tag:blogger.com,1999:blog-67625358446547771442024-03-21T21:24:52.884-07:00Monday Morning MacroEx-Hedge Fund PM, Full-Time Parent, Data Scientist & Interest Rates TraderUnknownnoreply@blogger.comBlogger10125tag:blogger.com,1999:blog-6762535844654777144.post-62903398619309336742019-08-22T13:46:00.005-07:002019-08-22T13:48:31.238-07:00An Unhealthy Obsession<div class="separator" style="clear: both; text-align: center;">
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<span style="font-family: Trebuchet MS, sans-serif;"><b><i><u>The Federal Reserve now spends over 1/3 of its time talking about financial markets in the minutes. That’s more than trade, monetary policy & employment combined.</u></i></b><br /><u><i><b>This unhealthy obsession has become a distraction – and it’s leading financial markets down a dangerous path.</b></i></u></span><div>
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<i><span style="font-family: Trebuchet MS, sans-serif;">Chart shows the proportion of FOMC meeting minutes that cover specific topics – based on an LDA analysis similar to that described by Blei et al (2003) & Jegadeesh & Wu (2015). Table reports avg proportion by topic for select years.</span></i></div>
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<span style="font-family: Trebuchet MS, sans-serif;">Expectations have done something funny over the past week as the market digests Wednesday’s minutes ahead of Powell’s speech at Jackson Hole. It’s going to have to be a very delicate performance for a Fed Chair whose recent linguistic gymnastics have been anything but. Complacency still remains remarkably high in the riskiest assets, while skew in bonds & gold tell a very different story.</span></div>
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<span style="font-family: Trebuchet MS, sans-serif;">Now, let’s look at what expectations have done across markets over the past week – for example. Here’s what the moves have been across normalized skew for:</span></div>
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<b><span style="font-family: Trebuchet MS, sans-serif;">1. 1wk expiries (end of the month). Y-axis = change in vols, X-axis = delta (25DP = 25-delta put).</span></b></div>
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<b><span style="font-family: Trebuchet MS, sans-serif;">2. 4mth expiries (end of the year). Y-axis = change in vols, X-axis = delta (25DP = 25-delta put).</span></b></div>
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<span style="font-family: Trebuchet MS, sans-serif;">Now, it’s pretty clear which direction we’re moving in – and it’s all thanks to the fact we’ve seen a pretty hefty rally over the past week in risk assets as we prepare for the largest annual convocation of central bankers.<br /><br />But what’s important before we get too carried away is that skew in general is already quite positioned the other way (obviously puts over calls in SPX, HY etc & vice versa in Gold & USTs).<br /><br />Here’s a snapshot of the shape of the surface in delta terms.<br /><br /><b>3. 1wk expiries (end of the month). Y-axis = OTM – ATM vol, X-axis = delta (25DP = 25-delta put).</b></span></div>
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<b><span style="font-family: Trebuchet MS, sans-serif;">4. 4mth expiries (end of the year). Y-axis = OTM – ATM vol, X-axis = delta (25DP = 25-delta put).</span></b></div>
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<span style="font-family: Trebuchet MS, sans-serif;">Before we look at these profiles & dismiss them with “well, that’s just because put skew is always elevated in risk assets…”, think about this for a moment. Here’s where we are in historical terms. Below shows 1yr expiry 25-delta risk reversals (calls over puts), 5yr z-score.<br /><br />First, here’s what the cost of calls on Gold & 30yr USTs looks like. We are right about at the 5-year highs on this chart. Clearly, the market is starved for upside on both assets whether because of duration needs, QE, or flight to quality (or some mix of all three).<br /><br /><b>5. 5yr history: Gold & 30yr calls – puts, 1yr expiry z-score.</b></span></div>
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<span style="font-family: Trebuchet MS, sans-serif;">Now, compare that to what we see in “risk assets”.<br /><br />Here is what the z-score of calls – puts looks like for SPX & HY. Despite the fact we’re within spitting distance of the all-world highs, the cost of protection is about middle of the range relative to the historical mean.<br /><br /><b>6. 5yr history: SPX & HY calls – puts, 1yr expiry z-score.</b></span></div>
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<span style="font-family: Trebuchet MS, sans-serif;">It’s disconcerting to see such an imbalance – especially when the degree to which complacency appears evident in “risk assets”. Unless Powell is capable of brandishing some new form of easing we’re hitherto unaware exists, this would suggest to me there’s a rude awakening that’s set to brew in the very assets whose sensitivity to a disappointment is highest.<br /><br />Now, a 50bp cut in September would be exactly the sort of thing that might satisfy BOTH sides of the equation: “well, I don’t need that much downside protection in equities or high yield because of could the Fed is going to bail me out with a larger cut than necessary, in order to hedge against downside in the economy, a lack of inflation, or the ever-present threat of bubonic plague just in time for the holiday shopping season.”<br /><br />But that’s NOT what’s priced. If anything, the rates pendulum has swung further back to ambivalence. And we’re now pricing a more likely than not outcome of only 25bps via the Eurodollar options market (though, to be fair, there’s still a wobble around where the tail between a -25 and -50 cut would land as seen in the squiggle made by the red line around 1.50% below…).</span></div>
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<span style="font-family: Trebuchet MS, sans-serif;"><img height="320" src="https://i1.wp.com/monday-morning-macro.com/wp-content/uploads/2019/08/sepdist.jpg?fit=1024%2C513&ssl=1" style="color: #586773; font-size: 0.9em;" width="640" /></span></div>
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<span style="font-family: Trebuchet MS, sans-serif;"><br />Ironically, this is happening at the same time that the Fed’s obsession with market sensitivity is also the highest – and when their companion central bankers globally are considering unveiling new measures for further competitive currency devaluation monetary easing. At some point, the bazooka won’t be able to reload fast enough.<br /><br /><i><u><b>REFERENCES:<br /><br />Blei, D. M., Ng, A. Y., & Jordan, M. I. (2003). “Latent Dirichlet Allocation.” Journal of Machine Learning Research, 3, 993-1022.<br /><br />Jegadeesh, N., & Wu, D. (2015). “Deciphering Fedspeak: The Information Content of FOMC Meetings.” working paper, Emory University.<br /><br />Blei, D. M., (2012). “Probabilistic Topic Models.” Communications of the ACM, 55(4), 77-84<br /><br />Hansen, S., McMahon, M., & Prat, A. (2014). “Transparency and Deliberation Within the FOMC: a Computational Linguistics Approach.”<br /><br />Prices from the CME group, Bloomberg.</b></u></i><br /><br /><i><span style="font-size: x-small;">Disclosure/Disclaimers: This material may contain indicative terms only, including but not limited to pricing levels. There is no representation that any transaction can or could have been effected at such terms or prices. Proposed terms and conditions are for discussion purposes only. Finalized terms and conditions are subject to further discussion and negotiation. OTC Derivatives Risk Disclosures: To understand clearly the terms and conditions of any OTC derivative transaction you may enter into, you should carefully review the terms of trade with your counterparty, including any related schedules, credit support documents, addenda and exhibits.<br /><br />You should not enter into OTC derivative transactions unless you understand the terms of the transaction you are entering into as well as the nature and extent of your risk exposure. You should also be satisfied that the OTC derivative transaction is appropriate for you in light of your circumstances and financial condition. In addition, you may be requested to post margin or collateral to support written OTC derivatives at levels consistent with the internal policies of your respective counterparty. I may have positions in assets mentioned above, but do not have plans to initiate any new positions within the next 72 hours.<br /><br />This post was written by me, the material is my own (except where sourced), and it expresses my own opinions. I am not receiving compensation for it & have no business relationship with any of the companies and/or organizations whose assets may be mentioned in this post.</span></i></span></div>
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Unknownnoreply@blogger.comNew York, NY, USA40.7127753 -74.005972839.9423093 -75.296866299999991 41.483241299999996 -72.7150793tag:blogger.com,1999:blog-6762535844654777144.post-21210169552394480042019-08-20T08:28:00.003-07:002019-08-20T08:28:24.405-07:00Currency Krav Maga<!--[if !mso]>
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 9"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="46" Name="List Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="List Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="List Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 4"/>
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<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjeuxoVyn5ih-JEFU-p18CQnAABYEFyfOm6O2w4QpiyahJ-U_cIII-j6g516eYzqRmelRkKNVovyXiwWcMaGrAZLtEzTQJx0Uj-DmeMo2YdX-1QoY1wzrEVBpbnXxITwXQ0Qq6NHY6pIEM8/s1600/kravmaga.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="635" data-original-width="1600" height="252" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjeuxoVyn5ih-JEFU-p18CQnAABYEFyfOm6O2w4QpiyahJ-U_cIII-j6g516eYzqRmelRkKNVovyXiwWcMaGrAZLtEzTQJx0Uj-DmeMo2YdX-1QoY1wzrEVBpbnXxITwXQ0Qq6NHY6pIEM8/s640/kravmaga.jpg" width="640" /></a></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif; font-size: small;"><br /></span></span></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">There’s
been a lot of discussion recently about $ strength preventing risk assets from
making new highs. I don’t dispute the fact – it’s pretty obvious that we’re
losing badly in the battle for competitive devaluation that global central
banks have embarked upon. But it's even worse than the headlines might suggest.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">To refer to this as a “USD bull market” is not correct. As
others have correctly pointed out: it’s a bear market for $ funders. Typically,
we’d see this manifest in overnight repo rates, but that’s not really happening.
We might also see this show up in LIBOR/OIS spreads (and cross-currency basis)
& it has, but to a fairly limited extent. <o:p></o:p></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><u><span lang="EN-GB" style="mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">Where this is
showing up instead is in FX forwards. In times of trade war, this is currency
krav maga - the art of self-defense.<o:p></o:p></span></span></u></i></b></div>
<div class="MsoNormal">
</div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;"></span></div>
<a name='more'></a><br />
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">Consider
this: since the start of the year, the average 1-year funding cost in EUR, GBP,
JPY & CAD has moved by about 30%. Cheaper for those currencies, more
expensive for the dollar.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6-MzDm6klsaol4maWDIa70G5E7Pgx4fVbDaKDr5M2sCjALNghqFvZyzXKy55BMwDute9_d8yY9PyDcN4C6-LE99SDl3pLyF5_4z74kPRPhafjrAEW947Lly1A4GT72pbwMGdr8u9MRalC/s1600/usdfunding12m.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "trebuchet ms" , sans-serif;"><img border="0" data-original-height="1054" data-original-width="947" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj6-MzDm6klsaol4maWDIa70G5E7Pgx4fVbDaKDr5M2sCjALNghqFvZyzXKy55BMwDute9_d8yY9PyDcN4C6-LE99SDl3pLyF5_4z74kPRPhafjrAEW947Lly1A4GT72pbwMGdr8u9MRalC/s640/usdfunding12m.jpg" width="574" /></span></a></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">Moreover,
it’s showing no signs of stopping. It’s essentially an explosion of the developed
markets FX carry trade: borrow in currencies where interest rates are low (or,
in many cases, negative), to invest in those countries where yields are high. In
order to do that, you need dollars. In the case of each of the 4 currencies
listed above, the forward value of the dollar is cheaper than the spot – making
the trade that much more attractive. Perhaps this stops when we reach zero,
perhaps it just continues.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">But that’s
not even the biggest move. Beyond the developed markets, the real jump has
taken place in just the last month as USDCNH forward points have gone up by
more than 2x. <o:p></o:p></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhc2otOL2xfcmVlyjKWysya0qy_PE8F-WJDEFMG6ZPsP1GoIcQHWO_-ebZnt3qB4ShnbE3uLyfXGhXp2v3xMF0tRMqYSTPSTwbc3dto232-Wousi7BRj0MQyqXk_2QRX-vJk8TpkMZEaSA-/s1600/cnh12m.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "trebuchet ms" , sans-serif;"><img border="0" data-original-height="439" data-original-width="726" height="386" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhc2otOL2xfcmVlyjKWysya0qy_PE8F-WJDEFMG6ZPsP1GoIcQHWO_-ebZnt3qB4ShnbE3uLyfXGhXp2v3xMF0tRMqYSTPSTwbc3dto232-Wousi7BRj0MQyqXk_2QRX-vJk8TpkMZEaSA-/s640/cnh12m.jpg" width="640" /></span></a></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">On a trade
weighted basis, this is a monster move.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">Take the
top 10 currencies on a trade weighted basis (I’ll use the Fed’s weights for the
sake of comparison). <o:p></o:p></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;"><a href="https://www.federalreserve.gov/econres/notes/feds-notes/revisions-to-the-federal-reserve-dollar-indexes-20190115.htm">https://www.federalreserve.gov/econres/notes/feds-notes/revisions-to-the-federal-reserve-dollar-indexes-20190115.htm</a><o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">Consider
what the trade weighted $ performance has been in spot space. <o:p></o:p></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMDdrKIMwoTMZTyIUIzdcLAysWUGnr_85Y5jAEB6Le75UOvzDeiGS7IonjSVW4_uUF9mv2l-xkxnnHoruZlTZilHLvdfz0la08eohoNsgdkl140EYWO885dUGAQbAwd4mV6cpqYr3ee_v-/s1600/spotfx.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "trebuchet ms" , sans-serif;"><img border="0" data-original-height="1007" data-original-width="1600" height="402" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgMDdrKIMwoTMZTyIUIzdcLAysWUGnr_85Y5jAEB6Le75UOvzDeiGS7IonjSVW4_uUF9mv2l-xkxnnHoruZlTZilHLvdfz0la08eohoNsgdkl140EYWO885dUGAQbAwd4mV6cpqYr3ee_v-/s640/spotfx.jpg" width="640" /></span></a></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">Now,
overlay what the trade weighted $ performance has been in forward space all-in
(spot + forward points).</span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQO2BeNfchpC7ilMVDnS_j8_jCwp9hXNdTiAfBGQNGrj_cT5cLNYIJk_Um9zgAkpQKXwuqvpQrnkYr0F1lJGL2k-MV7v68kN9-GKKVbOKa-8lB9fL2gsMH79mivCVIUI99Oag-qKVJFmPB/s1600/fwdfx.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><span style="font-family: "trebuchet ms" , sans-serif;"><img border="0" data-original-height="1007" data-original-width="1600" height="402" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQO2BeNfchpC7ilMVDnS_j8_jCwp9hXNdTiAfBGQNGrj_cT5cLNYIJk_Um9zgAkpQKXwuqvpQrnkYr0F1lJGL2k-MV7v68kN9-GKKVbOKa-8lB9fL2gsMH79mivCVIUI99Oag-qKVJFmPB/s640/fwdfx.jpg" width="640" /></span></a></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;"><br /></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><u><span lang="EN-GB" style="mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">Bottom line, it’s
pretty clear that this $ move is being driven by the forward borrowing cost
versus our major trading partners. In a trade war, this is logical self-defense.
