflationseemstohavereturnedtoapathconsistentwith2%overtime”)

2)increasinglyfocusedonthelabormarketsideoftheirmandate(Daly:"We'venowconfirmedthatthelabormarketisslowing,andit'sextremelyimportantthatwenotletitslowsomuchthatittipsintoadownturn").

TheseshiftsshouldallowPowelltodeliverremarksthatleanabitmoredovishthanthosefromtheJulypressconference.

However,wethinkthatthedecisiontogo25or50bpwillbeadata-dependentone.AsJanoutlinedinhismost

recentGlobalViews,themostlikelypathto50bpsatthispointisanotherdownsidesurpriseinthenextjobsreport—afterJacksonHole.Asaresult,we’dexpectPowelltoreiteratethattheFOMCdoesnotwanttoseefurthercoolinginthe

labormarketandiswellpositionedtorespondtoanyweaknessifnecessary,buttoleavethedecisiononthesizeoftheSeptembermoveopenpendingtheAugustjobsreport.”

Macro:Whatdowethinkontheequity/bondcorrelationfromhere-Havewefullymovedfrominflationtogrowthregime?

DomWilson(SeniorMacroAdvisor):“There’sobviouslybeenabigshifthererecentlytowardsanegativebond-equitycorrelation.ThetoolsthatVickiehasdevelopedforusshowtheunderlyingdriversprettyclearly–boththatwe’ve

hadthefirstbigshiftingrowthviewsinawhile,butalsothatthewaythemarketistreatingourMAPdatasurpriseshasflippedfromasituationwheregrowthnewsmostlychangedthemarket’sviewsonpolicy(“goodnewsisbadnews”)toonewhereit’snowclearlyinfluencingthemarket’sgrowthviews(“goodnewsisgoodnews”).

Aquickmarketgrowthdowngrade,nowpartiallyreversed

Source:GIR

Thatshiftmakessenseastheinflationnewshascontinuedtoimprove,looseningthatconstraint,andtheworriesaboutgrowthtakecenterstage.ThisisthemorenormalcorrelationstructureandIdothinkweshouldseemoreofit–aslongasthedominantissueisrecessionrisk,that’swhatyou’dexpect.Thisisaveryrecentshift,though,soit’simportantto

thinkaboutwhatcouldreverseit.Ithinktwothingshavethecapacitytopushusbackagain.First,ifthegrowthand

labormarketpictureimprovesenough(morethanourcentralcase),wecouldultimatelyfindthatweworryabouttheFedhavingtodeliverlesseasingjustbecauseoftherisksthatbrings–that’sessentiallytakingusbacktowherewewereamonthortwoago.Second,therearestillpotentialelectionoutcomes–intermsoftradeandfiscalpolicy–thatcouldputusbackintoapositivebond-equityworld.

Soit’sprobablytoosoontosaywe’veFULLYmovedtoagrowthregime.Butit’samuchmorelikelyplaceformarketstolivenowthanithasbeenforawhileanditmeansthatbondsandrateproxiesareprobablygoingtobebetter

portfoliohedgesthantheyhavebeen(realratesinparticular,givenhowlowtradedinflationisalready).”

ChristianMueller-Glissman(HeadofAssetAllocation,PortfolioStrategy):“Equity/bondcorrelationsacrossregionshaveshiftednegativeinthelast3months—aUSandEuropean60/40portfoliohadonlya3-4%peak-to-trough

drawdownandriskparityportfoliosperformedrelativelywell.

3mrollingequity/bondcorrelationofweeklyreturns

Source:GIR

Withcontinuedprogressoninflationnormalisationbutmorepotentialforgrowthvolatility,equity/bondcorrelations

shouldbemorenegativeinthecomingmonths.SinceQ1ourdynamicassetallocationframeworksignalledlowerlefttailriskfor60/40portfoliosbasedonlevelsandmomentumofinflation.Indeed,growthshockshavestartedtodominaterelativetorateshocks(seebelow)-thevolatilityofourRiskAppetiteIndicator(RAI)PC2"Monetarypolicy"factorhassharplydeclinedcomparedtothatofourPC1"Globalgrowth"factor.

