Ebb & Flow: Tidal Forces in Markets

There’s a pattern & predictability to tides that make them easy to forecast. But, on very long timescales, that doesn’t mean they are constant by any measure. At a celestial level, the amount of force produced depends on the mass of the objects involved, the distance, the eccentricity of the orbits, and the radius of the bodies – for starters. The push & pull that’s observed in financial markets is analogous: different assets exhibit similar ebb & flow as correlations oscillate.

Drug Addiction & The Stock-Bond Feedback Loop

Over the past month, the bond market has seesawed between paroxysmal rallies & emetic sell-offs. In between, however, an overall placid composure has taken hold: arguably due less to complacence & more to trauma as investors prepare for the next bout of volatility. While there’s little disagreement about the role that policymakers have played, what’s fascinating is the degree to which so much of the recovery in risk assets is due solely to the promise of more imminent easing, as opposed to any improving fundamental picture. It’s an addiction – and the time for intervention is long gone.

Cut Odds Rising

As it stands this morning, options market-implied odds of the Fed cutting by at least another 125bps by year-end are about 1 in 4. Since Wednesday’s close, the odds of the Fed cutting by at least another 75bps by year-end have roughly doubled. As it stands this morning, the Eurodollar options-implied odds (fitted to the FF curve & fwd FRA/OIS spreads) of a) the Fed only cutting once more by 25bps in September or, b) the Fed cutting rates by at least another 75bps are about equal.

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