But the extent of the move is going almost entirely unnoticed since the spot
richening of the $ has been “only” 5% over the same time period.<o:p></o:p></span></span></u></i></b></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;"><br /></span></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><u><span lang="EN-GB" style="mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif; font-size: small;">Until the forwards
begin to retreat in a meaningful way, it’s only reasonable to presume this move
should continue.<o:p></o:p></span></span></u></i></b></div>
<div class="MsoNormal">
<span style="font-family: "trebuchet ms" , sans-serif; font-size: small;"><br /></span></div>
<div class="MsoNormal">
<em data-rich-text-format-boundary="true" style="background-color: rgba(25, 30, 35, 0.2); border-radius: 2px; box-sizing: inherit; color: #191e23; font-family: "Noto Serif"; white-space: pre-wrap;"><span style="font-size: xx-small;">Disclosure/Disclaimers: This material may contain indicative terms only, including but not limited to pricing levels. There is no representation that any transaction can or could have been effected at such terms or prices. Proposed terms and conditions are for discussion purposes only. Finalized terms and conditions are subject to further discussion and negotiation. OTC Derivatives Risk Disclosures: To understand clearly the terms and conditions of any OTC derivative transaction you may enter into, you should carefully review the terms of trade with your counterparty, including any related schedules, credit support documents, addenda and exhibits. You should not enter into OTC derivative transactions unless you understand the terms of the transaction you are entering into as well as the nature and extent of your risk exposure. You should also be satisfied that the OTC derivative transaction is appropriate for you in light of your circumstances and financial condition. You may be requested to post margin or collateral to support written OTC derivatives at levels consistent with the internal policies of your respective counterparty. I may have positions in assets mentioned above. I do not have plans to initiate any new positions within the next 72 hours. I wrote this post myself, the material is my own (except where sourced), and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any of the companies and/or organizations whose assets may be mentioned in this post. </span></em></div>
Unknownnoreply@blogger.comNew York, NY, USA40.7127753 -74.005972839.9423093 -75.296866299999991 41.483241299999996 -72.7150793tag:blogger.com,1999:blog-6762535844654777144.post-80487803639099554382019-08-19T11:00:00.000-07:002019-08-19T14:13:41.912-07:00"Impossible" Events are on the Rise<!--[if !mso]>
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="index heading"/>
<w:LsdException Locked="false" Priority="35" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="caption"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="table of figures"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="envelope address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="envelope return"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="footnote reference"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation reference"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="line number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="page number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="endnote reference"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="endnote text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="table of authorities"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="macro"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="toa heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 5"/>
<w:LsdException Locked="false" Priority="10" QFormat="true" Name="Title"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Closing"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Signature"/>
<w:LsdException Locked="false" Priority="1" SemiHidden="true"
UnhideWhenUsed="true" Name="Default Paragraph Font"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Message Header"/>
<w:LsdException Locked="false" Priority="11" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Salutation"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Date"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 9"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9P038A6XSVuL4Ml547mILIrMa2exAK2KYL47swS9acJE_5_inR8oleyBPfsIZuD3O8JX-BPK1e6gztytgYDsxDaW7emk3M8hrDBt1wTDxGGwJ0kPDk9NJ-zVcxKlF8pTb9pghvlJBXog9/s1600/whitequeen.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="766" data-original-width="1002" height="488" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi9P038A6XSVuL4Ml547mILIrMa2exAK2KYL47swS9acJE_5_inR8oleyBPfsIZuD3O8JX-BPK1e6gztytgYDsxDaW7emk3M8hrDBt1wTDxGGwJ0kPDk9NJ-zVcxKlF8pTb9pghvlJBXog9/s640/whitequeen.png" width="640" /></a></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">A 4-sigma event would be expected
to happen once or twice in a trading lifetime - according to the most
popular VaR-based risk models. We’ve seen 10 of those this month in Treasuries.
What we should have learned from the GFC has been all but forgotten. What the
market had considered to be impossibilities (or at least highly unlikely...) is
quickly becoming the norm.</span></span></b></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;"><span style="mso-spacerun: yes;"></span></span></span></b></div>
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<a name='more'></a><br />
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<b style="mso-bidi-font-weight: normal;"><u><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">THE PROBLEM:<o:p></o:p></span></span></u></b></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">Having worked as a portfolio manager at several large hedge funds after
a stint on the sell-side, I’d like to think that I’ve seen my fair share of
methods for assessing risk. People who act as financial actuaries for a living
(i.e. “risk managers”) like to think that too. There’s an immutable tug of war
that takes place at nearly every hedge fund between the people who are trying,
recently without much success, to generate returns better than a passive index fund
(the investment team), and the people entrusted with making sure they’ve got
the tail events under control (the risk team). This generally means that the risk team runs a backwards-looking analysis to reassure investors that the likelihood of a fund-closing event is inconceivable. More and more, the response when such events transpire should be best summed up by Inigo Montoya.<o:p></o:p></span></span></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;"><br /></span></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyV1NRJdfSvI1FzBD9FBcgN2tQzJTLNhfgsiQ0kcRsu9kDXvIIR5B4_jeuMlAvATiYf-PwLxAPcGsRdGVKcgPxTZeeMi7uknudufGkec7aH4s2EEIh5HZFRACxH8Omj0H4XmIDG8vOofZ1/s1600/tumblr_m81efoicir1r927dro1_500-gif.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="281" data-original-width="500" height="358" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyV1NRJdfSvI1FzBD9FBcgN2tQzJTLNhfgsiQ0kcRsu9kDXvIIR5B4_jeuMlAvATiYf-PwLxAPcGsRdGVKcgPxTZeeMi7uknudufGkec7aH4s2EEIh5HZFRACxH8Omj0H4XmIDG8vOofZ1/s640/tumblr_m81efoicir1r927dro1_500-gif.jpg" width="640" /></a></div>
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<span style="font-family: "trebuchet ms" , sans-serif; font-size: 10pt;">Several "quantitative" metrics are frequently employed. They
range from those that track trailing realized volatility (VaR-based) to those
that use absolute numbers from prior historical periods (stress-based). Typically,
there’s a VaR limit as well as a historical drawdown limit which ends up being
imposed. The first one is almost always easier for a portfolio manager to meet
than the second, especially if the historical drawdown period includes 2008. It’s
this first type of risk modelling that is important for the discussion below.</span></div>
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<span style="font-family: "trebuchet ms" , sans-serif;"><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;">The most common VaR-based risk metric employed on the street is what’s
referred to as “5-year 95%”. What this means is that a portfolio manager’s risk
is measured by what would fit within a 2-standard deviation range using a
5-year lookback. A 2-standard deviation range (or two sigma - </span><span style="font-size: 10.0pt;">2</span><span lang="EL" style="font-size: 10.0pt; mso-ansi-language: EL;">σ</span><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;">) is defined, under a normally distributed series of
returns, as having an approximate daily frequency of once every 22 days (using
business days, this means about once a month). <o:p></o:p></span></span></div>
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<span style="font-family: "trebuchet ms" , sans-serif;"><b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;">A 4-standard deviation, or </span></b><b style="mso-bidi-font-weight: normal;"><span style="font-size: 10.0pt;">4</span></b><b style="mso-bidi-font-weight: normal;"><span lang="EL" style="font-size: 10.0pt; mso-ansi-language: EL;">σ</span></b><b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;">, move would have
an approximate daily frequency of once every 63 years (using 252 trading days a
year).<o:p></o:p></span></b></span></div>
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<b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">We’ve seen 10 of those this month
alone in Treasuries. And August is barely halfway done. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></b></div>
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<b style="mso-bidi-font-weight: normal;"><u><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">THE DIAGNOSIS:<o:p></o:p></span></span></u></b></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">Now, of course, normally distributed returns don’t always reflect the
real world (see Taleb et al) – something that was pointed out repeatedly in the
aftermath of the GFC. But that doesn’t mean the market evolved. Sure, options
markets began to assign slightly fatter tails to unlikely outcomes – but the
shape of the distributions being drawn were still roughly the same. Moreover,
the cohort of investors looking to exploit the extra cost of insurance rose as “systematic
vol selling” came to represent the peak of high Sharpe strategy deployment. <o:p></o:p></span></span></div>
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<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><u><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">What’s
fascinating is that these same measures are again being tested and – far from
terrifying investors – they are being accompanied by record low levels of
implied volatility. <o:p></o:p></span></span></u></i></b></div>
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<span style="font-family: "trebuchet ms" , sans-serif;"><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;">Take the rates market, for instance. US treasury yields have experienced
10 moves that would qualify as </span><span style="font-size: 10.0pt;">4</span><span lang="EL" style="font-size: 10.0pt; mso-ansi-language: EL;">σ</span><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"> or greater since the start of
August. In fact, this month already qualifies in the top 10 on record by this
measure, and we’re only halfway done – with the largest annual convocation of
global central bankers due up this weekend. <o:p></o:p></span></span></div>
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixwi14iYOvsk94LYjLKBm_iDKrQetUCRsUxhv3ObbwKMlxVshYdCt9eW20gFKdzCxcy2UqhjRc6kmEqYIgK-GZZAc9IEeWcmbbmIgJ6t6NxYwavsY7I_4jVzKAtGQ7rHnyfXG_af0dI191/s1600/monthly2.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="782" data-original-width="1600" height="312" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEixwi14iYOvsk94LYjLKBm_iDKrQetUCRsUxhv3ObbwKMlxVshYdCt9eW20gFKdzCxcy2UqhjRc6kmEqYIgK-GZZAc9IEeWcmbbmIgJ6t6NxYwavsY7I_4jVzKAtGQ7rHnyfXG_af0dI191/s640/monthly2.jpg" width="640" /></a></div>
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<b style="mso-bidi-font-weight: normal;"><u><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">THE PROGNOSIS:<o:p></o:p></span></span></u></b></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">Now, the common argument, at least the one that a trader will happily
provide – is that there is a fantastically large number of assets from which to
select an investment, and the correct methodology should be to assess the risks
across all these assets & weight according to a covariance matrix. Simply
said: yes, we’ve seen a large number of “tails”, but the number of dogs &
breeds have also grown exponentially over the past century. <o:p></o:p></span></span></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">This, of course, is fine as long as you assume that the volatile asset
classes in question are not ones that essentially drive performance & price
action across a far greater number of investments. That’s why it’s easier to
disregard the monster moves in Emerging Markets (unless you happen to be an EM
trader, in which case you probably stopped reading as soon as I used the term “normal
distribution”). <o:p></o:p></span></span></div>
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<br /></div>
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><i style="mso-bidi-font-style: normal;"><u><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">It’s
not fine when the asset class in question is the largest in the world, however,
and is driving the price action <span style="mso-bidi-font-weight: bold;">and
policymaking</span> in virtually every geographic region on the globe. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></u></i></b></div>
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<br /></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">One could also argue that, hey, we just cut rates – and perhaps these
huge moves are just what we should expect whenever the Fed cuts rates? To
those, I’d just point out that the Fed’s latest rate cut was essentially “priced
in” by the front-end of the market for the better part of 2 months – and that
we actually sold off the day the rate cut was in fact delivered. <o:p></o:p></span></span></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">There’s something bigger going on here & the market’s refusal to
acknowledge it can only be chalked up to the fact that we’ve become conditioned
to seeing larger & larger bazookas unveiled by policymakers whenever risk
assets endure a temporary swoon. This only engenders the possibility of greater
disappointment when the Fed, for example, fails to cut by 50bps in September.
