In today’s briefing:
- Central Bank Watch: The Fed has gone from QE to QT to QB
- Fade the War Hysteria
- Portfolio Watch: Time to consider (EUR) bonds?
- Positioning Watch: Shifting Gears without Panic
- EM by EM #26: Biden, Blinken, Barrels & Beijing
- US Treasury Watch: An opportunity of a decade or still the pain trade?
- US Corporate Animal Spirits Dented by Fed Policy Normalisation, but Profits Remain Resilient
- Is the Unemployment Rate Drifting Higher or Lower?
Central Bank Watch: The Fed has gone from QE to QT to QB
- The extreme volatility in the USD curve continues and Jay Powell gave a green light to further curve steepening by hinting that term premias could drive up the curve allowing the Fed to tighten a little less in the front.
- In this piece, we are going to take a deep dive into central balance sheet structures in the US and in Europe, which reveals that the ECB is much more determined in its attempts to bring liquidity down relative to the Fed.
- This is another reason to expect EUR-flation to drop faster than USD-flation.
Fade the War Hysteria
- Oil prices have jumped over $6 a barrel since the Hamas attack on Israel as a geopolitical risk premium became embedded in the oil price.
- Our review of the military backdrop, oil supply-demand factors and the market response to the crisis leads us to conclude that investors should fade any hysteria over a Mideast conflict.
- However, regional equity markets like Israel and Saudi Arabia should be avoided, each for their own idiosyncratic reasons.
Portfolio Watch: Time to consider (EUR) bonds?
- We of course have been totally explicit about how stocks have been a minefield to go long since August and while I entertained the thought of a brief comeback on the back of a potential breather at the long-end of the UST curve, it is rather obvious that none of that is really playing out.
The bond market is in a sad state and risk assets struggle to keep afloat and we grace ourselves of having no net exposure to either asset class.
We are currently in the process of thoroughly reviewing our portfolio and are actively considering the inclusion of bonds to profit from the prevailing disinflationary pressures and the overall subdued economic outlook
Positioning Watch: Shifting Gears without Panic
Another week of blood and drama. But fear not, we’re here to wrap up the week with our usual watch series, where we’ll gauge the current market sentiment using the latest positioning data.
First things first, let’s take a quick peek at the chart of the week down below. In yesterday’s Portfolio Watch, we spilled the beans about some big changes we’re planning for our portfolio.
One of the main reasons we’re making these moves now is because of what we see in this chart: The S&P 500 just dipped below its 200-day moving average support line, waving a red flag that suggests we might be in for a bumpy ride in the coming weeks
EM by EM #26: Biden, Blinken, Barrels & Beijing
- Both Biden and Xi find themselves walking on thin ice as domestic economic challenges pose a significant challenge to their foreign policy goals.
- Amidst the considerable volatility in risk assets and US Treasury bonds, we believe that commodities could present a favorable risk-reward opportunity.
- Our forecast of a possible recession is further complicated by price pressures arising from the pending restocking and the geopolitical risksIt’s hard to overlook the remarkable resilience of the US economy and the current turbulence in global bond markets.
US Treasury Watch: An opportunity of a decade or still the pain trade?
- Some much-needed bids provided relief to the bedrock treasury market last week, and yields eased off a bit.
- The relief was short-lived though, and this week’s yields continue its climb.
- But, is now a golden opportunity for buying bonds, or is the cocktail of vast issuance, some CBs unwinding their holdings, and still poor appetite bound to send yields even higher?
US Corporate Animal Spirits Dented by Fed Policy Normalisation, but Profits Remain Resilient
- US economic resilience can be explained by corporations not experiencing the same magnitude of interest rate hikes endured by banking customers due to their ability to raise capital market funding.
- US corporate buyback activity has fallen significantly since 2022 Q1 due to uncertainty about the economic outlook. The new 1% buyback tax has hitherto not significantly impacted S&P500 operating EPS.
- Animal spirits within the corporate sector are difficult to gauge. Proxies for animal spirits do not currently indicate high levels and are seemingly at odds with tight labour market conditions.
Is the Unemployment Rate Drifting Higher or Lower?
- Arguably, the current normalization of inflation, including the future path of Fed policy, is linked to the unsettled labor market dynamics
- The Beveridge curve, depicting an inverse relationship between vacancies and unemployment, offers clues on the ongoing labor market rebalancing
- While my exercise suggests that the unemployment rate is likely to drift up as vacancies decline, the extent of the rise remains uncertain
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