INSIDE
Insights, Perspectives & Trends
[IR]rational?
Macro/Markets Overview
FX | Rates | Credit
Equities | Alternatives
[IR]rational?
Welcome to week #32 of our “Global Macro/Markets Notes”. Here we try to make sense of short-term movements from global financial markets in the context of hard data, facts, and reason to help us “Navigate Global Macro/Markets”.
Among various popular saying and beliefs, two of them come to mind this weekend. The first, it is often said that “markets climb a wall of worry” towards the top and the second, that “markets can remain irrational much longer than we (investors) can remain solvent”. Well, last week we saw more climbing of the infamous wall of worry and this week we will see if markets will remain irrational much longer.
With mounting evidence of economic deceleration on a global scale, US aggregate equity markets climbed further the “wall of worry”, ending the week with close to 1.0% gains after “climbing the wall” more than 14% since June 16 intraday lows.
This week, we will have evidence of the degree of rationality in the markets once we learn from the US Bureau of Labor Statistics what has been happening with consumer prices since. On one hand we have Fed officials going out of their way to say that interest rates must continue to go higher, but on the other hand we have market participants betting that the Fed will not be able to follow through with its plans.
It will be another interesting chapter on our investor journey, and we will be here again next week trying to make sense of all of this and sorting through the noise to be best positioned for the next longer-term market movement.
I hope you this reading and as always, please let us know if you have any questions, concerns or comments that will help in the future versions of our publications.
Warm regards, LeoC.
Insights, Perspectives & Trends
Has the market gone mad? What is the next worry on “the wall”?
Marathon runners know very well that around the 20mi (30km) mark, there is the iconic wall they must climb. If they hit the wall, their pace slows dramatically, leaving them to struggle to the finish-line.
From May 27 to June 08, the S&P500 hit the wall and could not push further and went on to make a new bear market low on June 17. Since then, mounting evidence of economic deceleration on a global scale, together with surprisingly stubborn inflation and a hawkish Fed on the skin of a dove, have fueled a 12% rally that left many professionals (including us) and amateurs alike scratching their heads. One of the biggest mistakes in investing is stubbornness, which we define as hoping for an outcome even after hard data and facts have changed the underlying thesis. So far, we have been skeptical of the current #bearmarketrally as hard data and facts have not suggested otherwise.
The US CPI report on Wednesday will provide everyone more clarity towards the next leg of the market. It is possible, but we doubt, that a #USrecession has been fully priced in the market and a new #USbullmarket started. In this case, investments that are most sensitive to economic growth like small cap stocks (figure 2), sectors like tech and growth factors are ready to lead the way higher. While global economic deceleration is on our radar, Friday’s blowout US payroll has planted a seed that maybe the worst is over. Nevertheless, we still need to see the Fed taking off the foot from the breaks and excesses in the real economy, like bad loans and corporate profits, adjusted to reflect healthier conditions that supports a new bull run.
There is also the possibility that markets will correct through time and not as much more through price. In that case, we will remain highly volatile in a trading range until economic growth data improves and inflationary pressures recede. While energy and food prices have meaningfully slowed down since June 8, commodity prices have moved higher in the last 30 days. However, the Fed has been pushing the breaks hard, which together with an ongoing deceleration in global economic activity, will be enough to provide support to current levels in the market.
Now, what if everything goes wrong?
Well, our research together with insights from our partners and market data signals like the #10_2USTspread inversion (figure 4), suggest that it is also very possible that inflationary pressures are sticker than expected and the Fed will have to push harder on the breaks by raising rates not only more than they guided but much more than the current expectations of market participants. In that case, this 5th rally attempt will indeed #failed (figure 5) and it is plausible that we may see new lows in the major indices.
So, what is going to happen?
Nobody knows… that is the beauty of investing and speculating. We understand that this uncertainty may give you anxiety, but let us do the stressing for you. Our job is to sort through all of this and position our strategies to achieve the best possible results for an investor profile given probabilities of outcomes. Your job is to be able to identify your goals and objectives as accurate as possible so we can then match our strategies to your investment profile.
Please reach out to us if you are losing sleep over your investment or if you are not sure how to identify your investor profile. We have the tools, expertise and more important, the independence to help you achieve your goals and objectives.
Macro/Markets Overview
For the 32nd time this year (and every year 😊), we are back at the #mondaygrind by looking what has and is happening in the #globalmacromarkets. As you know by now, our goal is to simply try to understand the “message”, if any, that financial markets are sending through their short-term movements and dynamics. Without further ado, let’s begin…
FX | Rates |Credit
From our #bzcFXmonitor, the US Dollar Index (BBDXY) finished the week with a 0.6% gain and is now 8.63% higher on the year. Technically, 1,260’s represents a short-term support for the #USDuptrend that began around mid-summer 2021 and gained strength towards the beginning of April 2022.
Looking at the FX pairs:
The Euro (~31% of USD basket) weakened 0.36% to close the week at EURUSD 1.0183. The #EURdowntrend still intact; we are looking around the 1.0146 level for an immediate-term show of strength; we penciled a line in the sand around a multi-day close at or above 1.0363 for a possible change in trend.
The British Pound (~10.5% of USD basket) fell 0.8% to GBPUSD 1.2073 and continues its #GBPdowntrend. GBPUSD 1.20 is an immediate-term soft line in the sand. The recent BOE rate hike to 1.75% did not do much to lift the currency.