The response will be even more demand for stimulus and, in all likelihood,
another round of QE in Q1 2020. <o:p></o:p></span></span></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">How else to explain the fact that the relationship between these massive
moves in the rates market & the average level of the VIX during the same
month have gotten so dislocated from reality? <o:p></o:p></span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtTUJC2jJXRT8fc0X8rLDx1NPyZmageaY5yQGmOEHASsrPrYhnrxsEqH535q_lysP1azbzxCKdPmShyj-BLbFm9X6TWpyDKDKtpiJa3rN6UxnSWteuXGoJLfGspBHvfPy0aT-DBnsYT1NS/s1600/countvix.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="178" data-original-width="210" height="270" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgtTUJC2jJXRT8fc0X8rLDx1NPyZmageaY5yQGmOEHASsrPrYhnrxsEqH535q_lysP1azbzxCKdPmShyj-BLbFm9X6TWpyDKDKtpiJa3rN6UxnSWteuXGoJLfGspBHvfPy0aT-DBnsYT1NS/s320/countvix.jpg" width="320" /></a></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><o:p><span style="font-family: "trebuchet ms" , sans-serif;"> </span></o:p></span><span style="font-family: "trebuchet ms" , sans-serif; font-size: 10pt;">Frankly, the most concerning aspect of these moves is not what’s already
happened – but is what lies ahead. We can show how ex-ante Sharpe can be
affected by a surge in the denominator & that’s a big deal when there’s a
limited threshold for rates to go lower. It’s an even bigger deal when this
involves a supposedly “safe haven” asset. “Safe havens” cease to fulfil their
primary function when they’ve seen a double-digit number of events in the past
month that are only supposed to happen every 60+ years. </span><span style="font-family: "trebuchet ms" , sans-serif; font-size: 10pt;"> </span></div>
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<b style="mso-bidi-font-weight: normal;"><u><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">SO HOW TO PLAY IT?<o:p></o:p></span></span></u></b></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">The VIX is far from the only complacent asset class in the face of these
moves in Treasury yields. The problem is much more pervasive – extending to
those areas that, let’s be honest, really should know better. For example, the
biggest outlier on the complacency metric among the major asset classes appears
to be High Yield credit. <o:p></o:p></span></span></div>
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<span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">Having established that equity vol already looks low relative to past
periods of interest rate volatility, consider where High Yield spreads are vs
the VIX. <span style="mso-spacerun: yes;"> </span><o:p></o:p></span></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuzTqqAtEor1horibgWHQrQ5fUmtG5RNGTYEqNdB6jsTH_q8fh8kZD7UdyPTsYw1Vu4WjFRvbTeQZpjOVFI2U9OIUzj8r7-mNJFP2QVoNVQ4zhjLzpiJ4qVlsgr561675b-JqGpxJ5N2pA/s1600/HYvsVIX.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="439" data-original-width="821" height="342" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhuzTqqAtEor1horibgWHQrQ5fUmtG5RNGTYEqNdB6jsTH_q8fh8kZD7UdyPTsYw1Vu4WjFRvbTeQZpjOVFI2U9OIUzj8r7-mNJFP2QVoNVQ4zhjLzpiJ4qVlsgr561675b-JqGpxJ5N2pA/s640/HYvsVIX.jpg" width="640" /></a></div>
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<span style="font-family: "trebuchet ms" , sans-serif; font-size: 10pt;">On a rolling 6-month basis, the z-score for HY at-the-money volatility
lags significantly behind the average across rates, equities, investment grade
credit & commodities (3-month expiries shown below). In other words, relative
to other asset classes – and also relative to itself (!) – High Yield isn’t
pricing in any kind of particularly noteworthy move. The reason why this is so
problematic can be easily seen – during times when volatility rises
meaningfully, the weakest parts of the capital structure move the most.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnyoUezZxTY88NQxINDGgKTLD5KHylSY1f0c2g9dyRPj78c9fbplA12sFx07oFF6aoMrUHgzW23wzmtpcjjdtuSONVSk4e5JXFkIuPFfrNQhfCy3wS50TQL7I7gSsD4oZ_xvP8ReOQWzb_/s1600/hy+vol.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1093" data-original-width="1258" height="556" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhnyoUezZxTY88NQxINDGgKTLD5KHylSY1f0c2g9dyRPj78c9fbplA12sFx07oFF6aoMrUHgzW23wzmtpcjjdtuSONVSk4e5JXFkIuPFfrNQhfCy3wS50TQL7I7gSsD4oZ_xvP8ReOQWzb_/s640/hy+vol.jpg" width="640" /></a></div>
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<b style="font-size: 12pt;"><i><u><span lang="EN-GB" style="font-size: 10.0pt; mso-ansi-language: EN-GB;"><span style="font-family: "trebuchet ms" , sans-serif;">BOTTOM
LINE: Complacency has become commonplace alongside a “buy-the-dip” mentality
across risk assets. Record levels of realized volatility across the largest “safe
haven” asset class cannot be discounted as mere noise. The weakest & most
sensitive assets will be the next to go as VaR is recalibrated on a global
basis.</span></span></u></i></b></div>
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<!--EndFragment--><br />Unknownnoreply@blogger.comNew York, NY, USA40.7127753 -74.005972839.9423093 -75.296866299999991 41.483241299999996 -72.7150793tag:blogger.com,1999:blog-6762535844654777144.post-71171520262215539072019-08-14T04:42:00.000-07:002019-08-19T14:15:09.875-07:005 Things Every Trader Needs to Know About Rates<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0GdmfuSuO7aSSCLOOUKoa6o4HRIOhqdrD9MACJ44uMpjqBKl689JnSpd_teoxhSwbzV5TzqeDyH2Fy7saaUhCdsyQ4UxwJsbGmy2gk2bdmU147CvVnXqmNUIKzS3gbl4xy-v82C4ALkF8/s1600/IMG_1447.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="666" data-original-width="1200" height="354" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0GdmfuSuO7aSSCLOOUKoa6o4HRIOhqdrD9MACJ44uMpjqBKl689JnSpd_teoxhSwbzV5TzqeDyH2Fy7saaUhCdsyQ4UxwJsbGmy2gk2bdmU147CvVnXqmNUIKzS3gbl4xy-v82C4ALkF8/s640/IMG_1447.jpg" width="640" /></a></div>
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<div>
From what’s priced in to curve inversion to term premium. <b>Here are the 5 things every trader needs to know about the rates market…</b></div>
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<i>Updated 11:41am EST</i></div>
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<b>5. What’s Priced In</b></div>
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<b>-50bps is now the base case for September.</b></div>
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Here are the probabilities that the options market is assigning to the September FOMC, currently.</div>
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No change: 2.5%</div>
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-25bps: 19.7%</div>
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-50bps: 65.6%</div>
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-75bps or more: 12.2%</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHsu5fOPtxPcXGRcMjlijFsyF9mlupyUxgy6E4jJ6qY6Pa28l6h66PpkX_wHJyv8HbJxY3o11oSRwS5ncxhURz4ObO5J4Yqrl-28c4dVxiDb5-pwiYPHWqGHGJqEIw3fhGmo94iP9x5TBj/s1600/sepfomc4.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="803" data-original-width="1600" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhHsu5fOPtxPcXGRcMjlijFsyF9mlupyUxgy6E4jJ6qY6Pa28l6h66PpkX_wHJyv8HbJxY3o11oSRwS5ncxhURz4ObO5J4Yqrl-28c4dVxiDb5-pwiYPHWqGHGJqEIw3fhGmo94iP9x5TBj/s640/sepfomc4.jpg" width="640" /></a></div>
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<i>One brief note on methodology: the CME “FedTool” has a similar probability tree but it calculates the odds using binary Markov chains. In a nutshell, this means that they only allow for 1 of 2 outcomes to be altered at a given meeting. If you think the Fed could either stay on hold, cut by 25, cut by 50, or more (which the options market is telling us is a possibility – why else would somebody be wanting to pay anything at all for something like the EDU9 98.50 calls?), then a binary chained decision tree isn’t correct. Look closely at the CME tool, they show zero probability for an “on hold” result. Even in this cynical world of second guessing policymakers, we should know that can’t be correct with more than a month still to go…</i></div>
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<b>4. Curve Inversion</b></div>
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Read any sell-side literature & you’ll quickly find that the shape of the curve is one of the most widely followed “recession predictors” available, where a flat curve indicates a higher likelihood of recession. When this flattening becomes so pronounced that the yield on the longer tenor falls below the yield on the shorter tenor, it’s referred to as inversion – something that’s happened only a handful of times. We’re now sitting at the most inverted levels in the last 30 years for the spot 2s/10s swaps curve. But, caution against extrapolating that into the meaningful “recession predictor” that the street seems to love.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmh7vzBxAHa6kDEaATl4BkoVtEkKTR0TIJLpivRqfCs-AmN670SHMlTtQ7ETr6W865SQpVPAOzXfaytvBv9DKAqHv407SrSZQ_wfu1vtoEVJSbyabUGSVLUh15ipYpLjIgbh0T7C9XxB4G/s1600/2s10s+curve.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="930" data-original-width="1097" height="540" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjmh7vzBxAHa6kDEaATl4BkoVtEkKTR0TIJLpivRqfCs-AmN670SHMlTtQ7ETr6W865SQpVPAOzXfaytvBv9DKAqHv407SrSZQ_wfu1vtoEVJSbyabUGSVLUh15ipYpLjIgbh0T7C9XxB4G/s640/2s10s+curve.jpg" width="640" /></a></div>
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Here’s the same curve, but in Treasury space (not swaps). This is the curve that you’ll hear pundits hyperventilating over whenever it dips below 0 (which it did, ever so briefly, this morning).</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTBWIa9U0uFvfgYXw2JMDZzklTURw0R8qjlcizjUafN8kTXUt01Fas_f2-8X1JYPQljyZ89Obe75hqVxDxBPFnEKNH_RBXDDJYKkGoxE8enMK09ZRB1g91L3Lsf0GPvBlRqRfPhLuo7o9v/s1600/ust210.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="930" data-original-width="1097" height="540" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTBWIa9U0uFvfgYXw2JMDZzklTURw0R8qjlcizjUafN8kTXUt01Fas_f2-8X1JYPQljyZ89Obe75hqVxDxBPFnEKNH_RBXDDJYKkGoxE8enMK09ZRB1g91L3Lsf0GPvBlRqRfPhLuo7o9v/s640/ust210.jpg" width="640" /></a></div>
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There is a difficult causality to unravel here, but the bottom line is that – while over very long term horizons, it may seem causal to NBER-defined “recessions” – there’s no clear linkage. Here’s the last 21 times the curve has seen a weekly close that caused 2s/10s to go from positive to inverted – along with the SPX return over the following month. <b>There’s really nothing here.</b></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcks5lcEVw7iCmqmqE_AgXO4L1MLLiyemcOkNn2LkwdvMLdzc1Ny1R0MalcqHfDMqaxXQt360MuSovwNx8GmaBAVQ0zEzBTVYdZqi6PgNc_ooHLnldwIqyfZek2a6ocTAdtwQrRWge3NZq/s1600/spx1mth.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="768" data-original-width="408" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcks5lcEVw7iCmqmqE_AgXO4L1MLLiyemcOkNn2LkwdvMLdzc1Ny1R0MalcqHfDMqaxXQt360MuSovwNx8GmaBAVQ0zEzBTVYdZqi6PgNc_ooHLnldwIqyfZek2a6ocTAdtwQrRWge3NZq/s400/spx1mth.jpg" width="212" /></a></div>
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<b>3. Funding</b></div>
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One of the aspects of the financial crisis that was so devastating to the credit market was the fact that funding spreads experienced a seizure unlike anything they’d seen previously. Steps were taken in the aftermath to buttress the industry against this happening again, but we still see periodic flare-ups in funding markets that often precede meaningful volatility in other asset classes. The most popular measure of this to follow is the spread between bank borrowing rates (representing unsecured credit) & the overnight Fed rate (representing secured credit): LIBOR vs OIS, also referred to as FRA/OIS (FRA = forward rate agreement). When this spread widens, it indicates funding stress is present. <b>The Dec 19 future associated with this spread is now at its widest levels since early February 2018.</b></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQ4b_CxFbdccSCEbvbPI9HhQsz9u2tNKjxguv9ohS9MiSalpV5xrBOdjuMW2s4G_xLP8dQxkV06BcNlw6sPdpoK2BA38rSyHaMnBZ0pgn0p9E1PNuakUhB9_yar-FjoS3zt2fWuMI56USc/s1600/dec19_fraois.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="770" data-original-width="933" height="528" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQ4b_CxFbdccSCEbvbPI9HhQsz9u2tNKjxguv9ohS9MiSalpV5xrBOdjuMW2s4G_xLP8dQxkV06BcNlw6sPdpoK2BA38rSyHaMnBZ0pgn0p9E1PNuakUhB9_yar-FjoS3zt2fWuMI56USc/s640/dec19_fraois.jpg" width="640" /></a></div>
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We all know what happened after that to volatility in other asset classes.</div>
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<b>2. Positioning</b></div>
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Hedge funds are more long the front-end of the interest rates market right now than at any historical point on record. <b>Yes, rates are low – and the largest positions in the hedge fund community are setup to profit if they go even lower</b> (yellow line shows net position). </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEZf9aqxKKwtmDlqeYMTnsdT_DH7E1kS0njgyrxY2y4aro8Iqrliplc2rngPKeZhZLLbuTKHSW9hua1eDASIv1TH6mhcQxgI_J7TOxdKkErrfQncmSM4YyY9BhhhQIrsAEQy7K-BGHlQ7T/s1600/ed_cot.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="465" data-original-width="1217" height="244" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEZf9aqxKKwtmDlqeYMTnsdT_DH7E1kS0njgyrxY2y4aro8Iqrliplc2rngPKeZhZLLbuTKHSW9hua1eDASIv1TH6mhcQxgI_J7TOxdKkErrfQncmSM4YyY9BhhhQIrsAEQy7K-BGHlQ7T/s640/ed_cot.jpg" width="640" /></a></div>
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<b>1. Negative Rates</b></div>
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Negative Rates are to 2019 what Beanie Babies were to the 90s. They might be great for price appreciation during times like these, but if you’re expecting them to return your love in the way, say, a “positive” yielding investment will – you’re sadly mistaken.</div>
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That all being said. Consider this for a moment. The 0% coupon German 10yr note currently yields about negative 0.70%. It hasn’t yielded more than positive 1% since 2014. <b>But if you’d invested a million dollars in German 10yr bonds 6 months ago, you’d have made more in 6 months than you would make in interest on the US 10yr Treasury – from now until 2025.</b></div>
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The Federal Reserve tracks what’s called “Term Premium”. The best way to understand this is as a measure of what compensation you’re receiving (once you strip out all the effects of inflation & some other econometric factors) for owning Treasuries. This seems like a sensible measure to watch: if you’re getting 1.625% in interest for 10-year bonds, but the inflation rate is the same – then it’s not really all that much compensation you’re earning in the end.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwOmFSDPvtF_57S9yOj5nIuWk3T8WoPjpZMMJJYtlonYX2DjD6eOh8UMKBbpjSOAZ0LLJsylM_r7k5g3CWYfaxyL2wfSkQ4rWmpTDId55TJf3r7nuSgwJQHFn6tvV1IXN6c5v9eksLRkq3/s1600/termpremium.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="760" data-original-width="1600" height="302" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjwOmFSDPvtF_57S9yOj5nIuWk3T8WoPjpZMMJJYtlonYX2DjD6eOh8UMKBbpjSOAZ0LLJsylM_r7k5g3CWYfaxyL2wfSkQ4rWmpTDId55TJf3r7nuSgwJQHFn6tvV1IXN6c5v9eksLRkq3/s640/termpremium.jpg" width="640" /></a></div>
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<b>Currently, we’re at -1.21%. That’s <i><u>easily</u></i> the lowest since the Fed started tracking this in 1960.</b></div>
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<b>References: </b></div>
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NYFRB: <a href="https://www.newyorkfed.org/research/data_indicators/term_premia.html">https://www.newyorkfed.org/research/data_indicators/term_premia.html</a></div>
