In today’s briefing:
- Steno Signals #72 – When a Recession Meets a Melt-Up in Equities and Bonds
- Will Euro Shrink to Parity to the Dollar on Diverging Macro Economic Conditions?
- How the U.S. Could Both Be In A Bull and Bear Market
- Nine Reasons Why This Rally Has Legs
- US Treasury Continues Yield Curve Control as Short-Term Interest Rate Expectations Dip
Steno Signals #72 – When a Recession Meets a Melt-Up in Equities and Bonds
- Happy Sunday and welcome to our flagship editorial! What a week.
- The BoJ no longer has a firm guidance towards higher 10yr bond yields, the Fed accepted higher long bond yields as an excuse to pause and economic data has been abysmal.
- That cocktail has so far allowed the everything rally to thrive in a way we haven’t seen in quarters, but the feedback loop introduced by the big central banks may limit the scope of the bear market rally.
Will Euro Shrink to Parity to the Dollar on Diverging Macro Economic Conditions?
- Since December 2002, the euro has traded above parity to the USD with the only exception being the last quarter of 2022.
- Following central banks rate decisions to pause hikes across both sides of the Atlantic, volatility in the Euro/USD pair is near 12-month lows.
- Low volatility equates to lower option premiums. Periods of low volatility offer best opportunity for going long options.
How the U.S. Could Both Be In A Bull and Bear Market
- U.S. equity averages recently violated their 200 dma but a historical study found that violations are benign as long as the moving average is rising.
- The rising dma is only evident in the megacap growth-dominated S&P 500. Mid and small caps are becoming value candidates.
- How you position yourself will depend on your time horizon and whether you are a momentum or value investor.
Nine Reasons Why This Rally Has Legs
- The stock market reached an extreme oversold condition and a relief rally is underway. Every oversold rally begins with short covering, but needs more buying fuel to continue.
- Evidence of insider buying, even after the onset of the rally, provides bottom-up fundamental support to further gains.
- In addition, psychological relief from macro uncertainty also provides top-down bullish fuel for a sustainable advance,
US Treasury Continues Yield Curve Control as Short-Term Interest Rate Expectations Dip
- Excessive reliance on T-bill issuance by the Treasury reflects a form of yield curve control to prevent a higher term premium from damaging US financial conditions.
- The impact of higher borrowing on bank reserves has been reduced by the return of money market funds as investors and their lower participation in the Fed’s Reverse Repo Programme.
- Persistently high government borrowing for geopolitical conflicts will raise the real return demanded by Treasury investors, because defence spending does not beneficially impact the supply-side of the economy.
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