Uber-dove Brainard to the rescue.
After less-than-stellar auctions for 3 and 10Y paper, Fed Governor Lael Brainard drove a stake through the black hearts of the hawks with a characteristically dovish speech that included the following soundbite:
- BRAINARD URGES CONTINUED `PRUDENCE’ IN REMOVING ACCOMMODATION
Yes, “continued prudence. Just as long as we don’t exercise any “prudence” when it comes to expanding accommodation. As a reminder, some folks got spooked about Brainard’s “surprise” speech. Apparently word on the Street was that the Fed was throwing their super dove to the hawks in order to “prepare” the market for what would amount to a forced hike this month. The fact that the speech came on the heels of a Draghi dud didn’t help and there were noticeable signs of caution in overseas trading with virtually everything red from Shanghai to London.
But we can all forget about that now because we’re up triple-digits. So much for Friday’s bloodbath. And by the way, you might note that going into the week, traders had put on their largest short vol position in history:
RBC had this to say earlier today:
“VaR models are the real MVPs nowadays, because they have most everybody hitting ‘liquidate’ at the same time.”
“What has helped ‘light the match?’ The slightest hint that the post-crisis QE / monetary policy regime could be changed—namely 1) speculation that the BoJ could potentially look to steepen the JGB curve (kicked-off by BoJ’s Sakurai two Friday’s ago) 2) the ECB pausing on the widely-anticipated extension of their own bond buying last week, and 3) a Fed which is seeming trying to ‘force-through’ a September hike.”
Well no worries now. And we suppose the systematic strats can keep a’ ridin’ that leverage. So while BofAML may have been correct to suggest that “as a result of Friday’s decline, we estimate multi-asset vol controlled portfolios that use a systematic approach similar to our models may be subject to $12bn in global equity selling pressure in the coming days ahead. Likewise, we estimate about $40bn in global equity selling pressure via CTAs in the near term. Between the two, we could see ~$52bn in near-term selling pressure, half of which may be through US markets.”
It looks like the Brainard wins this round.