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CME Group: <a href="https://cmegroup.quikstrike.net/User/QuikStrikeView.aspx">https://cmegroup.quikstrike.net/User/QuikStrikeView.aspx</a></div>
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Bloomberg</div>
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<span style="font-size: x-small;"><i>Disclosure/Disclaimers: This material may contain indicative terms only, including but not limited to pricing levels. There is no representation that any transaction can or could have been effected at such terms or prices. Proposed terms and conditions are for discussion purposes only. Finalized terms and conditions are subject to further discussion and negotiation. OTC Derivatives Risk Disclosures: To understand clearly the terms and conditions of any OTC derivative transaction you may enter into, you should carefully review the terms of trade with your counterparty, including any related schedules, credit support documents, addenda and exhibits. You should not enter into OTC derivative transactions unless you understand the terms of the transaction you are entering into as well as the nature and extent of your risk exposure. You should also be satisfied that the OTC derivative transaction is appropriate for you in light of your circumstances and financial condition. You may be requested to post margin or collateral to support written OTC derivatives at levels consistent with the internal policies of your respective counterparty. I may have positions in assets mentioned above. I do not have plans to initiate any new positions within the next 72 hours. I wrote this post myself, the material is my own (except where sourced), and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any of the companies and/or organizations whose assets may be mentioned in this post. </i></span></div>
Unknownnoreply@blogger.comNew York, NY, USA40.7127753 -74.005972839.9423093 -75.296866299999991 41.483241299999996 -72.7150793tag:blogger.com,1999:blog-6762535844654777144.post-91492398666105349722019-08-13T14:53:00.002-07:002019-08-14T01:35:01.131-07:00Tidal Forces & Financial Markets<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6WQdz0k86HqvKttLssAE7CkP6o7tRSobOCBARyf0TtWmdXXHgJ2AP9rwVGZ812WCHfr3cV-yVUXNSFT6dQV5JYolQ6DNDvm-O73xO4KXo-FT8qCMheyMkjgFHHYiltb3f9IV5GhGRI86s/s1600/maxresdefault.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="720" data-original-width="1280" height="360" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6WQdz0k86HqvKttLssAE7CkP6o7tRSobOCBARyf0TtWmdXXHgJ2AP9rwVGZ812WCHfr3cV-yVUXNSFT6dQV5JYolQ6DNDvm-O73xO4KXo-FT8qCMheyMkjgFHHYiltb3f9IV5GhGRI86s/s640/maxresdefault.jpg" width="640" /></a></div>
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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. Trough to crest to trough to crest...<br />
<a name='more'></a>Since the Earth is about 80 times more massive than the Moon, with a radius about 4 times greater, the tidal force per unit mass of the Earth on the Moon is about 20 times stronger than that of the Moon on the Earth. Thus, while the extent of the tidal force on Earth is limited to the observance of tides, the extent of the force on the Moon is to lock its rotational period - which is why we will only ever see about 59% of the Moon in the night sky (the other 9% being due to other, very slight, perturbations in inclination known as libration).<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLfkU0gKh3xqxi8y9xysumReuPi1RgUKxXE7rl0-hRwiMXmWMvgI3UpNl00YIx-u6QAwIVnBkdk2jTmk9G8qN03acyJiMUw_a5nuGdr41wOUhIjMdbv-GcZJfmeLveOVrc6e3o0nSzKJQe/s1600/220px-Lunar_libration_with_phase_Oct_2007_450px.gif" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="220" data-original-width="220" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLfkU0gKh3xqxi8y9xysumReuPi1RgUKxXE7rl0-hRwiMXmWMvgI3UpNl00YIx-u6QAwIVnBkdk2jTmk9G8qN03acyJiMUw_a5nuGdr41wOUhIjMdbv-GcZJfmeLveOVrc6e3o0nSzKJQe/s400/220px-Lunar_libration_with_phase_Oct_2007_450px.gif" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Our neighbor, exhibiting both longitudinal & latitudinal libration - simulated view over 1 month.</td></tr>
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The tidal force felt by the Earth has caused not just the effects on coastal regions with which we're well-acquainted, it's also caused the length of the terrestrial day to increase by about 2 hours in the past 600 million years as torque is exerted due to unequal distribution of gravitational effects. This would, in an otherwise closed system, continue until the Moon & the Earth were tidally locked: the rotational period of the Earth would match the orbital period of the Moon, causing our familiar satellite to remain fixed in the same position in the sky & days to lengthen to months.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzZg8TopzEPLOX4iz7ryxltqsefTy30shf2e9k_6HdW8UVFD4D0HIJF7cicQHx7Z80Osln52dvygOuUeJqqp0bqZy46b_zBD7gD6hWSgEIXFpMFtvQitW4EgH2mNLTOUKHbj8MH9rz8a5s/s1600/QHa48A6.gif" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="411" data-original-width="500" height="526" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjzZg8TopzEPLOX4iz7ryxltqsefTy30shf2e9k_6HdW8UVFD4D0HIJF7cicQHx7Z80Osln52dvygOuUeJqqp0bqZy46b_zBD7gD6hWSgEIXFpMFtvQitW4EgH2mNLTOUKHbj8MH9rz8a5s/s640/QHa48A6.gif" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Two views of the Seven Sisters, near Eastbourne.</td></tr>
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But, unfortunately, this won't come to pass - because this is literally a three-body problem & the endgame will be dictated by the Sun. Well before tidal locking can come to pass, the expansion of the Sun as its life-cycle comes to a close will cause a drag to be exerted on tidal acceleration. As the Sun transitions to a red giant, the atmospheric drag created will cause the Moon's orbit to rapidly decay.<br />
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The pull of the Earth's gravity will take hold & spin the Moon ever-closer. At this point, our pock-marked solar companion will be a mass of craters that takes up a quarter of the sky - until it reaches an orbital distance of just under 11,500 miles, versus its currently observed 238,856 mi. At this point, an event of cataclysmic proportions takes place to end the life of our celestial partner.<br />
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At this point, the gravity holding the Moon together will be exceeded by the tidal forces which act to pull it apart. In an event made even more awesome by the vast swath of the sky taken up by the Moon, it will be torn apart in a monumental seizure that displaces a Saturn-like ring around the Earth.<br />
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That's short lived, however - in all likelihood the smaller fragments will begin raining down on the planet in a meteor shower a million times over. Life at this point will be long gone already, but shortly thereafter the Earth itself will be consumed by the expanding Sun, a final coda on the planet that's been home to the entirety of human existence.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimm7-JdGVq2A_7HEd6pdkSZ6GSHhLr-dWiq6wfoQ0UGfcofjV2W4o3ALE8Cdmjk08wGkwo0NpbkfnAwNFduOnyJeSDj7GFXNVELMpkzkxApgtG2WFqInbVDPZqrkVzUwPUMGpeqlB18tKS/s1600/a-still-from-the-movie-oblivion-depicting-a-shattered-moon.jpeg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="843" data-original-width="1600" height="336" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEimm7-JdGVq2A_7HEd6pdkSZ6GSHhLr-dWiq6wfoQ0UGfcofjV2W4o3ALE8Cdmjk08wGkwo0NpbkfnAwNFduOnyJeSDj7GFXNVELMpkzkxApgtG2WFqInbVDPZqrkVzUwPUMGpeqlB18tKS/s640/a-still-from-the-movie-oblivion-depicting-a-shattered-moon.jpeg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Death by Moon, "Oblivion".</td></tr>
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The force which today we see as just the predictably casual ebb & flow of oceans, ultimately becomes that which dictates the destruction of the Moon in a global hailstorm of fire.<br />
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The evolution of a microscopic relationship that pushes & pulls before ultimately transforming into a cataclysm of epic proportions is analogous beyond the life-cycle of our nearest & dearest celestial neighbor. The inherent instability of such a system is a classical example of the <i>n</i>-body problem, for which there is no general analytical solution. Except in very special cases, the motion of the bodies involved is generally non-repeating.<br />
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkuwcHmtEf8gJp3lFefimHx6TzGRVUZoaqs5qpkAmfWUQYC-ME3gP3igkvfaGLZDUk2gzQYpAaZgaceL397ySVJYi849sPNhW6Amf6KVzI9XU_jiGRqkD41Ob2hOLpjF5mVf4WKgxVMp6L/s1600/400px-Three_body_problem_figure-8_orbit_animation.gif" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="160" data-original-width="400" height="160" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkuwcHmtEf8gJp3lFefimHx6TzGRVUZoaqs5qpkAmfWUQYC-ME3gP3igkvfaGLZDUk2gzQYpAaZgaceL397ySVJYi849sPNhW6Amf6KVzI9XU_jiGRqkD41Ob2hOLpjF5mVf4WKgxVMp6L/s400/400px-Three_body_problem_figure-8_orbit_animation.gif" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">An example of a very special three-body solution, with an exceptionally small domain of stability.</td></tr>
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Atmospheric instability is an example of one such system, so are financial markets. There may be a constant observable "gravitational pull" between two entities or asset classes, but there's no closed-form solution that's arbitrage-free. Hence, diversification is seen as a virtue & correlations, except in times of extreme stress, carry a certain predictability - waxing & waning between intertwined assets.<br />
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At extremes, however, this tug of war begets system stress. Rising correlations are not always a harbinger of market drawdowns, but recent observational evidence does seem to suggest an observed rise in correlations may indeed be caused by herd-like behavior that accompanies generalized, directional activity. When global equity markets key off only a few inputs (or, one), this leads to systemic instability, especially when these inputs have high realized volatility. Recent examples include the Turkish Lira in the fall of 2018, or the Chinese Yuan now.<br />
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUSyFm9Ct7UeQWgMI-015SgoUVOU2canXiESBsnStYsOsFoRYSV4ZDXruQuK5MwBdvCtsVu3nUF69xaUtTayy_Bj_yiCEaGisr-Ph-kvSJMRM-FC9HNaXOkI0ch36svkVUDEVpeCXajGNP/s1600/model_actual_spx.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="335" data-original-width="1034" height="206" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgUSyFm9Ct7UeQWgMI-015SgoUVOU2canXiESBsnStYsOsFoRYSV4ZDXruQuK5MwBdvCtsVu3nUF69xaUtTayy_Bj_yiCEaGisr-Ph-kvSJMRM-FC9HNaXOkI0ch36svkVUDEVpeCXajGNP/s640/model_actual_spx.jpg" width="640" /></a></div>
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Measures of cross-asset correlations on a micro-level have increased to exceptionally high levels. Hourly correlations between equities, fixed income, commodities & currencies are at their highest levels since last December's collapse in risk assets, sitting at well north of 90% for key relationships. US equity markets, gold, CNH & rates are now intertwined on an hourly basis in excess of 95%. That's not a good thing when a single spark could cause a large move in any one.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhVfIG1mCNM9CL9f5nQTAIcKQnfDKOw3nlR12fRIHZ2yx7azdZ6uYE74089nk8KhD_-yJrsHIfFc2_ItVa-cDhA2fS2xtepOBQCWfsGxWIo5fIjvvIKn_tWbF5ivdNZcCt7mv1p6rCV28kY/s1600/crossasset_correlations_moon.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1044" data-original-width="1600" height="416" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhVfIG1mCNM9CL9f5nQTAIcKQnfDKOw3nlR12fRIHZ2yx7azdZ6uYE74089nk8KhD_-yJrsHIfFc2_ItVa-cDhA2fS2xtepOBQCWfsGxWIo5fIjvvIKn_tWbF5ivdNZcCt7mv1p6rCV28kY/s640/crossasset_correlations_moon.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Avg Hourly Correlation (rolling 24-hour lookback) for SPX vs CNH, Gold, FFF0.</td></tr>
</tbody></table>
However, it could be a very good thing if you had an idea of the predictable range one asset class might follow. That's rarely the case, however, unless one or more external forces are allowed to dictate prices. In the case of the rates market, due to the intervention of the Federal Reserve, this is the current reality.<br />
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Below is a histogram that shows the distribution of market-implied policy action in 2019, in basis points. At one extreme is 0, the amount of time the market has anticipated no action by the Federal Reserve this year. At the other extreme is -100, or the amount of time the market has judged the Federal Reserve likely to enact 4 cuts of 25bps each (or 2 cuts of 50bps, etc).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcuZScUUKMevudU_4CKnEoVdKRu69eIC2Dt9fTp3q4eDBgNGZlrWl-ZEwv7TLXH4NbjeH2tqCFdwJEKZrfCLeFxsUgtPBkIHLPTxVdzCXv027M0VJonk6v050sOfVrM0-00NPywqNZMDrt/s1600/distribution_moon.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1054" data-original-width="1345" height="500" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhcuZScUUKMevudU_4CKnEoVdKRu69eIC2Dt9fTp3q4eDBgNGZlrWl-ZEwv7TLXH4NbjeH2tqCFdwJEKZrfCLeFxsUgtPBkIHLPTxVdzCXv027M0VJonk6v050sOfVrM0-00NPywqNZMDrt/s640/distribution_moon.jpg" width="640" /></a></div>
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In the middle is -50, the amount of the time the market has anticipated the Fed will cut just twice this year. Interestingly, the shape of the distribution forms around two anticipated outcomes. One which groups loosely around only one cut this year, another grouped around the implication of three cuts this year. Oddly enough, there's very little middle-ground that's covered. This effect is captured by the ongoing debate between "mid-cycle adjustment" and a more traditional turn in the business cycle that necessitates successive Fed action. </div>
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Currently, we sit at the far right of the histogram - about 3.5 cuts total priced for 2019 (or an additional 2.5 following July's action). It's conceivable that we could return very easily to the -75 region within the next week or so as the Damoclean threat of tariffs is delayed. That very region was exactly where we sat when equities last tested the highs, SPX at 3000. </div>
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It's not at all clear, however, that further reduction in the number of cuts priced this year will yield much in the way of price appreciation for equities. Bouncing back to the lower gravitational well of only one cut this year (which we've already realized) would mean removing further stimulative effects from policymakers this year. While the threat of tariffs remain & the economic slowdown that has galvanized policymakers from Frankfurt to Auckland persists, risk assets still thirst for additional easing to maintain their current altitude.<br />
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<i><span style="font-size: x-small;">Disclosure/Disclaimers: This material may contain indicative terms only, including but not limited to pricing levels. There is no representation that any transaction can or could have been effected at such terms or prices. Proposed terms and conditions are for discussion purposes only. Finalized terms and conditions are subject to further discussion and negotiation. OTC Derivatives Risk Disclosures: To understand clearly the terms and conditions of any OTC derivative transaction you may enter into, you should carefully review the terms of trade with your counterparty, including any related schedules, credit support documents, addenda and exhibits. You should not enter into OTC derivative transactions unless you understand the terms of the transaction you are entering into as well as the nature and extent of your risk exposure. You should also be satisfied that the OTC derivative transaction is appropriate for you in light of your circumstances and financial condition. You may be requested to post margin or collateral to support written OTC derivatives at levels consistent with the internal policies of your respective counterparty. I may have positions in assets mentioned above. I do not have plans to initiate any new positions within the next 72 hours. I wrote this post myself, the material is my own (except where sourced), and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any of the companies and/or organizations whose assets may be mentioned in this post. </span></i></div>
