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Longview Economics: Oil – sell case brewing a.k.a. how much downside? (September 26)

Once the froth and ‘greediness’ of current oil market positioning has unwound, there’s likely to be a reasonably strong case for owning oil, says Bradley Waddington at Longview Economics in this contrarian note. In particular, and while oil prices will likely sell-off on concerns about recession, he says a large supply and demand ‘mismatch’ (as witnessed in other shocks – e.g. in the pandemic) is unlikely on this occasion. The size and duration of the increase in global oil inventories should therefore be relatively small, which should limit the size of the oil price correction, according to Waddington. Click here if you would like to speak to the analyst.

TD Securities: US Rates – the beatings will continue until morale deteriorates (September 27)

The recent bear steepening in rates is likely being driven by a number of factors including markets repricing for “higher for longer” Fed funds, worries about the impact of increased Treasury supply, fears of persistently high oil prices, and technical weakness, says Gennadly Goldberg at TD Securities. Previous bear steepening moves typically occurred amid a repricing of Fed expectations and 5y5y real rates have made up 75bp of the 78bp selloff in 10y yields since June, he says. While 5y5y real rates are now above taper tantrum levels, they are well below the 2.5-3% area seen in 2010-2011, adds Goldberg. While the recent drivers risk exacerbating the move higher in rates, he thinks restrictive financial conditions could weigh further on economic data. In addition, the government shutdown and student loan repayments pose key risks as we enter the fall, adds Goldberg. A persistent selloff in rates also increases the risk of “breaks” similar to the UK LDI episode or the SVB collapse, he adds. Click here if you would like to speak to the analyst.

CrossBorder Capital: The sell-off in Treasuries is not good news for global liquidity (September 2023)

CrossBorder Capital argues in this report that structural supply and demand forces are pushing US Treasury yields higher via rising term premia. The US Fed is almost powerless to offset this, the firm says. The resulting impairment to the value of the pool of collateral that backs credit markets will hit global liquidity, warns CrossBorder. Asset prices could suffer a negative shock, the firm says. Click here if you would like to speak to the analyst.

Ned Davis Research: Credit Adjustment (September 28)

In this note, Joe Kalish explains why he is removing his high yield underweight, which was inconsistent with the rest of NDR’s view. The firm has been taking its credit exposure through an overweight in EM debt, moving into private credit, favoring European corporates over the U.S., and preferring loans over fixed rate high yield.

Ned Davis Research: Respecting the bong breakout (September 26)

In an earlier note Kalish explains why he’s reducing his bond exposure by 5% and recommending curve steepeners. Kalish says technical breakouts across the curve and around the world warrant an additional exposure reduction, although fundamentals question the sustainability of the move. Ultimately, he says the curve has likely bottomed, even if there is one more rate hike coming.

Deutsche Bank: Mapping Markets – why the full lag from tighter monetary policy is still ahead (September 25)

After the latest round of central bank meetings, there’s been a growing sense of optimism among some market participants that the current tightening cycle is now completed, says Henry Allen at Deutsche Bank. But he says it is much too early to sound the all-clear. After all, monetary policy operates with a time lag, and the full effect will not be felt on the economy for some time, so there are strong reasons to be cautious about economic activity moving forward, warns Allen. Click here if you would like to speak to the analyst.

Deutsche Bank: FX blueprint – mirror image (September 22)

The latest FX Blueprint from George Saravelos at Deutsche Bank argues argues many of the trends into year end are likely to be the mirror image of performance he has seen so far in 2023 and he is changing many of his long-held views. The biggest shift is in Europe: he is turning bullish on the Scandis and bearish on the Swiss franc for the first time since last year and he sees GBP turning down. The Bank of Japan will now stand out as the only central bank that is starting to tighten policy and JPY underperformance should also finally come to an end, adds Saravelos. Over in EM he has already turned bearish CE3 over the summer but is now also turning more cautious on Lat Am FX. The one currency where Saravelos doesn’t see a reversal yet is CNY: until there is a more definitive growth turn in China this is one weakening trend likely to persist. Last and maybe least, EUR/USD has experienced one of its narrowest ranges in history so far this year, he notes. The next big move will depend on if the ECB or Fed turn dovish first, according to Saravelos. Uncertainty on this front is high and he remains neutral with a muted year-end forecast. Click here if you would like to speak to the analyst.

Macro Thoughts: You break it, you pay for it! 10% downside for equities (September 26)

The Fed’s ability to forecast lower inflation may be as bad as it was when inflation was on the rise – it is clearly coming down faster than they had anticipated, according to Macro Thoughts. The firm says they must now decide whether they will move the goalposts on what inflation data will be targeted in order to justify another hike, though with the rise in energy prices over the past few months, they may have an excuse, rather than a reason. Equity markets cannot ignore rising yields much longer, warns Macro Thoughts. The firm says the risks are that central banks overtighten, growth weakens and corporate earnings are squeezed. Therefore, Macro Thoughts says it should not be a surprise that equity markets are coming under pressure and if, on at least one day in October, equity markets sell off by as much as 10%. Click here if you would like to speak to the analyst.