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23 января, 02:54

Equities: Are TOPIX and Nikkei Still Cheap?

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Three months ago, we discussed the impact of Abenomics on Japan’s economy.   Japan’s economy, generally speaking, has been doing well.  While there is plenty to quibble about, since Prime Minister Shinzō Abe assumed power in late 2012 Japan has had its best sustained growth since the 1980s.  Unemployment fell to its lowest level since the early 1990s and inflation turned slightly positive.  Not everything is coming up roses: the government still runs a substantial deficit although its smaller than before, and while debt levels remain colossal, they have stabilized. Not surprisingly, Japan’s two main equity indices, the TOPIX and the Nikkei, turned in a stellar performance.  Since Abe took office in late 2012, the TOPIX returned 180% while the Nikkei returned 195%.  By way of comparison, the S&P 500® returned 110% over the same period of time.

19 января, 15:00

Why Has Inflation Been So Subdued?

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With unemployment low and inflation expectations creeping higher, the U.S. Federal Reserve (Fed) may hike rates two or three times in 2018, and Treasury bond yields might drift a little higher.  The big caveat is that this consensus scenario will only happen if inflation actually follows the script and starts to rise.  Dr. Janet Yellen will no longer be Chair of the Board of Governors of the Federal Reserve System (Fed); however, the Jerome Powell-led Fed and bond market participants are likely to remain just as data dependent as was the Yellen-led Fed.  

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17 января, 21:49

Is Resurgent Dr. Copper About to Relapse?

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If one looks at the price of copper (Figure 1) and the implied volatility on its options (Figure 2), one might think that the metal – often referred to as Dr. Copper for its reputation as a leading prognosticator of economic health because of its widespread applications -- has returned to robust health after a bad spell from 2011 to 2015. Recently, the price has been soaring, and the implied volatility low.  Fundamentally, copper looks good.  The global economy is expanding robustly and growth in China, copper’s single-most important market, stopped slowing two years ago.  A peek below the surface, however, shows that traders have concerns that this benign situation may not last, and 2018 could prove those concerns to be valid. 

12 января, 15:00

Five Reasons Event Risk to take Center Stage in 2018

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The year 2017 saw the juxtaposition of heightened policy uncertainty with relatively complacent markets and low volatility, especially in equities.  Much of the policy uncertainty may find some answers in 2018.  It is decision time for NAFTA and Brexit.  Elections will be in the spotlight, too.  Italy in March, Mexico in July, Brazil in October, and November 2018 will see a ferociously contested U.S. election for the entire House of Representatives and one-third of the Senate.  At the Federal Reserve (Fed), the focus will be on inflation and the shape of the yield curve as it decides how aggressively to push rates higher or not.  The weather will play a role, too, as we find out if La Niña deepens and brings droughts to Brazil and Argentina or fades away quietly. Event risk can present some interesting risk management challenges.  The two possible outcomes are typically binary in nature, like an on/off switch.  Before the event, markets may price an average of the two vastly different outcomes in terms of their impact on selected products or securities. After the event, the market’s “average” of the two outcomes will definitely not survive the outcome, as markets move quickly to price the actual outcome as it becomes known.  In these types of market environment, options can be a favored risk management tool.  In addition, if the probability of a price break or gap is substantial around the time the outcome becomes known, the options prices will add a premium for price gap expectations in addition to the typical estimate of future volatility.  This means that implied volatility calculations using models that assume price gaps/breaks do not exist (i.e., basic Black-Scholes-Merton) may over-estimate volatility by the amount of the potential price break premium. There are also risk management considerations relative to different types of event risk.  For example, political elections have known dates and unknown outcomes.  Weather events, such as droughts, do not have known dates, but the general conditions that could result in a drought are known and can be monitored.  In these cases, markets will price potential outcomes as probabilities shift. Here are our favorite event risk challenges for 2018.

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09 января, 21:46

The Yield Curve - Unemployment Feedback Loop

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Following up on our papers regarding the Yield Curve-VIX and Yield Curve-Credit Spreads cycles: here’s one more weird chart with which to inaugurate (and forecast likely developments in ) 2018.  

