A round of risk aversion gave the yen a reprieve in New York trading on Thursday but how it unfolded speaks to changes in the market in a low-volatility environment. The pound was the top performer on the day while the kiwi lagged. There are 8 Premium trades in progress, including 2 equity indices.
A whip laying on the ground is a good metaphor to understand how markets are behaving this year. Most of the time, it's limp. Different part might be nudged in different directions while the rest remains stationary. Periodically, however, something in the global economy shakes it more aggressively. When that happens, the handle is jarred and a wave of energy moves through the entire whip.
That wave is like how energy is moving through cross-assets in 2017. Sometimes what happens in a faraway place isn't enough to create a jolt but when it does – like with comment from Draghi that set off a round of European bond selling – the wave quickly moves from one asset to the next as it circles the globe and the crack of the whip awakens sleepy investors to the risks.
Mechanically, this is taking place because there are so many bets on low volatility. As volatility creeps up, it raises alarms in funds or algos that are monitoring cross assets, so they pare back risk and it sets off the chain reaction.
Going forward, the takeaway is that intermarket analysis is more important than ever. Tremors anywhere are capable of rattling the whip and when any market makes a big move – like Eurozone bonds – it's only a matter of time until the wave of volatility hits something distantly related like tech stocks. Afterwards, the energy is released, the whip goes limp again and risk assets slowly recover.