Macro Wrap – “I’m Baaaack” – Risk-On / Risk-Off Duo

by Enis January 24, 2014 7:20 am • Commentary

Granted, the Risk-On / Risk-Off Duo doesn’t quite have the rhyming skills of former rap genius Terrell Owens, but the terrible twosome has made a reappearance to start 2014.  Complaints throughout 2010 and 2011 about the difficulty of navigating a risk-on / risk-off environment where all assets moved together have all but been forgotten.  But my sense watching price action in the past couple weeks is that macro correlations are going to be higher in 2014.

The Japanese yen and the U.S. 10 year yield seem to be the leaders in this new macro dance. In the past 2 weeks, we’ve had 3 moves in the S&P 500 of around 1% (lower on Jan 13th, higher on Jan14th, and lower on Jan 23rd).  On each of those days, the yen moved in the opposite direction of the market by more than 1%, quite a move for a 10 vol asset.  On each of those days, the U.S. 10 year yield moved at least 4 bps in the direction of the stock market (lower on risk-off days, higher on risk-on days).

The increasing macro correlation comes at a time when the USD/JPY is struggling to maintain its big uptrend over the past few years.  The cross is touching its lowest level this morning since the Fed’s tapering announcement on December 18th, and is back below the May high of 103.74:


USD/JPY daily, 50 day ma in pink, 100 day ma in green, 200 day ma in yellow, Courtesy of Bloomberg
USD/JPY daily, 50 day ma in pink, 100 day ma in green, 200 day ma in yellow, Courtesy of Bloomberg

It has also broken its 50 day moving average for the first time since early November.

While markets last year worried more about the impact of higher rates on the U.S. economy, growth actually seems to be the bigger worry to start 2014.  Chinese systemic fears, weak U.S. corporate guidance, and emerging market growth scares are grabbing the headlines.  More importantly, financial asset prices are moving in lockstep with risk-on/risk-off perceptions about global growth getting better or worse.

The RoRo markets of the past also imply higher volatility.  While the VIX has been under 20 for much of the past 2 years, these initial rumblings in other asset classes might mean a bit more vertigo for traders in 2014.