Stories by John Swarr
By John Swarr | December 21, 2017
Before bitcoin grabbed all of the headlines this November, a widely talked about trade in 2017 had been the short-volatility trade. One popular trade investors have used to monetize the low volatility environment, XIV, has gained almost 200% this year. Although these returns don’t stack up with bitcoin’s run in 2017, the fundamentals driving short-volatility strategies are much clearer. But before discussing why the past year has been supportive of short-volatility strategies, I want to discuss two types of strategies first.
By John Swarr | October 26, 2017
This week’s Monday Morning O’Malley highlighted the upcoming selection of the next Federal Reserve (Fed) chair. The top candidates for the nomination include Jerome Powell, John Taylor, Janet Yellen, Kevin Warsh, and Gary Cohn. The Chart of the Week shows recent betting odds on who will receive the nomination. While the odds are fun to talk about, this week’s write-up covers the candidates’ viewpoints and policy stances so the risks behind the candidates can be anticipated. Investors should be prepared for any outcome by understanding how each candidate would lead the Fed on key issues including monetary policy, the balance sheet, transparency, and regulation.
By John Swarr | August 31, 2017
Despite the S&P500 (SPX) being less than 2% off the all-time high it achieved a mere three weeks ago, market signals are suggesting that investors are beginning to turn bearish on equities. Turbulence within the Trump administration, the potential for a government shutdown, and tension with North Korea all have investors nervous as volatility starts to pick up after a historically low period the past several months. As a sign market participants are wary of a pullback in equities, traditional safe-haven assets such as gold and the Japanese Yen have been rallying since mid-July.
By John Swarr | July 6, 2017
Second quarter U.S. dollar (USD) interest rate markets were very unexciting when looking at absolute movements in both swap rates and Treasury yields. However, an interesting development arose concerning the relative movement between the 30-year points of these two curves that will likely have the attention of market participants through the end of the year. The 30-year swap spread – defined as the difference between the 30-year swap rate and 30-year Treasury yield – has widened (or become less negative) significantly since June 13th, when the Treasury released its recommendations for financial industry reform, including a proposal to remove U.S. Treasuries (USTs) from the denominator of the supplementary leverage ratio (SLR) calculation. This proposal would effectively make USTs “cheaper” for banks to hold from a capital requirement perspective.
By John Swarr | May 11, 2017
Donald Trump’s election to the U.S. presidency late last year started what has been termed the “Trump reflation trade,” or the “Trump Trade” for short, in the financial markets. The Trump Trade is focused on the idea that the incoming president would spur economic growth and inflation with his stances on fiscal, regulatory and trade policies, which would lead to higher equity prices, higher interest rates/lower bond prices and a stronger U.S. dollar. The market’s initial reaction to the Trump Trade was strong – yields on the 10-year Treasury increased 80 basis points (bps) to north of 2.6%, the U.S. Dollar Index (DXY) rose 6.5% to 103, and the S&P 500 Index rallied 15% to 2400 at the highs. Since hitting their post-election highs, however, only equities have kept momentum from the rally as the markets question the president’s ability to push his agenda through a divided Congress.
By John Swarr | March 15, 2017
The Federal Open Market Committee (FOMC) is set to release its policy rate decision today at 2:00PM EST. The broad market consensus is the Federal Reserve (Fed) will raise the federal funds rate by 25 basis points (bps) this afternoon. However, market participants will also be anticipating the release of the “dot plot,” which FOMC members use to signal their outlook for the number and timing of future policy rate increases. The dot plot was last released at the December 2016 meeting, and the median dots showed three 25 bps rate hikes for 2017. Although the dots can help investors understand what FOMC members are thinking, the dot plot can differ from the market’s forecast of future short rates in the Eurodollar futures market.
By John Swarr | January 19, 2017
Risk assets have recently lifted higher thanks to the rejuvenation of “animal spirits” and the rising sentiment among spenders in the U.S. Gauges such as the Conference Board’s Consumer Confidence Index and the National Federation of Independent Business’ (NFIB) Index of Small Business Optimism are the most optimistic they’ve been in a decade, while equities hover near all-time highs. Believers in the animal spirits are calling for an increase in consumption-driven growth to provide additional tailwinds to risk assets this year. However, the market may be quick in overlooking a popular headline from yesteryear: the rise of the “smart” consumer.
By John Swarr | June 23, 2016
The European Union (EU) referendum vote tonight has created a series of unknowns for investors. The first unknown is whether or not the U.K. remains in the EU. Should the U.K. vote to leave the EU, investors will face a second set of unknowns.
By John Swarr | February 18, 2016
This week’s chart intends to capture the divergence between theory and reality in recent central bank actions to lower deposit rates into negative territory. Theory held up in practice in 2014, but recent moves to lower policy rates have not produced the same effects.