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A lack of volatility at the moment does not imply that all is well with markets. The team at RBS lists the risks ahead:

Here is their view, courtesy of eFXnews:

A few weeks ago we wrote of an Uneasy Calm in markets. Fed Chair Janet Yellen had just delivered her remarkably dovish speech in which she effectively pronounced the end of policy divergence. More divergence was intolerable because it strengthens the dollar, raises global volatility and weakens equities. That brings debt deleveraging to EM, hurting EM growth and hence global growth, all of which hurts the US.

In parallel, policy makers globally seemed to throttle back on competitive devaluation rhetoric, lending credence to the idea that an unwritten G20 deal was done in March – tone down Beggar-My-Neighbour mercantilism and be rewarded with a more dovish Fed for longer.  This all speaks to a crushed volatility world for longer.

But there are risks: (1)  the latest burst of Chinese credit-drenching, real estate fuelling, commodity-boosting stimulus is probably ending;  (2)  broader based weakness in global earnings;  (3)  risks of more disorderly yen strengthening as markets probe harder for BoJ/MOF tolerance levels on the currency;  (4)  the chronic circularity of argument that now permeates the Fed debate. According to the ‘hawks’, the Fed may now consider tightening because stock markets have recovered and the dollar has weakened relative to several weeks ago. This is horribly flawed and circular – the conditions about which the Fed opines are 100% endogenous to earlier Fed opining.  (5)  Saudi Arabia may not confine itself to a ‘no deal’ on oil output freeze but may actually increase its oil production; (6)  The ‘Carry’ game can see weeks of carry given back in one day on idiosyncratic EM fundamentals – as in Turkey and Brazil recently.

To the extent that markets are calm, this is still a most Uneasy Calm.  

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