*The issue of sequencing of themes remains hard to navigate for investors generally with higher levels of positioning short USD and long equities.
*Notable is collapse in vol – VIX testing 20/24 support zone – when real economic uncertainty remains so high.
*We remain on alert for a yearend meltup IF USD / US rates / Vol remain rangebound
*Increasingly view this final rally as “it” and look for a significant pick up in Volatility and downside equity risk into Q1 2021.
22Oct Chart Video: Divergence between bond vol and equity vol signals equity market complacency as the liquidity driven rally grinds on
*Inflation breakevens break to new highs in the US as a huge couple of weeks loom for BoC, ECB, BoE and Fed – what will they say and do?
*The volatility gap between equities and bonds continues to grow as internal flow dynamics continue to show this is as “low quality” rally
*Nov30th 4400puts in SP500 added to RadarScreen for a longer term expression of equity downside risk.
*Finally – apologies for no usual Friday “signoff” ! technical issues with the screen recorder but the main section of the video is intact!
21Oct Chart Video: Confluence of fundamental, technical and flow data points to near-term risk off potential
*Fed Beige book highlights slower growth / higher persistent inflation whilst Evergrande asset sale collapses in China and restrictions are coming in the UK
*The recent bounce in US equities has been driven by systematic and retail flows but real investors flows have been absent – the “seasonality” narrative has bene fitted to equity strength.
*We see near term risk for a vol spike and lower equities as very real with key signpost leaders such as AUDJPY, AUDUSD and JETS ETF all showing signs of turning lower.
*We add AUDUSD downside and US equity downside to RadarScreen today – prepare for pick up in volatility.
20Oct Chart Video: Fastest Horses lead the risk rally but investors grow increasingly concerned over growth and inflation – CAUTION!
*The recent rally in risk assets is being led by the “fastest horses” as momentum and retail chase the upside on the back of “transitory” inflation and central bank support narrative.
*But survey data shows institutional investors are concerned over both growth AND inflation – the epitome of our “fully invested bear” theme.
*VIX and volatility measures have been pushed back to the lows for 2021 but the Fed is increasingly debating whether employment is back to pre-pandemic levels.
*We do NOT buy into this equity / risk rally and are looking for plays to express longer dated equity downside taking advantage of the selloff in volatility.
19Oct Macro Video: Spike in frontend rates shows market concern with inflation and central banker response.
*The huge move higher in DM frontend rates highlights the markets concerns over inflation and central bank’s being forced to hike far faster.
*This creates a problem for central bankers used to controlling prices but unprecedented stimulus has changed the narratives dramatically.
*The pressure on Powell over his PA trading increases the chance of a Brainard Fed who will be uber-dovish – is this driving equities higher?
*The market will remain very tricky to gauge – we remain cautious on risk taking as short term narratives dominate.
18Oct Chart Video: The perfect setup for persistent inflation is causing policy makers to be overtaken by “events”
*An environment of sustained supply chain issues, unprecedented policy maker stimulus and the “cult” of climate change is creating the perfect setup for sustained inflation.
*The Bank of England Governor Bailey has been clear that inflaiton expectations are becoming unanchored and the Bank “needs to do something”.
*The market’s view of gradual rate hikes and controlled withdrawal of stimulus is naïve – this will happen much faster as events “overtake” policy makers.
*On the week equities looks vulnerable is yields curves continue to parallel shift higher across Developed markets – inflation is a global phenomenon.
15Oct Macro Video: As market continues rationalise CB response to higher frontend rates, negative real yields and tapering point to higher nominal rates
*The market is trying to rationalise Central Bank response to the market pricing in a faster pace of rate hikes as data shows inflation is clearly NOT TRANSITORY!
*But positioning and demand for fixed income is causing bonds to pause – allowing market to fit narratives around central bank policy mistake of hiking too fast.
*Our view remains that the fiscal and monetary response to the pandemic has been far too significant, fuelling bubbles in asset prices and unanchoring inflation expectations.
*The relationship between real yields, nominal yields and inflation breakevens will be critical for all markets – we hold our view for a move higher in long end rates in the coming months.
14Oct Chart Video: Yield curve flattening in response to huge US CPI indicates concern of hawkish policy mistake from the Fed but tapering is coming!
*US headline CPI at +5.4% highlights the fallacy of the transitory argument on inflation but bonds rallied and curves flattened.
*The bond market appears to be saying central banks are making a policy mistake in terms of hiking rates into a supply shock and will kill off growth longer term
*Critically though is the constant demand for bonds from central banks, which is ending as the Fed seems set to begin tapering in Nov at USD 15bio / month
*We maintain out short bonds, long Oil bias on the RadarScreen but are content to watch markets here for setups.
12Oct Macro Video: FED to target to Taper as inflation builds – higher Oil / USD / Rates a toxic combination for US equity indices
*US employment report will not prevent Fed from starting tapering purchases in November as inflation data runs hot.
*Consumer confidence wanes as inflation drives prices higher – this acts like a tax!
*Central banks are clearly behind the curve and then bond market is showing this – this is a negative cocktail for equities.
*USDJPY and USDMXN both rallying shows the impact of higher rates – but for differing reasons.
08Oct Macro Video: Oil upside potential increases to express rising inflation – expression added to RadarScreen
*The rise in both Oil and Global yields highlights the non-transitory nature of inflation and how policy makers are likely to be “over taken by events”
*The fundamental and technical setup for higher oil prices looks favourable and call spreads are added to the RadarScreen – USD 100 Oil pre year end is increasingly likely.
*Rates are breaking higher too – this is a combination that will maintain a bid tone to overall market volatility.
*Equities are tradeable but less “investable” – this remains a tactical market in risk assets.
07Oct Chart Video: Elevated VIX will maintain short-term market “chop” as traders chase near term narratives but inflation remains a game changer
*The elevated levels of the VIX ensure that intraday ranges remain high – this is encouraging yet more “narrative” fitting to price action
*The reasons for the recovery in equities – delay in debt ceiling vote in US and Russia to supply more gas – are both short term and spurious
*In reality – the markets remain trapped in a risk-averting environment with inflation the critical change to previous episodes.
*We continue to focus on higher rates, increased volatility – and recognise this is a tactical trading market with very short term opportunities.
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