Growthshocksarestartingtodominaterelativetorateshocks

Source:GIR

However,akeyconcernishowmuchlonger-datedbondswillbufferequitiesincaseoflargergrowthshocks–thetroughin10-yearyieldsislikelytobehigherinarecessionand/orbondmightsell-offmoreinarecovery.ThispointstovalueinalternativediversifierlikesafehavenFXandGold,defensiveexposureswithinassetsorselectiveoptionoverlayslikefrontendratesconvexity.”

US:CantheFedcut50bpsinSeptemberifpayrollsmovebacktothe3maverage+u/erateremainsunchangedat

4.2%?

DavidMericle(ChiefUSEconomist):“No.Historically,theFOMChasonlydonelargercutswhentherewasacrisisunderwayorwhenjoblessclaimswereaboutdoublewhattheyaretoday-caseswheretakingaggressiveactionseemedveryurgent.Consistentwiththatprecedent,recentcommentsfromFedofficialssuggesttheyarealongwayawayfromthinkingabouta50bpcutnow.

IfAugustpayrollgrowthisbackinlinewithourestimateoftrendjobgrowthat150k/monthandtheunemploymentrateretreatsabitassometemporarylayoffsreverse,thentheFOMCwillverylikelycut25bp.Toconsider50bp,they’dneedtoseeanAugustemploymentreportthatlooksmoreliketheJulyreport.Idothinktheyshoulderronthesideof

cautionifwegetthat,butthey’llneedmorebadnews,andrecentdatahaveprobablyraisedthebarabitfurther.Twoofthekeyreasonswethinkthisincreaseintheunemploymentrateislessdangerousthanpastincreasesandrecessionriskisstilllowarethatpermanentlayoffsarestillrareandthatfinaldemandisstillgrowingrobustly,sothere’snoreasonforlabordemandtosuddenlydropoff.Thedeclineinclaimsandthestrongretailsalesreporthavereinforcedthese

points,whichshouldmakeboththeFOMCandinvestorsmorerelaxed.

Admittedly,thelabormarketdatahavesentmixedandconfusingsignalslately,andit’sfairtowonder,howworried

shouldwebeaboutrisingslackalongsidealackoflayoffs,healthynetjobgrowth,andhighjobopenings?Wethinkthesedivergenttrendsarelargelyaresultoftheimmigrationsurgethatpeakedin2023H2andthestruggletoabsorbthatextralaborsupplyintheshortrun.Immigrationisnowslowingsharply,soifwe’reright,thenthedatashould

presentamoreconsistentmessageofstableunemploymentandslowerbutstrongenoughjobgrowthgoingforward.”

JoshSchiffrin(HeadofMacroTradingStrategy):“Theoddsofa50bpscutwouldbereducedifthepayrolldatacomebackto3maverageandtheunemploymentratecomesinat4.2%.Thatisthemostimportanteconomicdatapoint

betweennowandtheSeptembermeeting.

Thatsaid,a50bpscutwouldstillremainapossibility(thoughsmallerchanceinthiscase)giventhatthefedfundsrateisfarfromaneutralrateandyouhaveinflationmovingclearlylowertowardsthetargetandtheunemploymentbeingatthelongestimateofneutral.Whileonepayrollreportmightbecomforting,thebroadtrendhasbeentowardsaweakeninglabormarketandtheFedcoulddecidetheappropriatetacticstomanagethosedownsiderisksareswifter,prompter

actionratherthanwaitingforthemtomaterializeandthenresponding.”