The Canadian Dollar (~11% of USD basket) closed the week 1.06% lower to USDCAD1.2932. The #CADneutraltrend still at play and range bound between USDCAD 1.31 and 1.28.
After two consecutive weeks of a counter #JPYdowntrend move, the Japanese Yen (~13.5% of USD basket) lost 1.29% to USDJPY 135.01. Still, the JPY remains at a multi-decade low. The last time the JPY was this weak was around November 1998. The current trend is expected to continue as long as the Bank of Japan (BoJ) maintains its ultra-loose monetary policy, to support the country's still-fragile economic recovery, and continues to diverge from other major central banks' tightening policies.
The Chinese Renminbi ended the week down 0.26% at USDCNY 6.7619 and remains on a #CNYdowntrend since the first leg of the break in April 2022.
The Brazilian Real gained 0.18% on the week to end at USDBRL 5.1639. Lately, the #BRLdowntrend has been challenged by better-than-expected inflation data and a central bank rate hike that took the base rate to 13.75%. The USDBRL 5.20 line in the sand has been breached and we are looking for further appreciation to USDBRL 5.1026. Multiple closes below USDBRL 5.15 or better will characterize a change in trend to #BRLuptrend; we are following this development closely.
Bitcoin is again struggling to keep recent gains and closed on Friday at XBTUSD 22,985. Ethereum finished the week at XETUSD 1,680.
In our #bzcFImonitor, the blowout US employment report for July and hawkish messaging from Fed officials not only immediately after the report was released, but also since the last FOMC meeting result on July 27, helped drive U.S. Treasury yields higher despite downward pressure earlier in the week from rising U.S.-China tensions following House Speaker Nancy Pelosi’s visit to Taiwan.
The yield on the 2-, 5-, 10- and 30-year UST increased 34.1, 27.9, 17.8 and 5.6 basis points, respectively. The #10-2USTspread declined 16.1 bps further into negative territory and closed the week at -0.4030%, the most negative spread since early 2000s.
What do we make out of this?
Financial market participants have interpreted Fed Chair Jerome Powell's comments after the last FOMC policy meeting with a less hawkish tone and have been pricing more limited interest rate hikes since then. In general, investors and speculators have tried to determine how much the Fed will lift its benchmark rates and whether it might be forced to follow its tightening with a pullback if the economic conditions deteriorates too much.
Friday's blowout US payroll increase of 528,000 jobs vs. an expected 250,000 consensus forced participants to revisit their interpretation of the #fedpivot and pushed short-term rates closer to where Fed officials see benchmark rates at the end of the year. Nevertheless, bond market participants in specific are still at odds with the longer-term path of monetary policy provided by the Fed; setting the stage for a potential showdown between them.
The upcoming CPI index report on Wednesday and upcoming Treasury auctions during the week will provide us with information that will help us place our bets on who we believe will win this fight.
Core eurozone government bond yields (Germany and France) ended broadly level and slightly higher on hawkish commentary from US Fed officials, despite falling earlier in the week as UY Speaker of the House Nancy Pelosi arrived in Taiwan. In the UK, gilt yields mirrored the uptick on US yields as the Bank of England (BoE) increased rates by 50bps, despite warning that a recession is in the horizon.
The yield on the JGB10yr (Japanese government bond) fell 1.7bps to end the week at 0.1680%, reflecting global recession risks.
Equities | Alternatives
For #bzcEQmonitor, a much better than expected US job report, got investors once again worried the Fed will have to maintain an aggressive pace of interest rate hikes to tame the inflation beast; but the expectations of higher interest rates did not deter global equities to book another weekly gains. The aggregate MXWD index finishing up 0.28%, helped by broad US markets and a 0.9% gain from emerging markets, index MXEF.
In the US, the large cap S&P500, the tech/growth bias NASDAQ and the small-cap Russell 2000, ended the week with gains, that were partially offset by losses in the narrow Dow Jones Indices complex (industrials, transportations and utilities).
European equities weakened on expectations that major central banks will continue to raise interest rates aggressively to tame the inflation dragon. Despite overall strength in France (+0.37%), Germany (+0.67%), and Italy (+0.81%), the aggregate STOXX 600 Index fell 0.59%. The UK’s FTSE 100 Index added 0.22%.
Japan’s stock markets also finished the week on a positive note, with the Nikkei 225 Index rising 1.35% and the broader TOPIX Index up 0.35%. Upbeat domestic corporate earnings from exported oriented firms, which have been benefiting from a weak yen, supported share prices.
The Chinese Shanghai and Shenzhen indices declined 0.8% and 0.7%, respectively. Geopolitical tensions with the US over House Speaker Nancy Pelosi's visit to Taiwan, further mortgage boycotts in mainland China, and weak economic data were the main culprits. Nevertheless, Chinese chipmakers’ shares jumped as investors bet that the government will increase support for the domestic semiconductor industry after US Congress turned up the volume on the technology war by passing legislation aimed at not only supporting US chip manufactures, but also curbing the plans of firms looking to expand in China.
Our #bzcCMDmonitor showed heavy losses in commodities across the board. Gains in gold +0.54% and platinum +3.9%, were more than offset by losses in silver (-1.7%), the energy complex (WTI -9.7% and Brent -13.7%), and the agricultural complex (corn, soy beans, wheat, cotton and coffee down, while OJ, sugar, live cattle and lean hogs were up).