Macro Wrap – Fears of Global Deflation, $SPY, $VIX, $TLT

by Enis March 14, 2014 9:22 am • Commentary

I wrote about the return of macro risk-on / risk-off in a Macro Wrap post in January:

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).

I continue to view the USD/JPY cross and the U.S. 10 year yield as key risk barometers for global markets.  Those two prices are now near the lows of the year after a rapid move over the last 2 days.

First, USD/JPY’s daily shows the breakdown over the last week.  The currency cross is approaching its low of the year, which was 100.76:

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

The Bank of Japan tapered its quantitative easing program a bit more than expected this week, and the Yen has gained and USD/JPY has moved back below the 50 day moving average with a vengeance since that modest surprise.  The psychologically important 100 level coincides with the rising 200 day moving average, which has not been breached convincingly since late 2012.

Meanwhile, the U.S. 10 year yield is quite close to making a new low for the year as well, after its mirrored move lower over the last two days:

U.S. 10 year Treasury yield, Courtesy of Bloomberg
U.S. 10 year Treasury yield, Courtesy of Bloomberg

The 6 month chart of the 10 year Treasury yield tracks the USD/JPY chart quite closely.

A number of macro catalysts have emerged in the past couple weeks, all leading to risk-off behavior in broader asset markets (looking just at the S&P 500 would not indicate that risk-off price action).  The Ukrainian standoff as well as weak Chinese data are the most discussed, but the Bank of Japan’s taper this week as well as the commitment of the Fed to continue to taper are both weighing on the perception of global growth prospects, as fears of global deflation become more acute.

With the Crimean vote on Sunday, and the FOMC vote on Wednesday, we expect the week ahead to hold more volatility than normal.  The 10 year Treasury yield continues to be the “most important price in the world“, so we’ll be watching that closely as it nears the lows of the year.