BrandonBrown(ShortMacroTrading):“Theunemploymenthasrisenfromacyclelow3.4%to4.3%inJuly’s

employmentreport.While4.3%isonly0.1%aboveNAIRUintheSEP(wearenearlyrightontopoftheFed’sestimateoffullemployment),the0.5%riseinthepast4reportshasbeencauseforsomeconcern;namely,thepossibilitythe

upwardmomentumcontinuestopushtheratefurtherandfurtherabove4.2%.Whilethereisplentyofroomtocutrateswithfedfundscurrentlyat5.33%,astableunemploymentrateand25bpscuttingincrementswouldbepreferredbytheFed.Iftheunemploymentdipsbackto4.2%,25bpsshouldbethebasecaseforSeptembermeeting.

Anotherincrementalriseto4.4%wouldbecauseforenoughconcernthat50bpsbecomesbasecase.Giventhis

month’ssoftinflationreport,wewouldexpecta25bpcutiftheu-rateremainsat4.3%.Webelieve25wouldbechoseninthiscentralcasebecausetheFedhas8opportunitiestocutperyear,allowingtheFedtobringFFbackbelow3%bytheendofnextyearwithouteverneedingtocut50.

50bpcutssignaltheFedbelievesthefundsratemayneedtogobackto0inthenearterm,oratleastrapidlylowertoaroundthelongrundotinthenexttwoquarters.Givenunemploymentof4.3%isnearfullemploymentandcoreYoYinflationisstillabove2%,wedonotthinktheFedbelievesthistobethecase.”

JPY:HowispositioningintheJPYCarry-tradenow,andcantheBoJeverhikeagain?

ManojRangwani(AsiaMacroSales):“TheBOJhasonlyjustbeguntheirpolicynormalizationpath.RecentcommentsfromGovernorUeda’spresserandDeputyGovernorUchida’sspeechlastweeksuggesttheBOJwillbepatientgivenrecentturmoilinthemarket.

Howeveronce:1)Thestockmarketstabilizesand2)Dataremainsinlinewiththeiroutlookforecast,theBOJwill

“continuetoraisethepolicyinterestrateandadjustthedegreeofmonetaryaccommodation”asstatedintheirpolicynote.AssetpriceshaveallrecoveredbackwithUSDJPYnowat149andNikkeiat38K–theonlyassetclassthathasnotrecoveredbacktoAugust1stlevelshasbeenfrontendJGBs.FrontendJGBsarenowquicklybeingrepricedhigher

butweexpectanother15-20bpssellofftotakeplaceinthefrontendfromcurrentlevelsinordertofullyresettheriskoffeffectssincetheJulyhike.

PMKishidasteppingdownfromtheLDP-racehasbeentakenbysurpriseandnextTuesday(20th)wewilllearnaboutthecandidateswhowillrunfortheLDPpresidency.ShinjiroKoizumi,thesonofX-PMJunichiroKoizumi(renownedforhikingpolicyratesmid-2000+privatizingthepostbankcouldpotentiallybeleadingpolls-Heisonly43yrsold,youngandextremelypopularwiththepublic,whichcouldchangethefaceofJapanesepolitics.ApotentialeuphoriacouldbecreatedintheequitymarketwhichwillmakeiteasierfortheBOJtohikesoonerratherthanlater–asearlyasOctoberespeciallyifUSDJPYdoesnotslowdown.

Inflationcontinuestocomfortablytrendabove2%andQ2GDPbeatexpectationsannualizingover3%,drivenbysharpturninconsumerspending+confirmingapositivecyclefromincometospending.TheglobalcyclemightbeturningwithmanyglobalCBsstartingtoeasemonetarypolicyafterdefeatinginflationwhileJapanseemstohaveonlystartedtogetcomfortablewithsustainedinflation.GovernorUedaconfirmedthepolicyhikeinJulywasamere“adjustment”toverylowrealratesanddoesnotseetheupperboundat50bps.RecentdatahasbeenfollowingBOJ’soutlook

confirmingthevirtuouscyclefromwageintorisingprices.Theyneedtolearnfurtherwheretherealneutralrateis,butwearestillveryfarfromachievingtheirtarget.

