Familiar Beat, Different Dance

Any rout in stock markets is impressive but not unique. What's different this time is how localized the trauma is. We look at the reasons why. The Swiss franc was the top performer Thursday while the Australian dollar lagged. In the Premium Insights, Ashraf locked in 330-pip gain in long GBPAUD and 530-pt gain in shorting the Dow30.

Almost any time this century, a washout in stock markets would result in a flight to quality. Bond yields would fall and the yen would catch a bid as risk trades and carry trades unwound. Yet surveying the FX market and, especially, the bond market over the past week, you would be hard pressed to notice that anything had changed. US equities, meanwhile, are down 10% after a late-Thursday selloff broke Monday's low.

Explanations aren't easy. Many point to the bump in wage inflation in the US jobs report and the ensuing US dollar strength helps to support the argument; but there were plenty of caveats in that rise and the bond market hasn't priced in a notably more-hawkish Fed.

Certainly one factor is the implosion of bets against volatility. A few carcasses have already emerged and we have no doubt there are more if only because betting against volatility has been remarkably profitable and consistent over the past few years.

Perhaps it's a combination of factors specific to equities. The US tax reform trade inspired euphoria and slaughtered shorts while other markets have always been more cautious about the broader economic impacts.

When are bond yields too high for stocks?

Timing has certainly played a part as well. There is no great carry trade to unwind. The euro had been used as a funding currency for years but that unwound in 2017 on tightening expectations. The yen has also seen inflows during a solid stretch of growth.

Ultimately, the broader picture is unchanged but the market psychology has changed. Expect a more-picky, skeptical environment for at least a few months. That will put extra emphasis on incoming data.

On particular spot to watch in the day ahead is Canada's jobs report. USD/CAD touched the highs of 2018 on Thursday and the Canadian jobs report is due on Friday. The consensus at +10K is too high after back-to-back extremely strong reports and minimum wage hikes in January.