*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.
22Apr Chart Video: The confusing market tape reflects conflicting narratives but US rates remain the core driver of markets
*Equities bounce in face of net sell flows as market digests reflation narrative vs Covid case spikes in many places such as India and Japan.
*The heart of the market remains US rates – and they continue to drift towards key supports
*The Bank of Canada joined Norges Bank in beginning to offer a road map for tapering and potential rate hikes; this creates increasing divergence between national policy responses.
*USDJPY approaches key support at 107.70 but correlation with US rates remains strong – we debate restructuring the long dated upside play.
21Apr Macro Video: Recent “leaders” such as German Dax turn lower as volatility increases; USDCAD upside added to RadarScreen
*Volatility pick up driving liquidation across assets as market reverts to squeezing winners.
*Break downs in two recent leaders – Nikkei and Dax – illustrate this as so-called “winners” such as ARKK look technically very weak.
*Bank of Canada today – USDCAD upside added to RadarScreen to give local gamma over both meeting and risk-off catch up for CAD
*US yields at risk of continuing lower – which we consider a tremendous opportunity to get short bonds once again.
20Apr Macro Video: “Goldilocks” looks on borrowed time as yields and implieds vols show signs for basing
*As Rates find a base and equity momentum wanes we view the current “Goldilocks” for risk assets as being on borrowed time.
*A move up in volatility will stop systematic portfolio equities adding to longs, whilst discretionary inflows for 2021 are at historical records.
*With April seasonality being strongest for Global equities, we see volatility on the horizon and being to prepare for this.
*The FOMC meeting on 27/28 April will be closely watched for tapering language; Global central banks will follow the Fed’s lead.
*Incidents this year such Gamestop, Archegos, Wirecard and Greensill, Spac frenzy and then periodic dumps in Bitcoin highlight the amount of leverage in the financial system and the underlying fragility.
*Recall a quote from Jim Chanos mentioned by us some months: “ We are in a golden age for fraud”
*April is traditionally the strongest month for returns in US equity indices, but volatility is building under the surface.
*In FX – the correlation between Gilt-Bund spread and EURGBP remains strong – UK yields need to rally for EURGBP to resume downtrend.
16Apr Macro Video: The weakness in US bond yields is not sustainable, and a turn higher will usher in broader volatility
*The market has been quick to fit narratives to the recent pullback in US bond yields related to “peak US growth and inflation”
*We view this as another case of markets fitting spurious fundamental narratives to what is clearly risk reductive price action.
*We looks for bond yields to find a base and note the pick up in the VVIX – the VIX of the VIx itself as a sign that volatility is basing too
*The Nasdaq looks vulnerable to a turn lower, and put spreads are added to the RadarScreen.
15Apr Chart Video: The break up in commodities may herald a new leg to the reflation trade, but the recent tech rally looks increasingly tenuous.
*The rally in both Oil and Copper suggests a potential rotation in the reflation trade back to commodities as rates remain stable.
*The Correlation between Nasdaq and Bitcoin has recently strengthened, but we question whether the Coinbase IPO weak price action suggests BTC wil pause
*Given Nasdaq entered our resistance zone at 14,000/14,500 we have added downside put spreads to the RadarScreen with 6.25:1 payoff ratio
*The strength in commodities can keep nominal bonds weak – we continue to watch real yields with great interest.
14Apr Chart Video: Strong US 30yr auction shows investor demand for bonds is strong, but this does NOT mean rates will trend significantly lower
*The blow out auction in US 30 bonds was notable for strength of demand from end-user investors, but the real yield on the bond compared to March CPI was NEGATIVE!
*This does not necessarily mean rates will go materially lower in the US as the supply of bonds will be relentless given the funding needs of the US government.
*The move higher in equities and stable rates and USD are driving financial conditions looser, but this is starting to look very stretched.
*Watch Oil and Copper for signals of the Reflation trade rotating back into commodities; we remain very tactical here and look for levels to buy vol.
13Apr Macro Video: US CPI today will set tone for markets looking for direction whilst volumes falls – this a recipe for higher volatility
*US CPI today is key for nearterm direction as many markets mark time and “flag” whilst waiting.
*US equity market internals are weak on both volumes and valuations, with a stand out being the Russell2000.
*We highlight the perverse incentives of years of failed policy form central bankers through a simple chart of global equity market capitalisation (USD) vs balance sheets of Fed / BOJ / ECB.
*USDJPY – like many markets – is marking time as vols fall – but we are preparing for a breakout either way
12Apr Chart Video: Huge week for “goldilocks” looms with data and Bonds, Oil and Copper providing crucial signpostsfor the reflation theme.
*Friday’s macro video focused on the potential for reflation trade resumption and discussed the Fed’s role in generating inflation expectations.
*With US CPI Tuesday, US earnings starting, US bond auctions and Covid headlines we look at a crucial week for this reflation theme.
*US equity volumes remains very low as markets grind higher on heavy positioning and positive earnings expectations – the complacency of “Goldilocks” is due to be tested.
*The relative performance of Nasdaq vs Nikkei is notable as reflation spread – we are waiting for a final move in Nasdaq into 14000-14500 target zone as potential entry point
09Apr Macro Video: Poor US equity internals and US fixed income suggest “Goldilocks” could be short lived – prepare for volatility to rise
*Deteriorating US equity market internals and increasing geo-political risks point to a limited time frame for “Goldilocks”
*The Fed itself is holding down US real yields and as such as fuelling inflation expectations but a move higher in real yields will see nominals yields move higher too.
*We believe this will fuel the rotation back from growth to value and recharge the reflation themes; US CPI next week is critical.
*This means the VIX time period under 20 could be short lived – we are preparing for a volatility pick up in the coming weeks.
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