Pay1y1yJPYIRS:Wetradedashighas70bpsintotheJulyMPMandtodaywearestill20bpslower->Frontendrateshavesignificantmovetorepricehigher.”

Source:MarqueePlotToolProasof16Aug2024,pastperformanceisnotindicativeoffuturereturns,accessplotHERE

SungMoKoo(TokyoFICCStrats):“EvidencesuggeststhattheJPYcarry-tradehasmostlybeenunwoundasofearlylastweek–perhapsthemostoutstandingonebeingCFTCJPYfuturesnetpositiondecreaseby~85%inthefirstweekofAugust.Wemayhaveseensomecarrytradesbuildupagainthereafter,butaslongasmarketremainsfocusedonUSrecessionriskandremainsvolatile,itisnotlikelytogrowaslargeasithasbeeninthepastfewyears.

CFTCJPYNetNon-CommercialFuturesPositions

Source:BloombergasofAug16,2024.

WealsodidnotseeanyevidenceofJapaneseinvestorsfleeingfromforeignbond/equitiesspace.Rather,JapanesenetpurchaseofforeignsecuritiesacceleratedinthelastweekofJulyduringthemarketturmoil,soitseeminvestorstooktheFX/equitiessell-offasadip-buyingopportunity.

Retailinvestors’EMcurrency-focusedFXcarrypositionwasalsowashedoutbymorethan40%inthefirstweekofAugust,accordingtoTokyoFinancialExchangedata.

CanBOJeverhikeagain?ManymarketparticipantstookBOJdeputygovernorUchida-san’sspeechlastweekto

beverydovish:“theBankneedstomaintainmonetaryeasingwiththecurrentpolicyinterestrateforthetimebeing…”or“theBankwillnotraiseitspolicyinterestratewhenfinancialandcapitalmarketsareunstable”.

Despitethedovishtone,wethinknothingfundamentallychanged.Japan’scoreinflationhasprintedoverthe2%targetfor27consecutivemonths.Shuntowagenegotiationresultedin5.10%increase,thehighestinmorethanthreedecades.USDJPYisstillhigherthanthelevelatthebeginningoftheyear,evenafterso-called‘JPYcarrytrade’unwind.

BOJInflationOutlook

Source:BoJ

BOJmadeitclearintheJulyMPMthatcurrentpolicyrateof0.25%iswellbelowitsideaofneutralrateanditshouldgraduallyraiseinterestratestoachievetheirpricestabilitytargetby2H25.WhiletheriskscenarioisoverseaseconomyrecessionimpactingJapaneseeconomy,neitherBOJnorwethinkthatisthemostlikelyoutcomeatthemoment.The

questiononBOJratehikeshouldbewhen,notif.WeprojectthenextpolicyratehikemostlylikelytooccuraroundJan2025andseeJPYswapmarketunderpriced.”

MarketImpliedJPYO/NRate

Source:BoJ

KarenFishman(FXStrategy):“FXfuturespositioningdatafromtheCFTCsuggestthat,asofAugust6,shorter-terminvestorshadunwoundroughly90%ofspeculativenetJPYshorts.Asofthefollowingweek,theyhadinfactflippedtobeingnetlongJPYforthefirsttimesince2021.

Thatsaid,longer-terminvestorslikelyremaininthecarrytrade(andthere’salreadybeeninterestintacticallygettingbackin),leavingmoreroomtorunifYenappreciationpressuresreemerge.Inthatscenario,arapidtighteninginJapanfinancialconditionswouldchallengethedomesticinflationoutlookandalmostcertainlypreventtheBoJfromhikingratesagain(ifnotdriveashiftbacktoeasing)untilthatweretochange.

