From Economic Shock to VAR Shock Flash Update | The Corona Correction | Refinitiv | Summary and Q&A

TL;DR

The market is experiencing a shift in phases, moving from a risk off flight to safety event to a value at risk shock and deleveraging cycle, leading to a funding crisis and structural changes in asset management.

Key Insights

• ✳️ The market went through a risk off flight to safety phase before transitioning to a value at risk shock and deleveraging cycle.
• 📱 Increasing bond yields indicate extreme duress in smart beta and risk parity portfolios.
• 🏦 Central banks' efforts have not been effective in addressing the changing market structure.
• 💰 The focus should be on the dollar, as a significant increase could worsen financial conditions.
• 💵 Global cash flows are collapsing, impacting non-US invoices, central bank reserves, and dollar-denominated debt.
• 😘 Funding issues are prevalent, with indicators like FRA-OIS spreads, Ted spreads, and cross-currency basis spreads blowing out.
• 🫰 Copper and the Kospi 200 index are showing signs of volatility, indicating structured product impacts.

Transcript

morning it's 10 past 9:00 on Wednesday morning 10 past 9:00 UK time we've got it a little bit of an update here we've got equities or S&P limit down again Europe significantly down once more but I just wanted to focus on how I think they mark its structural and special market structure but how things are evolving and how we've moved from one phase ... Read More

Questions & Answers

Q: What triggered the shift in phases in the market?

The shift occurred when Boeing drew down a credit line, which led to a value at risk shock and deleveraging cycle, affecting smart beta and risk parity portfolios.

Q: Why are bond yields increasing?

Bond yields are increasing due to extreme duress in smart beta and risk parity portfolios, indicating a funding and deleveraging cycle in the market.

Q: Why are central banks' efforts not working effectively?

Central banks are using the 2008 rulebook designed for problems at banks, while the current issues involve certain asset managers and shadow banks, causing a mismatch in the strategies employed.

Q: What is the significance of a stronger dollar in the current market?

A stronger dollar would tighten financial conditions, exacerbating the funding crisis and further destabilizing the market as global cash flows collapse.

Summary & Key Takeaways

• Initially, the market experienced a risk off flight to safety event, with equities down, bonds up, and funding currencies like the yen and euro appreciating.

• The shift in phases occurred when Boeing announced the drawing down of a credit line, leading to a value at risk shock and deleveraging cycle.

• Bond yields are increasing, indicating extreme duress in smart beta and risk parity portfolios, while central banks' efforts have not yet proven effective due to the changing market structure.