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Macro Risk Advisors: Amidst back-end turbulence, reading the Fed speak
The market seems desperate to price the pivot, and while the Fed should be done, yesterday’s speeches were not a pivot, says Macro Risk Advisors in this short video. The firm says while President Logan and Vice Chair Jefferson acknowledged tighter financial condition, they also continue to emphasize a tighter labour market. Clearly if they break something, and following the “hawkish hold” the backend of the UST market was under serious stress, they will stop, according to Macro Risk Advisors. Indeed, the firm says acknowledgement of the bear steepening by Daly, Goolsbee, Logan and Jefferson hint at a 5% 10-year put. Click here for the full report. Click here if you would like to speak to the analyst.
Deutsche Bank: When to go long the US front-end? (October 11)
DB’s rates team’s forecast is consistent with a significant rally in the US front-end, predicated on the US entering a recession next year and, as a result, the Fed cutting policy rates below neutral.
With real policy rates priced to peak at ~3% (on a 6-month average basis), monetary policy is likely to be tight enough. However, their strategists say that the significant coordinated monetary and fiscal policy easing during covid has resulted in a large transfer of leverage from the private to the public sector balance sheet. As a result, the transmission of monetary policy may turn out to be slower than would otherwise have been the case.
It’s this uncertainty on timing that has seen them avoid being outright long the US front-end. Instead, they’ve favoured forward 2s10s steepeners, arguing that the upside to global term premia should reduce the risks to the trade in a soft landing scenario.
So, now that the easy part of the global term premia repricing is behind us, the question of when to go long the US front-end is increasingly relevant. In the current context, there are three logical potential triggers to their mind. 1) Weakness in the labour market, e.g. an increase in jobless claims, 2) Further financial stress, e.g. via US regional banks, 3) A potential shift towards more restrictive fiscal policy.
Nomura: Virtuous FCI feedback loop lifting assets on ”more dovish”Fed messaging (October 11)
Nomura’s Charlie McElligott says the move into Rates / Duration Upside has been the right one following the peak of the “negative convexity” capitulatory selloff last Tuesday,as the Fed’s coordinated “end of tightening cycle” messaging shift in recent days since has proven the turning point for USTs…and with it, has facilitated a broad“Assets” rally, particularly as lower Treasury Yields are then too allowing financial conditions to “ease” again via US Dollar pullback as well.
Of course for Equities, the risks go beyond the Macro(Multiples / Discount Rate implications)of say, hot CPI / PPI print potentials this week,as we turn into Corporate EPS season—where IF we were to see a meaningful Earnings deterioration, or thematic weakening in Consumer trends—it would open-up an entirely new front of challenges and downside catalysts…although as it currently stands, that looks yet-again unlikely, with many around Street saying Q2 marked the“trough” on EPS, and many strategists now forecasting an above-normal “beat” this quarter off of what were lowered-bar. Click here for the full note.
Forest For The Trees: Fade the drop in 10y UST yields; 10y UST yields, oil, gold and USD should all rise on Israel/Hamas war (October 10)
The question of whether Iran gets drawn into the Israel conflict is often mentioned. According to Forest for the Trees, the US has been allowing Iran to export more oil in an attempt to keep oil markets calm, keep UST markets calm (higher oil prices mechanically force more UST selling), and inflict more pain on Russia. If the US wants to inflict pain on both Russia AND Iran, it will be effectively sanctioning oil suppliers that make up 23% of global oil export markets…which would likely drive oil prices MUCH higher. Indeed, if the price of oil were to rise sharply due to the US putting more aggressive sanctions on 23% of the world’s oil net exports, it would only accelerate foreign UST holders to sell. Click here for the full report. Click here if you would like to speak to the analyst.
Gavekal Research: War in the Middle East – more uncomfortable memories (October 10)
Charles Gave is old enough that the events of the Yom Kippur war of 1973 are a memory, rather than history, and he draws upon this to provide some insight into the implications from the new conflict in Israel. In the 1973 war, an Arab oil embargo caused a sharp rise in oil prices, leading to inflation, recessions, and fiscal crises in Western countries. The current conflict in Israel raises concerns about potential long-term effects on two main vectors: oil prices and interest rates. With global oil markets already tightly balanced, any disruption in Middle East oil supplies could lead to a sudden and steep rise in energy prices, particularly impacting Europe, which is heavily dependent on Middle Eastern oil. Rising long-term interest rates also pose a significant danger, potentially leading to fiscal challenges similar to the UK’s experience in 1976. As a result, Gave suggests that investors should consider holding bonds outside OECD markets, owning gold, selling shares of state-dependent companies, and avoiding businesses reliant on consumer spending in highly indebted countries. Click here for the full report. Click here if you would like to speak to the analyst.
Liberum: Global oil, gas and LNG; Israeli conflict – initial energy thoughts (October 10)
The ongoing conflict in Israel has minimal direct impact on oil and gas markets as Israel is a small oil importer and gas exporter. Escalation risks, however, could significantly affect global oil and gas production and exports, particularly in the Middle East, which produces 31% of global oil and a substantial portion of LNG. The Biden administration aims for lower gasoline prices, making rising prices a concern during its re-election campaign. Iran’s increasing exports and Saudi Arabia’s potential fighter jet purchase complicate the situation. China is closely watching global military events, which could affect its One China principle. Crude price escalation benefits oil producers like Chevron, while rising gas/LNG prices benefit companies like Shell and Equinor. Click here for the full report. Click here if you would like to speak to the analyst.
The Schork Report: Oil markets; Hmm? Not the reaction you would expect (October 10)
The crisis in the Middle East is rapidly developing to a level on par with the 1973 Yom Kippur War, according to the Schork Group. The firm says with Iran’s hand all over the unfolding savagery being carried out by Hamas terrorists, and the US Navy and Air Force positioning military assets to react to further provocations from the Mulahs, it was reasonable to expect a stronger reaction from the oil markets’ first opportunity to trade on the news. Indeed, Schork warns that if an all-out destabilisation of the region were to happen and Iran were to significantly reduce or even cease its oil exports or more likely, Iran’s export facilities were knocked out by the Israeli Air Force, the loss of these barrels would be catastrophic, not just for the oil market, but for humanity. Click here for the full report. Click here if you would like to speak to the analyst.
Macro Risk Advisors: VXX options can provide targeted exposure for vol normalisation
Implied vol has picked up meaningfully in recent weeks, according to Macro Risk Advisors. Cross-asset volatility has been a key driver of higher equity implied vol, says the firm, and SPX realised volatility has been slow to react – leaving a good set-up for (limited) vol normalisation trades. In this short video, Rocky Fishman explains why VXX put strategies can benefit from lower vol and a steeper curve, says MRA. By stimulating the VXX’s performance, vol view can be translated into specific trades, adds the firm. Click here for the full report. Click here if you would like to speak to the analyst.