That’sespeciallytrueifUSgrowthfearsandexpectationsfordeeperFedcutstriggertheYenstrength.Butunderour

baselineforecastsforUSrates,Japaninflation,andUSD/JPYatslightlyhigherlevels–assumingmarketvolandriskofaUSrecessionremainlow–additionalhikesshouldbeachievable,thoughnotinthenear-term.Despitesomelikely

narrowingintherealratedifferential,marginallyhigheroddsofrecession,andriskoffurthercarryunwinds,westillfindithardnottobebearishYenoverthecomingmonths,whenrisksentimentlookssettoimproveandCNYprobablyweakens(barringamajorshiftintheoutlook).”

AdamWalker(ManagingDirector,EFXSMMTrading):“CFTCpositioningdatasuggestsasignificantreductioninpositioninginUSDJPY.Theyreportednon-commercialshortsfallingfrom225,000to77,523contractswhichrepresentsa12.5bn$positionreductionsinceearlyJuly:

Source:GBM

Thisreductioninpositioningisbackedbya70%dropinmarketactivityonEBS+CME”

Source:GBM

Therehasbeenasharpshort-coveringinJPYsinceearlyJuly,marketisnowneutral/slightlylongJPY:

Source:GBM

WhileRMarealsoslightlylong,themovehaslargelybeendrivenbyHedgeFundpositioning:

Source:GBM

Markets:Whatsignaldoyoutakefromthevolatilityofpastfewweeks-Apurgeofconcentratedpositionsinsummerlowliquidityorasignofmarketvulnerabilitytotheverycrediblethreatofarecession?

AndreaBerni(HeadofEuropeanEquityStructuredProductsTrading):“Theequitiesdrawdownfrommid-Julycameagainstabackdropofaconcentratedmarket,stretchedvaluations,positioningandahighbarforearnings.It

acceleratedwithsofterdatachallenginggrowth,MiddleEastescalationconcerns,BOJhikeresultingincarrytradesunwinds,wildequity/volmovesonMonday5th,andultimatelysignificantdeleveraging(fromCTAstocarrytrades).

Thatsaid,equitieshavenowretracedasignificantportionofthedrawdown(SPX74%,SXXP61%,NKY49%)and

marketsrepricedexpectedFedcuts.Toputincontext,S&P500isnowonly~2.2%offJuly’shighs,sorecessionriskcan’thavebeenrepricedmuchhighernetoftheincreasedcutspricedin.Vulnerabilitiestogrowthremain,asindicated

byequity/bondcorrelationsrealisingnegative.Butindeedpositioningdoesfeelcleaner,andtherealisedvolatilityincrease(albeitsmalloutsideofJapan),willbefeedingintopositionsizingconsiderations.

Specificallyontheequityimpliedvolmoves,whileindeedthemovesonthe5thofAugustwerewildespeciallyduring

Asia/Londonhours–theywereshortlivedandvolswereactuallydownbystrikebyendofweek.SPX3mATMvolsarebackto~13.5%,vs~11%atthestartofJuly,sonotmuchofarepricingoverall.Whiletherewasn’tanexplicitlyobviousdriverofthevol/VIXmovethistime,asopposedtoFeb18whereshortVIXETFsweretheculprits,thesimilaritywasthatitstillfeltatechnicalmovedrivenbyflowsratherthanafundamentalrepricingofvol.Lookingatpossibledrivers,thevolumesthatwentthrough,andthetimingofthemoves,itseemsreasonablethatsimpleupside“shortgamma”wasthemainforceinalowerliquidityperiodoftheday.ShortVIXETNsandsystematicstrategieswouldnotgenerallytradeVIXduringAsia/Londonhours.”