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Unknownnoreply@blogger.comtag:blogger.com,1999:blog-6762535844654777144.post-33447476413409729462019-08-12T11:30:00.000-07:002019-08-13T08:53:18.682-07:00Odds of another 100bps or more this year? 1 in 5.<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRCWVqb9f3Int1uwJwGlbuHlrkVHXfRDcoo01MjlUqK3awB6lHTW5jWnZZANzDzO3v8QCaJ6AIn3l2tJSyvXiYHp3Jc2SdoYtRbC8cOnAAJfsMrCL73JBECxQAX7HaejmBT1mIkdqhM5c7/s1600/jerome-powell-e1546618250729.jpg" imageanchor="1"><img border="0" data-original-height="600" data-original-width="1200" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRCWVqb9f3Int1uwJwGlbuHlrkVHXfRDcoo01MjlUqK3awB6lHTW5jWnZZANzDzO3v8QCaJ6AIn3l2tJSyvXiYHp3Jc2SdoYtRbC8cOnAAJfsMrCL73JBECxQAX7HaejmBT1mIkdqhM5c7/s640/jerome-powell-e1546618250729.jpg" width="640" /></a></div>
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I mentioned this morning that the options market was beginning to make some pretty exceptional progress on the way to pricing in 50bps+ at the September meeting. What's even more significant, in my mind, is what the market has done to the odds of additional easing in 2019. We're now 1 in 5 odds that the Fed delivers an <i>additional</i> 100bps by year-end.<br />
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<a name='more'></a><br />
<b><u>September: </u>Options Market-Implied probability of >25bps cut at September FOMC now about 75% (left of red line, was <10% day of July FOMC). OTC options mkt has odds of Fed unchd in September same as 75bps cut.</b><br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHxnImwmQg8_GIVkrKmzCzSWnIhPsgaipym9GF6ofhBQ4wN0Yj7JzAKu7JqSZZ2Np8wY0vtDcd0hdzOy_RtQPciB-E1mvrPSu7Bvi95aSnrSngNEoPygdAzCnTp_g_lv17rMOm84ytn97O/s1600/Sep_FOMC_Probabilities.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="803" data-original-width="1600" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHxnImwmQg8_GIVkrKmzCzSWnIhPsgaipym9GF6ofhBQ4wN0Yj7JzAKu7JqSZZ2Np8wY0vtDcd0hdzOy_RtQPciB-E1mvrPSu7Bvi95aSnrSngNEoPygdAzCnTp_g_lv17rMOm84ytn97O/s640/Sep_FOMC_Probabilities.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Odds calculated using the Eurodollar & OTC swaption mkt, fwd FRA/OIS spreads & fitted Fed Funds curve.</td></tr>
</tbody></table>
<b><u>December:</u> Options Market-Implied probability of at least 100bps additional cuts between now & the end of the year is about 20%. That's increased four-fold over the past two weeks. At the current pace of transformation to the probability distribution, we'll be pricing in odds of zero rates by the end of the month. </b><br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAsWPXlpFzXp0tz2cDU6y4dgsmTiSTyQ8XZ0B7ltp8cjGMpaFoPQ3aK5rEJrraydTaE3JiC6DcmIj5lbpIxAxqMUUY05cDcZXmgivmV1B55VyePoBEn2_qmnPLjnDP9opXD03lidy12Bn2/s1600/decfomc_prob.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="803" data-original-width="1600" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgAsWPXlpFzXp0tz2cDU6y4dgsmTiSTyQ8XZ0B7ltp8cjGMpaFoPQ3aK5rEJrraydTaE3JiC6DcmIj5lbpIxAxqMUUY05cDcZXmgivmV1B55VyePoBEn2_qmnPLjnDP9opXD03lidy12Bn2/s640/decfomc_prob.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Odds calculated using the Eurodollar & OTC swaption mkt, fwd FRA/OIS spreads & fitted Fed Funds curve.</td></tr>
</tbody></table>
<i>For those looking for a more detailed way of thinking about "odds", a brief practitioners' guide below. </i><br />
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First, the September "odds". The simplistic way to think about the pricing of odds for Fed cuts at upcoming meetings is to look at how many basis points lower that rate is versus the current spot rate. Right now, here's what those rates look like vs the 1-month "spot" rate.<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2EQ70PeYXj3lSlrb3H-rCsF20DIhWQ-xSNqkxZHihIImjzhi6PyOW3EK6GxMyMpIJOt_xQQof0OCa60Wt6VXSlMiadtxUvRcV26eo27iM63MrOOyffWuxmNaOclV21jmCx8Rb_dvBKh9Y/s1600/mtg+bps.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="96" data-original-width="198" height="152" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh2EQ70PeYXj3lSlrb3H-rCsF20DIhWQ-xSNqkxZHihIImjzhi6PyOW3EK6GxMyMpIJOt_xQQof0OCa60Wt6VXSlMiadtxUvRcV26eo27iM63MrOOyffWuxmNaOclV21jmCx8Rb_dvBKh9Y/s320/mtg+bps.png" width="320" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">What's currently priced into each of the 3 upcoming FOMC meetings.</td></tr>
</tbody></table>
In other words, the September FOMC is pricing in a total of 34.5bps, the October meeting is pricing in just over 2 "cuts" between now & then, and the December meeting is priced for just under 3 "cuts".<br />
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What's crucially important is this: just because the September FOMC has 34.5bps priced in, that doesn't mean that there's a 62% chance of a 25bps cut & a 38% chance of a 50bps cut.<br />
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If that were true, then that would mean you'd need to think there was 0% chance of the Fed staying on hold (it's low, to be sure, but nothing's 0% until it's realized) *and* more importantly 0% chance of the Fed cutting by any more than 50bps. Clearly, that can't be the case either. The Fed has routinely cut by more than 50bps in a crisis (the GFC, for example) and they will again. There's a better way of doing this, and it involves using the options market.<br />
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Using current Fed Funds curves & fwd FRA/OIS, we can fit all possible Fed "paths" between now & the end of this year to current mkt pricing of the Eurodollar & OTC swaption mkt. The resulting probability distribution returns a shape of the fwd OIS curve for each meeting.<br />
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Understanding I've likely lost 99% of the audience there, I'll leave further discussion for another time.<br />
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References:<br />
<a href="https://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund_quotes_settlements_futures.html">https://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund_quotes_settlements_futures.html</a><br />
<a href="https://www.cmegroup.com/trading/interest-rates/stir/eurodollar_quotes_globex_options.html">https://www.cmegroup.com/trading/interest-rates/stir/eurodollar_quotes_globex_options.html</a><br />
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<br />Unknownnoreply@blogger.comNew York, NY, USA40.7127753 -74.005972839.9423093 -75.296866299999991 41.483241299999996 -72.7150793tag:blogger.com,1999:blog-6762535844654777144.post-69331899495865864472019-08-09T06:50:00.000-07:002019-08-09T10:05:31.466-07:00Drug Addiction & the Stock-Bond Feedback Loop<div class="separator" style="clear: both; text-align: center;">
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOg2XTaV0qAtUJ9-2QfLqS0cJpmVJFGFj4pGafzgrdGCboA9me_L2TFy3qQxCJpklAQ7s-qaOlq0E6NFCTAEYu5W4w8zMwydMMBf3zPBKdQWztgyXysISGcyeoHXuiZ7_RJdPaMgc2DTzR/s1600/hq2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="331" data-original-width="1169" height="181" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOg2XTaV0qAtUJ9-2QfLqS0cJpmVJFGFj4pGafzgrdGCboA9me_L2TFy3qQxCJpklAQ7s-qaOlq0E6NFCTAEYu5W4w8zMwydMMBf3zPBKdQWztgyXysISGcyeoHXuiZ7_RJdPaMgc2DTzR/s640/hq2.png" width="640" /></a></div>
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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.<br />
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<u><i><b>Let's be clear on one thing: the equity market has only managed meaningful recoveries when the odds of Fed easing are on the rise. Not the other way around. </b></i></u></div>
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Drug addiction teaches us that, particularly in cases involving an excessive amount of stimulant, the brain releases dopamine in excess. That, in turn, causes a feedback loop to develop: mu receptors (a class of opioid receptors) are over-excited, causing them to shut down dopamine production. The physical response is withdrawal, leading to more & more stimulus required for a release of dopamine. This dysphoria is what causes addicts to seek out more of the drug, in a vain search for that initial "high".</div>
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<b>Here's a chart showing the percentage of time we've spent at various degrees of additional implied easing for the September FOMC, over the last month - once a full cut was priced for the July FOMC.</b></div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiCFnq2_-0mH20qJuzHcQmgCzM-qsRxHSVWxrhyphenhyphenWfuUrW1dkErL_6NoIvQemUaOxdRYwuzeN4VKhLQ1rYBy7hKD7Z0VOtaP1tea5F_vm8dr3CB36Q3eteGNadbcp9vWL-lqsxZlEG9LpfS/s1600/sepfomc.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1000" data-original-width="1500" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhiCFnq2_-0mH20qJuzHcQmgCzM-qsRxHSVWxrhyphenhyphenWfuUrW1dkErL_6NoIvQemUaOxdRYwuzeN4VKhLQ1rYBy7hKD7Z0VOtaP1tea5F_vm8dr3CB36Q3eteGNadbcp9vWL-lqsxZlEG9LpfS/s640/sepfomc.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">% of time spent at various degrees of easing expected at the September FOMC</td></tr>
</tbody></table>
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Note that the shape of the distribution shows really 2 key "humps". One small hump between 30-35bps (i.e. slightly more than one 25bp cut), and one much larger hump between 20-25bps (i.e. slightly less than one 25bp cut). Currently, we're sitting at 32bps, meaning that the market is pricing in a little more than one 25bp cut in September.</div>
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<b>Meanwhile, the December FOMC doesn't look too dissimilar. We've spent the majority of the time pricing two outcomes for the Fed: one where they ease by just under 50bps, one where they ease just under 75bps. </b></div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhz-I069e7g2mV_8yAFazdAVISEZiW4LiVJtl7Ieqnir_bQTlRMeci82IkdCClS6JYbuRXBfq7lvWAY_6jHxsvFJFbXVC5JjXcBR2-9CNW9sMhTshK2IZkT3Yll90Qvs0nvZAIPlZAp0BB3/s1600/decfomc.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="998" data-original-width="1497" height="426" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhz-I069e7g2mV_8yAFazdAVISEZiW4LiVJtl7Ieqnir_bQTlRMeci82IkdCClS6JYbuRXBfq7lvWAY_6jHxsvFJFbXVC5JjXcBR2-9CNW9sMhTshK2IZkT3Yll90Qvs0nvZAIPlZAp0BB3/s640/decfomc.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">% of time spent at various degrees of easing expected at the December FOMC</td></tr>
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What's concerning, however, is what these charts look like when you overlay the distribution of "what's priced in" for the FOMC & equity market returns. </div>
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See below: cumulative SPX returns vs "what's priced in" for the September FOMC.</div>
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDwQ83k0i7noE9Gx7yeqCXQCz0uDuY-C_N384MbUTGqB3lhXCbMeEkQVFGqqbx0SBuzSndqO5AYN_FWGV3e-Y7LxSUqp77_ymOQKIjZHPj5u_7BLW2aHuM1S9vZIsB_jagzHCtGgjJnmnO/s1600/sepfomc_vs_spx.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1410" data-original-width="1506" height="598" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhDwQ83k0i7noE9Gx7yeqCXQCz0uDuY-C_N384MbUTGqB3lhXCbMeEkQVFGqqbx0SBuzSndqO5AYN_FWGV3e-Y7LxSUqp77_ymOQKIjZHPj5u_7BLW2aHuM1S9vZIsB_jagzHCtGgjJnmnO/s640/sepfomc_vs_spx.jpg" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Histogram of cumulative SPX returns over the last month at various degrees of easing expected at the Sep FOMC.</td></tr>
</tbody></table>
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In other words, the majority of positive SPX returns have taken place when the promise of central bank easing is on the rise. Not the reverse. In fact, since we're now priced for MORE than 25bps of easing at the September FOMC, this means that the Fed is being pushed towards an outcome where they have to deliver 50bps - <i>in order to keep equity markets on the rise. </i></div>
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<i><br /></i></div>
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If not, then the realistic best case scenario is that stocks sell-off & then the Fed is pushed again towards promising more easing (one can easily envision a scenario where QE4 is unveiled as a response) in December. <b><i><u>In that sense, equity markets are rooting for yields to continue to head lower. When they stop heading lower or reverse altogether as investors contemplate the reality of what negative yields mean, that's the proverbial Minsky moment for equities. </u></i></b></div>
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<b>Bottom line: without another "hit", the equity market doesn't have a lot of positive news to look forward to. And that's a bad thing for independent central banks. </b><br />
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Sources: Bloomberg. Pricing uses active Federal Funds futures contracts, as of 8/8/19.</div>
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Unknownnoreply@blogger.comNew York, NY, USA40.7127753 -74.005972839.9423093 -75.296866299999991 41.483241299999996 -72.7150793tag:blogger.com,1999:blog-6762535844654777144.post-48014925790699941342019-08-07T08:08:00.002-07:002019-08-07T10:02:58.785-07:00Yes, We are Pricing Odds of an Emergency CutAt its most extreme this morning, I'd estimate the mkt was pricing in almost 10% probability of a 25bp cut by the Fed <i>tomorrow</i>. How do I figure? It's based on FFQ9 (August Fed Funds futures).<br />
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<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuzt6O_WD1G9Mu2BpJuNPrTp9QrdWoUujj2lSfbinB-Patfl8j8QvXYMT4ltWlnneSwGQoMlmoWnMWNCOVnF31MATDZ8IGSr9XI2L9-wEIYdB8t4r0qnwPMIRu932XCgPmUpyHz7WjxtzU/s1600/ffq9.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="135" data-original-width="412" height="130" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjuzt6O_WD1G9Mu2BpJuNPrTp9QrdWoUujj2lSfbinB-Patfl8j8QvXYMT4ltWlnneSwGQoMlmoWnMWNCOVnF31MATDZ8IGSr9XI2L9-wEIYdB8t4r0qnwPMIRu932XCgPmUpyHz7WjxtzU/s400/ffq9.jpg" width="400" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><i>WARNING: This will involve some basic math.</i></td></tr>
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FFQ9 is the 30-day August Federal Funds futures contract. It's priced as a simple average of Daily Effective Federal Funds Rate (hereafter "EFFR") for each day of the month. That rate is published in arrears (i.e. what's published today is yesterday's rate) on a daily basis at 9:00am EST by the New York Fed. It's currently 2.13% (3bps over IOER).<br />
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<i>IMPORTANT NOTE: There's an extremely large number of realistic possible outcomes, including those where IOER continues to drift lower. There are reasons relating to the plumbing of the money markets that make this unlikely, but it's a possibility. I'm only addressing the one which is most pressing: the market-implied probability of an emergency Fed ease. </i><br />
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<b>Here's a table showing how this daily calculation works with 3 different scenarios which I'll discuss in more detail below. </b><br />
