In today’s briefing:
- Global Credit Outlook: Tightness at Banks and Speculative Grade Issuers to Persist
- Portfolio Watch: The Summer Volatility Razor
- Positioning Watch – The 60/40 Portfolio in Reverse
- Bond Rout = Stock Rout?
- Why Our “Ultimate Market Timing Model” Is Cautious
- US Bond Market Signalling Higher Yields
Global Credit Outlook: Tightness at Banks and Speculative Grade Issuers to Persist
- Credit markets have finally accepted the view that central bank policy rates will remain higher for longer. Despite the resilience of global demand, conditions vary considerably on a cross-border basis.
- Conditions in credit markets have not deteriorated as badly as envisaged. Investors are wary about speculative grade borrowers. Banks continue to be much more risk averse than credit markets.
- US borrowers will wait before refinancing due to the higher for longer policy of the Fed. Asia Pacific speculative grade borrowers face refinancing risks if market conditions fail to improve.
Portfolio Watch: The Summer Volatility Razor
- Usually, July is a bit of a zombie month with traders locked in or taking chips off the table to enjoy the beach instead.
- But with VIX up some 13% on the week and treasury yields at 15-year highs after a massive rout on the back of a massive beat on the ADP report which today seems to be undermined by a Non-farm payroll report as of writing.
- It would seem that the general modus operandi in this point is whether your book can tackle a peak in volatility or not
Positioning Watch – The 60/40 Portfolio in Reverse
- The reverse 60/40 portfolio seems to be THE allocation of the average trader with equity positioning slightly underweight and bond positioning massively overweight.
- Being underweight equities is not doing any good for your portfolio at the moment, and the long bond trade doesn’t have positive returns in sight if everything that’s unfolding right now continues.
- Macro-wise and market-wise we are currently at a big crossroad, as traders and PMs are trying to figure out the state of the global economy, and how central banks are going to respond to recent data releases.
Bond Rout = Stock Rout?
- The S&P 500 hit an air pocket last week and as it was rattled by the rout in bond prices.
- As the index weakened, SPY formed a textbook island reversal with a measured objective of about 435, which represents a fairly shallow pullback.
- Looking ahead over the next few weeks, current conditions argue for a corrective period or consolidation before equity bulls can regain their mojo.
Why Our “Ultimate Market Timing Model” Is Cautious
- How would you like to take greater equity risk while reducing the worst of the downside risk? Our Ultimate Market Timing Model (UMTM) is designed to do that.
- Our UMTM is cautious on equities based on two scenarios. The first is a mild recession, which is consistent with the Fed’s staff forecast.
- The other more ominous scenario is the false soft landing which turns into stagflationary growth, which would be unfriendly to both stock and bond prices.
US Bond Market Signalling Higher Yields
- Late Economic cycle rate hikes are seen as a buying opportunity of duration as inflation expectations are expected to come under control.
- For the first time, FED funds are not discounting rate cuts in 2023.
- If inflation remains high over time, the strategies of reducing interest rates in 2024, investing in a long US duration and expecting lower breakeven views may face difficulties.
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