This week, our Stress Indicators again show limited risk aversion - true this morning, the sell-off can be seen in Italy's fixed income market, but the reaction is still short of even catching up to its 200-day moving average.

I have noted a few times that complacency looks high. Today and over the weekend I read pretty much all of our peers' research and predictions for 2013:

  • Not a single one sees any risk of US or European equities falling next year - not one.
  • The average expected Europe ROE is >20% and in the US >15%
  • 95% of them think the Fed will expand its balance sheet by another USD 0.5-1.0 trillion 
  • Most see EURUSD higher
  • Recovery of flows into Europe
  • The one divergent issue remains Japan - some people see a recovery in earnings - and flow induced reweighting of Japan to the tune of USD 50 billion or more, but most see more of the same.

Today's guest chart is from our Head of FX Strategy John Hardy, who has produced this "appealing" chart of correlation between 6 month forward VIX relative to the front month and the S&P - note the recent and overall divergence:

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