This Morning's Log Entries

1/8/2020 7am

Overnight S&P futures plunged 1.7ish% on the Iranian missile attacks of US bases in Iraq. After the dust settled it was clear that Iran strategically struck in a way that would yield no US casualties and that they felt they could herald at home as a strong response to the killing of their military leader. Consequently the S&P has rebounded back into the green to the tune of 31bps this morning.

During the selloff last night, all of our non-correlated core positions were screaming higher in the futures market: GLD, FXY and of course the SPX puts (hugely) in particular. This morning FXY is in the red by 11bps, gold is up 7bps and the puts are down 700bps.

Overall, 20 of our core positions are in the green this morning, with RSX on top, up 130bps, while 7 are in the red, with UDN on the bottom, down 44bps.

Trump speaks at 8am pt this morning on the Iran situation. Based on this morning’s action -- spx up, vix down -- the market is anticipating de-escalation.

9am

Trump’s address was strong in terms of commitment to keeping Iran from obtaining nuclear capabilities, and he announced a ramping up of sanctions as well. In the end, however, he was clear that there is no military action pending, and that he expects the same from Iraq. On balance, the statement was notably de-escalatory.

Of course risk markets responded aggressively to the upside, while defensive asset classes -- gold (GLD), bonds, the yen (FXY) -- sold off. Defensive equity sectors, however -- utilities, reits, staples -- while underperforming cyclicals, are trading higher at the moment.

The market’s action is entirely consistent with everything we’ve seen of late; which is a reflection of the prevailing FOMO (fear of missing out) mentality. Which, as we know, is typical action at this stage of the cycle, although, and alas, it generally turns out to be very unfortunate for those getting sucked in.

That last sentence said, history suggests that this phenomenon can persist for an extended period of time. But given the overall current state of general conditions, and the insanity prevailing in the high-yield debt market, we need to continue to tread cautiously right here.