E Markets: Monkeys

There is a volatility virus in the present markets as good news and bad news are amplified beyond the expected trading ranges leading to manic depressions. Today and perhaps the entire week is euphoric after the blues from Friday and Monday. The 1995 Terry Gilliam film 12 Monkeys maybe the right way to think about today. We are in a new world traveling back in time to fix the inevitable haunted by our own demise. The film is also intended to be a study of people's declining ability to communicate in modern civilization due to the interference of technology – something to which we can all relate with in 2018. But today is 12/12 – Doble Doceday – where anything is possible if you think beyond the linear progression of time and place. The headlines are a mix of good and bad news with the US/China trade talk hopes ongoing after a Trump interview suggested he may intervene for the Huawei CFO while the UK PM likely faces a leadership challenge and the risk of a new election mixes badly with the rising fear of a no-deal Brexit. The best way to monitor the madness of the moment isn’t in watching the VIX or in tracking the USD but rather looking at the GBP/JPY trend – where JPY reflects rates, trade worries, and global growth and GBP reflects the carry trade, geopolitical fears and the BOE policy risks. This is a market that is going lower and seems even with the 0.85% bounce today to be set up for more pain. 

Question for the DayIs Oil more important for 2019 than rates? What drives the market fears for 2019 is growth and politics, but behind the fears are doubts about policy – as the ECB sets up for a path to normalization. The deflationary effects of lower oil prices matter here – as oil reflects demand and supply. The OPEC monthly released today sheds light on both of these factors. The role of lower prices in October and November will be felt in 2019 and the reaction function of central bankers will follow. Markets are stuck waiting for US CPI today and the ECB tomorrow but they maybe wise to watch the oil market after those events as one of the keys to unlocking value in the new year. Rates reflect the risks of a policy mistake, of US deficits, of US growth doubts and of the fear of geopolitical pressures. Oil may be leading those risks. 

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