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj17QJfDa5nv7CUlTYViZ0n9p8BUxFbublCtq1iZ7Zhc886vvtbfM9Kx1IW3319-hbiqxDtYCxGPNsDyUmxsGve0cagBcmU7T71Hg6sudIjXLf-_BUOk8jTzG76b67Lw9EUUzHvptKMYTDX/s1600/ffq9_days.jpg" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="1102" data-original-width="520" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj17QJfDa5nv7CUlTYViZ0n9p8BUxFbublCtq1iZ7Zhc886vvtbfM9Kx1IW3319-hbiqxDtYCxGPNsDyUmxsGve0cagBcmU7T71Hg6sudIjXLf-_BUOk8jTzG76b67Lw9EUUzHvptKMYTDX/s640/ffq9_days.jpg" width="299" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><i>No color = days we already know, Orange = future days (we don't know today's rate yet), Red = assumes the Fed cuts</i></td></tr>
</tbody></table>
EFFR has been trading anywhere from flat vs IOER to 5bps over for the better part of the last 6 months. When the Fed cut rates on July 31, EFFR went down by 26bps - from 2.40% to 2.14%. It stayed at 2.14% for the first two business days of the month, then went to 2.13%.<br />
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Because EFFR stayed at 2.14% on Friday August 2nd, that means according to the calculation methodology that the first 4 days of the month (i.e. the non-business days of Sat & Sun) also get counted as 2.14%. Therefore, assuming the Fed doesn't do anything the rest of the month, the fair value of FFQ9 would be calculated as the simple average of 4 days at 2.14% and 27 days at 2.13%. Therefore price = 100 - rate = 97.86871.<br />
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But FFQ9 traded at 97.885 this morning! So what gives?<br />
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<b>Clearly the mkt is pricing in some probability of EFFR being much lower that 2.13% at some point this month. But when? Emergency eases are just that: "emergencies". They're not telegraphed ahead of time or scheduled. So, we can only calculate probabilities by making an assumption about the day of the cut. </b><br />
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Let's take an example. Say the Fed cuts by 25bps on the last Thursday of the month (8/29), for whatever reason. EFFR only falls on the day AFTER a Fed cut (it wouldn't take effect the same day), so we'd have two days of 2.13% - 25bps = 1.88% (8/30 & 8/31). Under that scenario FFQ9 = 97.88484. Close to current market pricing. But that's assuming a 100% probability of a cut on 8/29. Markets don't work in 0% or 100% probabilities. It's frequently something in between. So then, what's the probability of the Fed cutting 25bps TOMORROW?<br />
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If the Fed cut 25bps tomorrow, that would mean we'd have 4 days of 2.14%, 4 days of 2.13% (both today - which we don't know yet - and tmrw would be 2.13% along with Monday & Tuesday's rates), and 23 days of 1.88%. That price works out to 98.05419. Given that, we can work out what the probability assigned to this outcome should be.<br />
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If "no cut" = 97.86871 and "25bp cut tmrw" = 98.05419, we can work out what a market price of 97.885 implies. That is:<br />
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97.885 = 98.05419 * X + 97.86871 * (1 - X), where X = probability of a cut tmrw.<br />
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<b>By applying a little elementary algebra, X = 8.78% or ~9%. </b><br />
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Now, clearly, there's a lot at work here. The market has to price in all possible paths of cuts which could theoretically take place on any day (including a weekend, in theory, which would cause EFFR to take effect at the lower rate on the following Monday). As I'm writing this, FFQ9 has ticked back lower, suggesting that the market is assigning less probability to a forthcoming emergency ease. But it's clearly a fluid situation. SPX another -5% might alter the entire calculus.<br />
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<b>Also, EFFR could drift lower relative to IOER. I would emphasize "could". We "could" also drift higher. The odds of those events are roughly offsetting, to be conservative. We spent the last month trading closer to 5bps over IOER (which, if applied to the scenario for the rest of this month, would imply an even higher mkt-implied probability for emergency Fed action). </b><br />
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References:<br />
Fed published rates: <a href="https://apps.newyorkfed.org/markets/autorates/fed%20funds">https://apps.newyorkfed.org/markets/autorates/fed%20funds</a><br />
Calculation of EFFR: <a href="https://www.newyorkfed.org/markets/obfrinfo">https://www.newyorkfed.org/markets/obfrinfo</a><br />
Settlement details: <a href="https://www.cmegroup.com/trading/interest-rates/settlements.html">https://www.cmegroup.com/trading/interest-rates/settlements.html</a><br />
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<br />Unknownnoreply@blogger.comtag:blogger.com,1999:blog-6762535844654777144.post-39004208912076946662019-08-05T05:22:00.000-07:002019-08-06T14:39:38.451-07:00Cut Odds Rising<!--[if !mso]>
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 5"/>
<w:LsdException Locked="false" Priority="10" QFormat="true" Name="Title"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Closing"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Signature"/>
<w:LsdException Locked="false" Priority="1" SemiHidden="true"
UnhideWhenUsed="true" Name="Default Paragraph Font"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Message Header"/>
<w:LsdException Locked="false" Priority="11" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Salutation"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Date"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 9"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
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<br />
<div class="MsoNormal">
<b style="mso-bidi-font-weight: normal;"><span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">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. <o:p></o:p></span></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">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 <b style="mso-bidi-font-weight: normal;">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. <o:p></o:p></b></span></div>
<div class="MsoNormal">
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjC7SvhHKWNCS6Ux4ehWsuCF3jGRZfp0FGFzGmZF11vF8UfMjk5VpH4BjbR8bjZoQpQ_r2QsMuYks3NlV8BMy62ZMg2Ub5TT6n6IjAZMgn88RsNrRKTPzjtGm2E8KYLvhbetzyFj9O8fi0a/s1600/tidal1.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="548" data-original-width="1125" height="308" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjC7SvhHKWNCS6Ux4ehWsuCF3jGRZfp0FGFzGmZF11vF8UfMjk5VpH4BjbR8bjZoQpQ_r2QsMuYks3NlV8BMy62ZMg2Ub5TT6n6IjAZMgn88RsNrRKTPzjtGm2E8KYLvhbetzyFj9O8fi0a/s640/tidal1.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Market-implied odds using the Eurodollar options surface, fitted Fed Funds curve & fwd FRA/OIS spreads.</td></tr>
</tbody></table>
<br />
<span style="font-family: "avenir book"; font-size: 10pt;"></span><br />
<a name='more'></a><span style="font-family: "avenir book"; font-size: 10pt;"><br /></span><br />
<span style="font-family: "avenir book"; font-size: 10pt;">Here are what the options market assign as the
likeliest outcomes for the Fed this year (there are other possibilities, obviously
– these are the most likely as defined by current options skew):</span><br />
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-CPSMMRpBB0unt4S76PmKkzkCI-bvOkqwWBAXaskSI8sU7xPUmIJoAAIhzwLGoxmlO689g0WKWXg-yUEg-BCtt2qnUNRoD_AEpiDbzBmrTFpdAOZk-c0dbZjPYavrxHqardslxrF4unAS/s1600/tidal2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="655" data-original-width="609" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-CPSMMRpBB0unt4S76PmKkzkCI-bvOkqwWBAXaskSI8sU7xPUmIJoAAIhzwLGoxmlO689g0WKWXg-yUEg-BCtt2qnUNRoD_AEpiDbzBmrTFpdAOZk-c0dbZjPYavrxHqardslxrF4unAS/s640/tidal2.png" width="594" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">Last week played host to price action that was truly
historic in the bigger picture. On Wednesday, <b style="mso-bidi-font-weight: normal;">both equities & gold sold off by more than 1% & the front-end
of the Treasury curve sold off as well. That’s the first time ever the Fed has
managed that on the same day as they’ve announced a cut in policy rates.</b> Oh,
and lest we forget, the dollar also strengthened on a trade-weighted basis. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhStuhyphenhyphenuHqLd_xq1496MSvDPGhAV6yTiuXnX03ZYPGsDERQsWCwoLnjqyfcvN4kU3j7HZsxCPu96VjQQD6_RtufE5PJAzisuweJOF4tgqW73XQYH7zyZVrTloRdgpoqibkLyNaTwxhiT1W2/s1600/tidal1.2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="281" data-original-width="477" height="376" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhStuhyphenhyphenuHqLd_xq1496MSvDPGhAV6yTiuXnX03ZYPGsDERQsWCwoLnjqyfcvN4kU3j7HZsxCPu96VjQQD6_RtufE5PJAzisuweJOF4tgqW73XQYH7zyZVrTloRdgpoqibkLyNaTwxhiT1W2/s640/tidal1.2.png" width="640" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">Obviously, that front-end sell-off didn’t last long. In
the long-term historical context, the 25bp+ rally we’ve seen in 2-year yields
in the 3-day period AFTER the day of a Fed cut is not without precedent. But <b style="mso-bidi-font-weight: normal;">the last time since the start of the 1990s
that we got a larger rally in absolute terms was in early 2001 – when yields
were close to 5% (they followed that one up with another cut the same month,
and then another 9 before the calendar year was up). <o:p></o:p></b></span></div>
<div class="MsoNormal">
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKwwhe5WM8MjfmDpCgOA6Orwx3jRL_bn45AP23VYM9L5zl_Vo7JtSP0gpWi8yMh2aCBdHsY9PrPmTA_Rm219rbNi3Jus4nW1s6TptBU6mSr2qDuMQpJSqOgAPqUwhKcWqC0rNDSXpEQsYj/s1600/tidal4.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="586" data-original-width="693" height="539" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiKwwhe5WM8MjfmDpCgOA6Orwx3jRL_bn45AP23VYM9L5zl_Vo7JtSP0gpWi8yMh2aCBdHsY9PrPmTA_Rm219rbNi3Jus4nW1s6TptBU6mSr2qDuMQpJSqOgAPqUwhKcWqC0rNDSXpEQsYj/s640/tidal4.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Blue = number of times we've seen lower yields (negative) or higher yields (positive) since 1990 after a Fed cut. Orange = number of times implied by a standard normal distribution model.</td></tr>
</tbody></table>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><o:p><br /></o:p></span><span style="font-family: "avenir book"; font-size: 10pt;">That’s all in the context of a trade “spat” that seems
to be growing into a much larger conflagration. Despite the warnings of nearly
every street economist that this will generate a significant inflationary
impulse to consumers, over the next year, </span><b style="font-family: "Avenir Book"; font-size: 10pt;">the
market will charge you more to protect against inflation going below 0% than it
will charge to protect you against inflation going above 2%. </b><span style="font-family: "avenir book"; font-size: 10pt;">The last time
this skew was so lopsided, the market was still expecting the Fed to hike rates
this year.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4b8PsD24JxtzeXHSPHbuqrlHNoiFb8w_E2FiD36M3Rvra-HYGYlPWo_uBWHa6UKKHLsvaq62wA5Qsa_ByBdw5gTmzxjXl8qv4cNwdCrjsJ4UHv4Ivz7bvx3xVn5y55eKhnTN7NyPAmi2X/s1600/tidal5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="512" data-original-width="1024" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4b8PsD24JxtzeXHSPHbuqrlHNoiFb8w_E2FiD36M3Rvra-HYGYlPWo_uBWHa6UKKHLsvaq62wA5Qsa_ByBdw5gTmzxjXl8qv4cNwdCrjsJ4UHv4Ivz7bvx3xVn5y55eKhnTN7NyPAmi2X/s640/tidal5.png" width="640" /></a></div>
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<br /></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">It’s turning into a bit of a choppy affair today, so
will update with some additional thoughts later in the afternoon. <o:p></o:p></span></div>
<!--EndFragment-->Unknownnoreply@blogger.comNew York, NY, USA40.7127753 -74.005972839.9423093 -75.296866299999991 41.483241299999996 -72.7150793tag:blogger.com,1999:blog-6762535844654777144.post-34906911283279148952019-07-29T09:00:00.000-07:002019-08-06T14:40:19.030-07:00From the Vasty Deep<!--[if !mso]>
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="page number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="endnote reference"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="endnote text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="table of authorities"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="macro"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="toa heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Bullet 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Number 5"/>
<w:LsdException Locked="false" Priority="10" QFormat="true" Name="Title"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Closing"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Signature"/>
<w:LsdException Locked="false" Priority="1" SemiHidden="true"
UnhideWhenUsed="true" Name="Default Paragraph Font"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Message Header"/>
<w:LsdException Locked="false" Priority="11" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Salutation"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Date"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
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<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
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<br />
<b style="font-family: "avenir book"; font-size: 13.3333px;"><i>GLENDOWER: I can call spirits from the vasty deep.</i></b><br />
<b style="font-family: "avenir book"; font-size: 13.3333px;"><i>HOTSPUR: Why, so can I, or so can any man - but will they come…?</i></b><br />
<div class="MsoNormal">
<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;"><b><br /></b></span></span>
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">Such has been the dilemma faced by the central banking
community, increasingly so: policy officials have the same apparent ability as Shakespeare’s
Glendower (based on one Owain Glyndŵr, the last native Welshman to hold the title of
“Prince of Wales”), yet the characteristic response from markets has been just
as capricious as Hotspur’s retort suggests: just because you say it's easing doesn't necessarily make it so...</span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">Fiat policy is successful not by
virtue of the exhortation, but by manifestation of that which has been
prescribed. It’s one thing to say you’re easing, quite another to convince
markets of it.</span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;"><br /></span></div>
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbbecsdUKjGW_MZtzI2aDvEQnLfBuDKLUFznggIHy3M81p6YYnQK8AXSKjMaqjXLgz8sufOtdm-KHHyk5rkj_Uet7Cb87mH3rL2IZHCfhrPtRCNV86Wphe0_Bf74gnnruNzwoV3M_QrGI9/s1600/glendower1.png" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="357" data-original-width="352" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjbbecsdUKjGW_MZtzI2aDvEQnLfBuDKLUFznggIHy3M81p6YYnQK8AXSKjMaqjXLgz8sufOtdm-KHHyk5rkj_Uet7Cb87mH3rL2IZHCfhrPtRCNV86Wphe0_Bf74gnnruNzwoV3M_QrGI9/s200/glendower1.png" width="196" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"><i><span style="font-size: xx-small;">Owen Glyndŵr of Wales, Fiat Policy Pioneer</span></i></td></tr>
</tbody></table>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">The difference, perhaps, is that while the character
in Henry IV seems to have genuinely “believ’d the magic wonders which he sang”,
central bankers should be more acutely aware of the wide gulf between saying
& doing. Indeed, the pragmatic response has been to join edict with act to
the point that we now have policy prescription written in no uncertain terms
(“yield curve control”). </span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;"><b>On the threshold now of the first rate cut by the
Federal Reserve since 2008, this question has to be even more vexing for those
about to do the cutting. At this point, is a 25bp cut alone enough to “ease”?