VIXFrontFuturevsSpotMoveScatterChart–Daily,byVIXFutureStartingLevel

Source:GBM

ShawnTuteja(HeadofETFVolatilityTrading+CustomBasketVolatilityTrading):“Muchhasbeenwrittenaboutthevolatilityintheequitiesmarketoverthepastfewweeks–namelythatVIXopenedonMondayAug5thnorthof65–

somethingthathasonlyhappenedtwicebeforeinhistory(2008and2020).WhatstoodoutthemostwasthattypeofVIXmoveinthepasthastranslatedintoan8-12%SPXdownmoveontheday,yetSPXwasdown~4%mostoftheday

Monday,whichspeakstotheissuebeingmoretechnicalinthevolmarketratherthanwidespreadfundamentalpanic.

Fromourlens,what’sevenmorenotableistheresetlowerinVIXaftertheevent.Infact,therealizedvolatilityoftheVIXoverthepasttwoweeksisthehighestinthehistoryofthemarket.

Fromtheselevels,webelievethatmuchofthestructuralissuesthatcausedtheVIXspikehavehealed,anddealersaremore“onsides”forthesemovesgoingforward.Whatitdoespointoutisjusthowquicklyliquiditycandryupinthe

marketsintimesofstress.

Inourview,themarketwasn’ttradingthe“recession”themeMonday(asSPX,RTY,andNDXallmovedwiththesamecorrelation),butratheritwastradingadeleveragingevent.ItdoesmakeusthinkthatVIXlikelyhasafloorabovetheearlysummerlevelsfromnowuntiltheelection,anditmakesuswanttopositionmoredefensivelyintotheelectionasweseehowfastliquidityleavesthesysteminavolshock.”

BorisVladimirov(SeniorEMStrategist):“Consideringallrecentdevelopments,ourtemplateforQ3remainsforanenvironmentthatiscloserto2018(slowinggrowthandoneortwovolatilityeventsduringa9-12monthperiod)ratherthan2008(arecessionthatleadstoasustainedFCItightening,raisingsystemicriskissues):

-WhileUSgrowthisdefinitelyslowing,ourbaselineisthattherecessionprobabilityisnowmuchmorefairlypricedthaninAprilandwewouldnotbechasingthe30dreceivershere.

-Our1yaheadrecessionprobabilitymodelremainsaround50%andifanythingisslightlylowerthaninAprilthisyear(as1y1yrealratesand10yyieldshavecomedown80-100bpsinQ2).

-Our10yUSTmodel,whileestimatinga3.75-3.95rangeinAugust,islookingforareboundin10yyieldsabove4%inSeptember.

-Ourmodelusingregime-adjustedVIXpositiondatabasedonthe7episodesofassetmanagershort-coveringtakenoverbyalargeleveragedshortandlongbroker/dealers(since2011)implies1-2volsdeclineinVIXperweekinthe4

weeksafterthespikeandstabilisationofrisksentimentthisandnextweek.WewouldusethatstabilisationtoaddtoVIX25-35callspreadsforOctoberexpiry.

-Finally,afteramonthofbeingonthebench,JPYhascomebackastopfunderinourmacroRVFXmodelandourJPYmarketfactormodelimpliesthat,followingadecadeofaggressivemonetaryeasing,theJPYmightbeontrend

depreciationsimilartosomecoreEMcurrenciesandthatonlyaUSrecessionwithnegativeUS1y1yrealratescouldbringtheyenclosertothepasttwocycles(2016-2024)averageof119.Intheabsenceofaclearrecession,140canbeconsideredanattractiveleveltoaddtoYenfundedcarrylongs.

-Ourmonthaheadterminal(2y1y)ratesmodelsforUSEURandGBPindicatescopeforadditional20-30bpsfurtherdownsideinSeptemberandasteepercurve.WealsolikeM5-M6SOFRsteepenersastheycouldwinbothinrecessionaswellasmidcyclere-acceleration.

Thebottomlineisthat,whileweestimatesomewhathigher1yaheadrecessionprobabilitythantheimpliedbyM5SOFR(45-50%vs35%),westillthinkthattheFedeasing,aswellasthecurrentmarketeasingandmostimportantly,theUSelectionsoutcome,couldextendthecycleandhencewe