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03 января, 15:45

Bitcoin: Supply Growth, Mining Difficulty and Prospects in 2018

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Off The Charts! examines the pertinent economic issues of the day, providing a deeper dive into complex topics and framing the issues in a way that can lead to a better understanding of the financial and commodities markets.

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15 декабря 2017, 17:17

NYMEX’s Physically-Delivered Light Sweet Crude Oil Futures Contract FAQ

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1. What are the amendments to the WTI quality specifications?

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11 декабря 2017, 15:00

Credit Spread-Yield Curve: All Eyes on the Fed

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In our previous paper on the VIX-Yield Curve Cycle, we described a circular motion that occurs between the yield curve’s two-year moving average and the VIX’s two-year moving average, and that the cycle has been repeated three times since 1989. Turns out an extremely similar pattern arises between the yield curve and credit spreads, specifically with the Credit Suisse High Yield Bond Index and its option- adjusted spread (OAS) over U.S. Treasuries of comparable maturity. As with the VIX-yield curve cycle, looking at the overall cycle needs proper explanation (Figure 1).  So, let’s break it down.

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04 декабря 2017, 15:00

Bitcoin: Will Stunning Rally Sustain or Sour in 2018?

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Our previous article on bitcoin focused on the crypto asset as a currency and delved into the inherent tension in its role as a medium of exchange and a store of value. This paper examines why bitcoin is so volatile; its supply and demand drivers, and how the cryptocurrency compares to commodities. What is most striking about the economics of bitcoin is the certainty of its supply and the vagaries of demand. The rate at which bitcoin is mined has been highly predictable and unlike almost any other asset – currencies or commodities – its ultimate supply is a known quantity, fixed well in advance. There will never be more than 21 million bitcoins. This feature makes supply almost perfectly inelastic. No matter how high prices go, miners will not produce more than 21 million coins. Moreover, price increases won’t necessarily incentivize a more rapid mining of bitcoin. Even if they did, it would only influence miners to create more bitcoin today at the expense of creating less in the future since the total supply will reach a hard, asymptotic limit of 21 million coins. The supply inelasticity explains in large part why bitcoin is so volatile.  Items with inelastic supply show a greater response to demand shifts than items with elastic supply. The same is true of demand: the more inelastic the demand, the greater the price change in response to small fluctuations in either supply or demand. In the abstract examples below, we show the relatively modest price response to an upward shift in demand for a market with normal supply elasticity, on the left, and contrast it with the much bigger price response from the same demand shift in an inelastic supply market, on the right (Figure 1).

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29 ноября 2017, 19:40

VIX-Yield Curve: At the Door of High Volatility?

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We freely admit: Figure 1 is probably the strangest chart that you will ever see, at least in finance.  You may be wondering: did they throw blue spaghetti noodle on paper for inspiration and then write an economics article about it?  Or, have they spent too much time with disciples of psychologist Timothy Leary, a proponent of experimenting with psychedelic drugs?

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21 ноября 2017, 17:00

Saudi Arabia: Turbulence on the Horizon?

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There is considerable change underway in Saudi Arabia, from how the country is governed and managed to an even more activist role in the politics of the volatile Middle East. Options markets, however, appear to be almost entirely unconcerned about recent developments in the country, the world’s largest exporter of crude oil and a key U.S. ally in the Middle East. 

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13 ноября 2017, 15:00

Wheat: Will High Inventory Further Dent Prices?

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Chicago Board of Trade soft red winter wheat prices began a long-term bear market over five years ago in July 2012.  Since then, prices have fallen by more than 50%.  The good news for wheat growers is that while prices are depressed by 2007-2017 standards, at $4.30 per bushel, they remain higher than levels between 1997 and 2006 when prices fell below $3.00 per bushel (Figure 1).  What concerns many wheat growers, however, is the level of inventory.  Ending-stocks-to-use ratios have rarely been so high (Figure 2).  Will the level of inventories further pressure prices and send wheat below $4.00, or even $3.00 per bushel?