The simple answer is no. </b></span><br />
<span style="font-family: "avenir book"; font-size: 10pt;"><b><br /></b></span>
<span style="font-family: "avenir book"; font-size: 10pt;"><b></b></span><br />
<a name='more'></a><span style="font-family: "avenir book"; font-size: 10pt;"><b><br /></b></span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">“What’s priced in” for Wednesday is not just
equivalent to EFFR – yield(FFQ9). That’s because, however small the likelihood
of an “on-hold” result, there is closer to a trinomial decision tree that must
be followed for each meeting. </span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">As a result, the entire curve & options
surface needs to be fit to a weighted probability across each possible path
that policy could follow this year – resulting in a solution that yields a
small but not insignificant possibility of “on-hold”.</span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">Over the past 2 weeks,
the rank order of 10 most likely paths for policy this year as determined by
the shape of the options surface + Fed Funds curve have stayed mostly constant,
with the exception of Williams’ outburst on the 18</span><span lang="EN-GB" style="font-family: "avenir book";"><span style="font-size: 11.1111px;">th</span><span style="font-size: 10pt;"> (which left
more than 50% odds priced for just one of two outcomes: 1) July -50 followed by
another -25 later in the year, and 2) July -25 followed by -50 in September). <o:p></o:p></span></span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><o:p><br /></o:p></span></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvVF9hnO3VNsV9Bg7N7B7kzepxHlDgI37jTv1_OFNU1XD33q98pNdMSrzY3oMiZggs-QhFk0Hlfx2pQC9DpWpodsGatxdZ7HrXUZwFYCKPaYCn_ndZd-bB1qYzsmb0fReRflfHn0CcGTMk/s1600/glendower2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="214" data-original-width="1125" height="121" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvVF9hnO3VNsV9Bg7N7B7kzepxHlDgI37jTv1_OFNU1XD33q98pNdMSrzY3oMiZggs-QhFk0Hlfx2pQC9DpWpodsGatxdZ7HrXUZwFYCKPaYCn_ndZd-bB1qYzsmb0fReRflfHn0CcGTMk/s640/glendower2.png" width="640" /></a></div>
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<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="List Continue 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Message Header"/>
<w:LsdException Locked="false" Priority="11" QFormat="true" Name="Subtitle"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Salutation"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Date"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text First Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Heading"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Body Text Indent 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Block Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Hyperlink"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="FollowedHyperlink"/>
<w:LsdException Locked="false" Priority="22" QFormat="true" Name="Strong"/>
<w:LsdException Locked="false" Priority="20" QFormat="true" Name="Emphasis"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Document Map"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Plain Text"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="E-mail Signature"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Top of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Bottom of Form"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal (Web)"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Acronym"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Address"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Cite"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Code"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Definition"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Keyboard"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Preformatted"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Sample"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Typewriter"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="HTML Variable"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Normal Table"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="annotation subject"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="No List"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Outline List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Simple 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Classic 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Colorful 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Columns 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Grid 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table List 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table 3D effects 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Contemporary"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Elegant"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Professional"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Subtle 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Web 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Balloon Text"/>
<w:LsdException Locked="false" Priority="39" Name="Table Grid"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Table Theme"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 1"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 2"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 3"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 4"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 5"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 6"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 7"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 8"/>
<w:LsdException Locked="false" SemiHidden="true" UnhideWhenUsed="true"
Name="Note Level 9"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Placeholder Text"/>
<w:LsdException Locked="false" Priority="1" QFormat="true" Name="No Spacing"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading"/>
<w:LsdException Locked="false" Priority="61" Name="Light List"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 1"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 1"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 1"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 1"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 1"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 1"/>
<w:LsdException Locked="false" SemiHidden="true" Name="Revision"/>
<w:LsdException Locked="false" Priority="34" QFormat="true"
Name="List Paragraph"/>
<w:LsdException Locked="false" Priority="29" QFormat="true" Name="Quote"/>
<w:LsdException Locked="false" Priority="30" QFormat="true"
Name="Intense Quote"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 1"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 1"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 1"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 1"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 1"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 1"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 1"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 1"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 2"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 2"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 2"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 2"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 2"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 2"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 2"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 2"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 2"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 2"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 2"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 2"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 2"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 2"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 3"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 3"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 3"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 3"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 3"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 3"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 3"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 3"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 3"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 3"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 3"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 3"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 3"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 3"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 4"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 4"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 4"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 4"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 4"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 4"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 4"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 4"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 4"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 4"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 4"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 4"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 4"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 4"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 5"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 5"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 5"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 5"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 5"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 5"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 5"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 5"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 5"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 5"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 5"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 5"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 5"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 5"/>
<w:LsdException Locked="false" Priority="60" Name="Light Shading Accent 6"/>
<w:LsdException Locked="false" Priority="61" Name="Light List Accent 6"/>
<w:LsdException Locked="false" Priority="62" Name="Light Grid Accent 6"/>
<w:LsdException Locked="false" Priority="63" Name="Medium Shading 1 Accent 6"/>
<w:LsdException Locked="false" Priority="64" Name="Medium Shading 2 Accent 6"/>
<w:LsdException Locked="false" Priority="65" Name="Medium List 1 Accent 6"/>
<w:LsdException Locked="false" Priority="66" Name="Medium List 2 Accent 6"/>
<w:LsdException Locked="false" Priority="67" Name="Medium Grid 1 Accent 6"/>
<w:LsdException Locked="false" Priority="68" Name="Medium Grid 2 Accent 6"/>
<w:LsdException Locked="false" Priority="69" Name="Medium Grid 3 Accent 6"/>
<w:LsdException Locked="false" Priority="70" Name="Dark List Accent 6"/>
<w:LsdException Locked="false" Priority="71" Name="Colorful Shading Accent 6"/>
<w:LsdException Locked="false" Priority="72" Name="Colorful List Accent 6"/>
<w:LsdException Locked="false" Priority="73" Name="Colorful Grid Accent 6"/>
<w:LsdException Locked="false" Priority="19" QFormat="true"
Name="Subtle Emphasis"/>
<w:LsdException Locked="false" Priority="21" QFormat="true"
Name="Intense Emphasis"/>
<w:LsdException Locked="false" Priority="31" QFormat="true"
Name="Subtle Reference"/>
<w:LsdException Locked="false" Priority="32" QFormat="true"
Name="Intense Reference"/>
<w:LsdException Locked="false" Priority="33" QFormat="true" Name="Book Title"/>
<w:LsdException Locked="false" Priority="37" SemiHidden="true"
UnhideWhenUsed="true" Name="Bibliography"/>
<w:LsdException Locked="false" Priority="39" SemiHidden="true"
UnhideWhenUsed="true" QFormat="true" Name="TOC Heading"/>
<w:LsdException Locked="false" Priority="41" Name="Plain Table 1"/>
<w:LsdException Locked="false" Priority="42" Name="Plain Table 2"/>
<w:LsdException Locked="false" Priority="43" Name="Plain Table 3"/>
<w:LsdException Locked="false" Priority="44" Name="Plain Table 4"/>
<w:LsdException Locked="false" Priority="45" Name="Plain Table 5"/>
<w:LsdException Locked="false" Priority="40" Name="Grid Table Light"/>
<w:LsdException Locked="false" Priority="46" Name="Grid Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="Grid Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="Grid Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 2"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 2"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 3"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 3"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 3"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 3"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 3"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 3"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 4"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 4"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 4"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 4"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 4"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 4"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 5"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 5"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 5"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 5"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 5"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 5"/>
<w:LsdException Locked="false" Priority="46"
Name="Grid Table 1 Light Accent 6"/>
<w:LsdException Locked="false" Priority="47" Name="Grid Table 2 Accent 6"/>
<w:LsdException Locked="false" Priority="48" Name="Grid Table 3 Accent 6"/>
<w:LsdException Locked="false" Priority="49" Name="Grid Table 4 Accent 6"/>
<w:LsdException Locked="false" Priority="50" Name="Grid Table 5 Dark Accent 6"/>
<w:LsdException Locked="false" Priority="51"
Name="Grid Table 6 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="52"
Name="Grid Table 7 Colorful Accent 6"/>
<w:LsdException Locked="false" Priority="46" Name="List Table 1 Light"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark"/>
<w:LsdException Locked="false" Priority="51" Name="List Table 6 Colorful"/>
<w:LsdException Locked="false" Priority="52" Name="List Table 7 Colorful"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 1"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 1"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 1"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 1"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 1"/>
<w:LsdException Locked="false" Priority="51"
Name="List Table 6 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="52"
Name="List Table 7 Colorful Accent 1"/>
<w:LsdException Locked="false" Priority="46"
Name="List Table 1 Light Accent 2"/>
<w:LsdException Locked="false" Priority="47" Name="List Table 2 Accent 2"/>
<w:LsdException Locked="false" Priority="48" Name="List Table 3 Accent 2"/>
<w:LsdException Locked="false" Priority="49" Name="List Table 4 Accent 2"/>
<w:LsdException Locked="false" Priority="50" Name="List Table 5 Dark Accent 2"/>
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<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">Every path to which the options + Fed Funds markets
have assigned a greater than 1% probability at some point in the last 2 weeks
are shown below. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdfNeQmY5w2w6iImwo97fTZhe-74HISe73UA9mergrxA_-m2gj5fNa9sL6XtM25kkn2frUHJo3TRSIGrNOmiNtzK6okTFX8YaaJTtQa-g4S9YjRdjdcKdIl3-vdx7Z0gpObI-8n-wumfIu/s1600/glendower3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="459" data-original-width="1125" height="260" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhdfNeQmY5w2w6iImwo97fTZhe-74HISe73UA9mergrxA_-m2gj5fNa9sL6XtM25kkn2frUHJo3TRSIGrNOmiNtzK6okTFX8YaaJTtQa-g4S9YjRdjdcKdIl3-vdx7Z0gpObI-8n-wumfIu/s640/glendower3.png" width="640" /></a></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">Across all possible outcomes, we can sum up the
“on-hold” vs -25 vs -50 July policy actions to give a better idea of what
front-end assets are priced for.</span></div>
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<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiox0HzGW53qjFx6mA3O03tAnUm_dtqYLLj8U2Fb0edkORW_igtUlkm2iqGxIDEsDbvdFQOFXTLoG2U_m2V6JUTUAub4tvlQy8cdKYkcREiQZ5gHgxAd7el5F5S6XGz2BpfYL2SW1gUA_J5/s1600/glendower4.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="82" data-original-width="852" height="60" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiox0HzGW53qjFx6mA3O03tAnUm_dtqYLLj8U2Fb0edkORW_igtUlkm2iqGxIDEsDbvdFQOFXTLoG2U_m2V6JUTUAub4tvlQy8cdKYkcREiQZ5gHgxAd7el5F5S6XGz2BpfYL2SW1gUA_J5/s640/glendower4.png" width="640" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">Like Hotspur, Fed officials may be wondering how a
delivered 25bp cut in July alone will actually “ease”. <o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><br /></span></div>
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<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;"><b>TRADE: EDU9 1x1.5 PUT SPREADS</b></span></span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">For choice, I like the following here as a low premium way to position for the Fed to disappoint dovish expectations in the front end: </span><span style="font-family: "avenir book"; font-size: 10pt;">Buy EDU9 97.875/97.75 1x1.5 ps for 4.25</span></div>
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<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10pt;">Trade pays out 3x if we reduce the number of 25bp cuts by just half a cut 2 days before the September FOMC. Since it expires before the Sep FOMC, there should at least something priced for each of the Sep & Oct meetings (+ a few days’ worth of Dec). <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">Net PNL shown below under various shocks to FRA/OIS (+/- Xbps) and the bps worth of cuts still priced into U19->3mth OIS.</span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyNuQ0z9yFQ4XEEXA0pR3xdEsbSPwdu9XBN8A1cDSm1B4bBzs3TH5fv_3U_j8sp82vtXo7FYc6A9td8ZhTf578UBg4PZeWp42HMjpGh4IVNnxqEmeBv3Tlb_FJfd17c_txO4eeYu_o4Ule/s1600/glendowerBPS.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="365" data-original-width="1600" height="144" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgyNuQ0z9yFQ4XEEXA0pR3xdEsbSPwdu9XBN8A1cDSm1B4bBzs3TH5fv_3U_j8sp82vtXo7FYc6A9td8ZhTf578UBg4PZeWp42HMjpGh4IVNnxqEmeBv3Tlb_FJfd17c_txO4eeYu_o4Ule/s640/glendowerBPS.jpg" width="640" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">Payout Ratios below (i.e. gross PNL / premium): </span></div>
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<span style="font-family: "avenir book"; font-size: 10pt;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqCVZUd18vD-O2gLQnDRoeSBs3AlEPJAdTk9zkhnsecjBC_T9k3fcxLJ9ahbjr3uvJeFdQxI_Erel1QpOGcq2xFiiTXBGOVzqxpPFVpTvbO9j_KAvO1YcwTOS9Q1xZbalFNe8eCGxGSJXl/s1600/glendowerRATIOS.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="365" data-original-width="1600" height="144" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiqCVZUd18vD-O2gLQnDRoeSBs3AlEPJAdTk9zkhnsecjBC_T9k3fcxLJ9ahbjr3uvJeFdQxI_Erel1QpOGcq2xFiiTXBGOVzqxpPFVpTvbO9j_KAvO1YcwTOS9Q1xZbalFNe8eCGxGSJXl/s640/glendowerRATIOS.jpg" width="640" /></a></div>
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<span style="font-family: "avenir book"; font-size: 10pt;"><br /></span></div>
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<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;">Additional discussion & consideration below... </span></span></div>
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<span style="font-family: "avenir book"; font-size: 10pt;"><b><br /></b></span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;"><b>A BLUNT MONSTER WITH UNCOUNTED HEADS:</b></span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">Let’s not kid ourselves either, to say the current Fed
roster has had a mixed track record of successful communication with markets
would be charitable. For the 8 meetings over the past year, 4 of those took
place ostensibly while the Fed was still in “tightening” mode: however, all 4
saw 5yr Treasury yields rally by more than a 1-day standard deviation within 24
hours.</span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><br /></span></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZlp0TDnfioRu4g2kU_pfQEvK8Pk79Z694lbLVXglLKXG2NJ-e1g-_6CnoBDyOFeRvrYqemBvA5quEBwyTI2l31Imq2ba5d5wQq5ZoMR9hYT_Hg6AApAtsVAp395S735YaAqhIKGwLZtX7/s1600/glendower5.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="481" data-original-width="816" height="376" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZlp0TDnfioRu4g2kU_pfQEvK8Pk79Z694lbLVXglLKXG2NJ-e1g-_6CnoBDyOFeRvrYqemBvA5quEBwyTI2l31Imq2ba5d5wQq5ZoMR9hYT_Hg6AApAtsVAp395S735YaAqhIKGwLZtX7/s640/glendower5.png" width="640" /></a></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">After the Fed’s January 2019 “pivot”, the price action
has been more consistent with an increasingly dovish bias – unless you count
the May FOMC, of course.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi09LFJL7HEaSBRq70897lMoHUSdOigVFnUBNmBYx7WiB3KcElv-f2KCRHm4vhACBdiwTDqYs_9uFKEquvSi-jJzhMwpULH32jtk2nT66ii2IjnZBYg0sv2-E9h85HP29uz0CAzybHh30rn/s1600/glendower6.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="481" data-original-width="816" height="376" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi09LFJL7HEaSBRq70897lMoHUSdOigVFnUBNmBYx7WiB3KcElv-f2KCRHm4vhACBdiwTDqYs_9uFKEquvSi-jJzhMwpULH32jtk2nT66ii2IjnZBYg0sv2-E9h85HP29uz0CAzybHh30rn/s640/glendower6.png" width="640" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">But, to put a finer point on the issue facing the Fed
this week, controlling front-end yields by mechanically moving the overnight
rate is only one part of the equation. Sceptics might refer to Wednesday’s
decision as “data-independent easing”, but even Janet Yellen opined this
weekend on the global dynamics which have conspired to drive the Fed back
towards a cut in rates less than 9 months after the last hike. So, the effect </span><span style="font-family: "avenir book";"><span style="font-size: 13.3333px;">that the Fed’s action will have on currency markets (and equities, for that matter), is perhaps even more important. </span></span><br />
<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;"><br /></span></span>
<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;"><b>UNEASY LIES THE HEAD:</b></span></span><br />
<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;"><b><br /></b></span></span>
<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;">The Fed is not ignorant of this fact, of course. Policy officials are well-aware that, for example, the average daily annualized return on a long position on the S&P has been 6.8% over the last 25 years – of which a little over 1/3 is earned on average on the 8 days a year that the FOMC renders its verdict on policy. By the same token, going short the USD versus a basket of G10 FX has had an average daily annualized return of around 30bp over that same time period, but doing that only on FOMC dates would do about 2.5 times better. That’s despite the fact the Fed has raised front end rates on 36 days over that time period, versus cutting them on 29. </span></span><br />
<br />
<table cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBvek7MgvaGt8X7OTFaEGQl0DPhkpsD0btmoJ-6cE8nM7Wzhu3EL_h_2y1sWiUTBZiuXagxTXskAeRVu8TgITWKRMcQS-_5OCKqiY-2JTdyomtqd6aZSLrNSo5noCdO_UmKf4cDWjAaFeC/s1600/glendower7.png" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: auto; margin-right: auto;"><img border="0" data-original-height="488" data-original-width="361" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBvek7MgvaGt8X7OTFaEGQl0DPhkpsD0btmoJ-6cE8nM7Wzhu3EL_h_2y1sWiUTBZiuXagxTXskAeRVu8TgITWKRMcQS-_5OCKqiY-2JTdyomtqd6aZSLrNSo5noCdO_UmKf4cDWjAaFeC/s400/glendower7.png" width="295" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Sir Henry Percy, for whom the other London club is named.</td></tr>
</tbody></table>
<br />
<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;"><b>It would seem as though this is a point in favour of Glendower being able to summon spirits to his aide. However, a crucial detail is omitted – the critical element of surprise.</b></span></span><br />
<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;"><br /></span></span>
<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;">This dovish skew is because of a risk-avoidance policy by central banks who would rather err on the side of a dovish surprise. For every June 2013 or March 2014 where the market reacted hawkishly, there’s a September 2013, March 2015, or March 2016 where the market saw a much more substantial dovish reaction. Indeed, we’ve seen our fair share of “dovish hikes” (June 2004, June 2006, March 2017, etc), but the contrasting example has been far more infrequent – though not entirely sui generis. Markets evolve, of course, and have begun to anticipate such skew to the distribution, e.g. “Pre-FOMC Drift”. If central bankers know that market participants believe they are being rewarded by staying invested in an asset other than cash, then there has to be some additional incentive to stay allocated thusly when policy “eases”: enter the value of surprise. </span></span><br />
<div>
<br /></div>
</div>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;"><b>THE BETTER PART OF VOL, IS DISCRETION</b>:</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">The same is true for volatility. Enterprising academics
(displaying an intrepid approach to risk-management that might make even the
most generous CRO blanch, might I add) have noted that excess returns on short
straddle positions taken the day before the FOMC & covered the day after.
