In mid-December we received a call from one of the sales equity guys at a major investment bank we speak to rather infrequently. He pointed out that “credit was exploding” and that credit was the place to look at “as oil problems are spilling over”.
Those types of calls are almost always marking a local extreme inflection point. We wrote about the fact that panic had gotten ahead of itself in late December. Since then, both US and European credit, have managed retracing almost the entire move higher.
Oil was a big driver back then, and everybody was suddenly a professional when it comes to oil. Not overly surprising, oil put in a low right at the time we saw oil volatility index, OIV, explode to the upside. Back then we wrote and showed the chart below;
Oil volatility is now in full explosion mode. This is pure panic and these levels won’t be sustainable long-term…
Oil (white) versus Oil volatility (orange).
We must admit we have no great view on oil here. 55 is a big resistance level to watch closely. The panic component of oil is gone, but the question is how far down do you sell credit?
Below chart shows the US credit (white inverted) and oil (orange). The two were glued together post the October sell off, but recently credit markets have become very leisure about risk, as now Powell seems to have found his put again.
We tend to look at the world of risk from a global perspective and not only from the equities angle. As we look at the self-explanatory chart below, and watch investors puke credit protection (and equity index volatility as well), we are eagerly waiting for that sales call from the equity guy explaining to us that credit is now telling us all is fine.
That would be the perfect time to start loading up on protection trades. Stay tuned!
Source; charts by Bloomberg