For example, the left-most column suggests “Mean” 9.3% historical returns from
short straddle positions on the first ED contract.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><img border="0" data-original-height="480" data-original-width="815" height="235" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDUBZgTSl0IXnH5IMir4gm78-DjicSPYoo5jTbyU2woTl931KA7qKc3zr-sBnNBZQC2CY3TVB3Onr3Ui0VWF_VzqkTzEPfCLeSQt0HdqaFjTTQLQc0Y1zU34ijdUqlenUeo4KHECBYMspZ/s400/glendower8.png" style="margin-left: auto; margin-right: auto;" width="400" /></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Link: <a href="https://www.frbsf.org/economic-research/files/wp2019-12.pdf">https://www.frbsf.org/economic-research/files/wp2019-12.pdf</a></td></tr>
</tbody></table>
<div class="MsoNormal">
<span style="font-family: "avenir book"; font-size: 10pt;">Indeed, while it’s fashionable to bemoan the general
lack of implied volatility in markets today, the fact is that violent shocks
have more frequently pierced an otherwise quiescent surface. If we define a
significant shock as a 1-day return which is more than 5 standard deviations
away from the daily average return of the preceding 33, the S&P has seen 4
such days in the last 3 years. That compares to 14 such days in the prior 45
years. Indeed, to find the last time you’d have seen 4 days that generate
returns as outsized relative to the preceding month, you’d need to go back to
the last time geopolitics convulsed to such an extent that the World was
considered to be at War.</span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">Nor is this unique to equity markets: the number of
so-defined “5-sigma events” over a 3-year rolling block has been increasing
across asset classes over the post-crisis period. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<table align="center" cellpadding="0" cellspacing="0" class="tr-caption-container" style="margin-left: auto; margin-right: auto; text-align: center;"><tbody>
<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfexgNgLgwTeTT5GamXvLzEi0k533RjIzPkH1s04lH5ypt2wvk5ByfCRJNVzVxJ5LQblEwgee7GTRij0ThUmsiWldCFwz-8chFVfRDqpEcLUjAz7Y08tkSVZPPiXM8UsxcWmKo2aYNBImx/s1600/glendower9.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="450" data-original-width="881" height="326" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhfexgNgLgwTeTT5GamXvLzEi0k533RjIzPkH1s04lH5ypt2wvk5ByfCRJNVzVxJ5LQblEwgee7GTRij0ThUmsiWldCFwz-8chFVfRDqpEcLUjAz7Y08tkSVZPPiXM8UsxcWmKo2aYNBImx/s640/glendower9.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;">Source: Neuron Advisors, Robert Hillman, Bloomberg</td></tr>
</tbody></table>
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<span style="font-family: "avenir book";"><span style="font-size: 13.3333px;"><b>ECB - A CASE STUDY:</b></span></span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><br /></span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">On that note, it’s worth contemplating the move that
European assets saw last week when the ECB stayed the course by setting the
stage for a cut in the fall (disappointing those who were hoping for a more
immediate policy prescription).</span><span style="font-family: "avenir book"; font-size: 10pt;"> </span></div>
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<tr><td style="text-align: center;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFFmFIpXKSBQ0VRi3DTfErZnysaSk0QJF9iV55eKKdHgsWqgF2z-2BxX7NjElmA4RynoOoGKtI1RzZSdMf8kgMsx65PeByeDQpfhT2Zde_1ctEp65bqFf3RfsOLA_djwz1JK7Aa8JdKUgS/s1600/glendower10.png" imageanchor="1" style="margin-left: auto; margin-right: auto;"><img border="0" data-original-height="598" data-original-width="877" height="436" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFFmFIpXKSBQ0VRi3DTfErZnysaSk0QJF9iV55eKKdHgsWqgF2z-2BxX7NjElmA4RynoOoGKtI1RzZSdMf8kgMsx65PeByeDQpfhT2Zde_1ctEp65bqFf3RfsOLA_djwz1JK7Aa8JdKUgS/s640/glendower10.png" width="640" /></a></td></tr>
<tr><td class="tr-caption" style="text-align: center;"></td><td class="tr-caption"></td><td class="tr-caption"><br /></td></tr>
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<span style="font-family: "avenir book"; font-size: 10pt;">Equity markets & FX reacted in kind, taking their
lead initially from the move in rates as the best kind of curve move for bank
equities appeared in the offing, before collapsing back to the day’s opening
levels as the worst kind of curve move for bank equities was realized instead.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJgnN4zR11HKdXBh3wHVlIeYl86xRsTS083Dcv3JkdLCHByq9fJiV453zockfDT6R1s7BwIal2DoPes_SHkfrkKP21H5Ajf5uFhDNCQq9GbSXEbxcaitXx5t1eART7wb5c4gV_O6TyZRlJ/s1600/glendower16.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1070" data-original-width="1566" height="435" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJgnN4zR11HKdXBh3wHVlIeYl86xRsTS083Dcv3JkdLCHByq9fJiV453zockfDT6R1s7BwIal2DoPes_SHkfrkKP21H5Ajf5uFhDNCQq9GbSXEbxcaitXx5t1eART7wb5c4gV_O6TyZRlJ/s640/glendower16.jpg" width="640" /></a></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">It’s well-known that Draghi is particularly sensitive
to intra-day moves preceding his press conference & last Thursday’s move
appears to have been just that: markets became overly optimistic about the
likelihood for an overtly dovish message from the ECB President after foregoing
a cut & Draghi didn’t take the bait. <o:p></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgg6sjSkgPcvI_zYclxX9ARKrFyggcc0-VEs7Fm8es2djlKfKpBh27gNT1nak8ZN0gq9MkQ9BnYl4Sro69qUxCqCMY3nxzPp22gQ5LrdyO_c3p0cBDIlaEtQpAS7m87dPH_GdWsRQ7Y3i7W/s1600/glendower18.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1070" data-original-width="1566" height="436" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgg6sjSkgPcvI_zYclxX9ARKrFyggcc0-VEs7Fm8es2djlKfKpBh27gNT1nak8ZN0gq9MkQ9BnYl4Sro69qUxCqCMY3nxzPp22gQ5LrdyO_c3p0cBDIlaEtQpAS7m87dPH_GdWsRQ7Y3i7W/s640/glendower18.jpg" width="640" /></a></div>
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<span style="font-family: "avenir book"; font-size: 10pt;">Keep in mind that Draghi is literally the most
seasoned central bank president at the helm of a developed currency as a known
quantity to market participants (Thomas Jordan at the SNB is a close second; I
don’t count Carney’s dual stint between BOC & BOE, and because he’s hardly
a model for tamping down on unrealistic market expectations). </span></div>
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<span style="font-family: "avenir book"; font-size: 10pt;"><br /></span></div>
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<span style="font-family: "avenir book"; font-size: 10pt;">No matter how it’s
positioned in the press conference on Wednesday, Powell will be faced with the
prospect of recalibrating market expectations which were – at a minimum on an
absolute basis – off by about 4bps on the overnight rate as the wings of the
distribution are clipped. As the market digests the participants’ expectations
for policy forthcoming & an immediate end to QT before the press
conference, note that the “most likely” path that the market assigns today to
2019 policy action is consecutive cuts of 25bps at each remaining meeting. The
next 6 “most likely” paths (not counting the 1 path where no action is taken at
all) represent fewer cumulative cuts (and with no policy action at not one but
two meetings remaining this year). Table from earlier shown again for emphasis:</span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><o:p><br /></o:p></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu2YMaonWP9XvBUsbH8Vih7Ql0Oyg6XHlL4QL1wodW7mfdHwNg_FGDo3M0R_IwLdJKX4faQlGNcl7pjXWLPNSFA_jJzVZ4M2Fu4aCZHupRzQi9FsEGgDr43W0mAgqztWSD5C0_WP0eMP4a/s1600/glendower2.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="214" data-original-width="1125" height="120" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiu2YMaonWP9XvBUsbH8Vih7Ql0Oyg6XHlL4QL1wodW7mfdHwNg_FGDo3M0R_IwLdJKX4faQlGNcl7pjXWLPNSFA_jJzVZ4M2Fu4aCZHupRzQi9FsEGgDr43W0mAgqztWSD5C0_WP0eMP4a/s640/glendower2.png" width="640" /></a></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;">Glendower, himself, might shy away from such a task. <o:p></o:p></span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><b><span style="color: blue;">A few takeaways: <o:p></o:p></span></b></span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><b><span style="color: blue;">1. It’s a very high hurdle indeed for the Fed to pull
off a dovish ease at Wednesday’s meeting. <o:p></o:p></span></b></span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><b><span style="color: blue;">2. Don’t expect the press conference to unveil some
previously unforeseen boon to the dove’s cause. <o:p></o:p></span></b></span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><b><span style="color: blue;">3. Position for what the Fed will do, not what they
should. <o:p></o:p></span></b></span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><b><span style="color: blue;">4. To the extent a cut is positioned as a one-off to
pre-emptively cushion the economy against a shock, we’re back to trading SPX
digitals. <o:p></o:p></span></b></span></div>
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<span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><b><span style="color: blue;">5. Better to play the odds as they are reallocated
across the options surface following Wednesday’s meeting.</span></b></span></div>
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<i><span lang="EN-GB" style="font-family: "avenir book"; font-size: 10.0pt;"><o:p>Disclosure/Disclaimers: </o:p></span><span style="font-family: "avenir book";"><span style="font-size: 13.3333px;">This material may contain indicative terms only, including but not limited to pricing levels. There is no representation that any transaction can or could have been effected at such terms or prices. Proposed terms and conditions are for discussion purposes only. Finalized terms and conditions are subject to further discussion and negotiation. </span></span><span style="font-family: "avenir book"; font-size: 13.3333px;">OTC Derivatives Risk Disclosures: To understand clearly the terms and conditions of any OTC derivative transaction you may enter into, you should carefully review the terms of trade with your counterparty, including any related schedules, credit support documents, addenda and exhibits. You should not enter into OTC derivative transactions unless you understand the terms of the transaction you are entering into as well as the nature and extent of your risk exposure. You should also be satisfied that the OTC derivative transaction is appropriate for you in light of your circumstances and financial condition. You may be requested to post margin or collateral to support written OTC derivatives at levels consistent with the internal policies of </span><span style="font-family: "avenir book"; font-size: 13.3333px;">your respective counterparty. I may have positions in assets mentioned above. I do not have plans to initiate any new positions within the next 72 hours. I wrote this post myself, the material is my own (except where sourced), and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any of the companies and/or organizations whose assets may be mentioned in this post. </span></i></div>
<!--EndFragment-->Unknownnoreply@blogger.comNew York, NY, USA40.7127753 -74.005972839.9423093 -75.296866299999991 41.483241299999996 -72.7150793