Read on the Trading Floor - 25 Sept 2023
Today’s focus… higher US yields impairs 60-40 portfolio performance, European growth fears, energy crisis 2.0 and politicians moving the net zero goalposts
#Theme 1: Higher for longer and its impact on the 60-40 portfolio...
Bloomberg's US government bond chart has dominated FinTwit over the weekend as the 3 years of losses for bonds, are unprecedented ...
With higher energy prices and CB's committed to higher rates, some of the most popular research pieces on our platform today are focused on the impact a prolonged period of bond steepening can have on financial stability as well as 60-40 portfolios. What used to be considered a safe hedge is facing an (inflationary) regime shift.
Blind Squirrel Macro: The '60/40' Portfolio doesn't work anymore. The Murdoch Effect. is very important read. "What started with ‘stimmie checks’ has now morphed into an explosion of deficit spending with governments seeking to even get directly involved in industrial policy (e.g., Inflation Reduction and Chips Acts). ‘Big Government’ has never been bigger! And it is popular with the electorate!"
The BondBeat: Random rainy day thoughts
Unlimited Funds: Where top Turn When Stocks and Bonds Move Together
The Macro Compass: A Rare & Dangerous Trend in Bond Markets
JPM: The Investment Implications of a Rising Federal Deficit
#Theme 2: as Germany goes, Europe follows...
Stagnation confirmed this morning in Germany, as IFO continues to point towards Germany (with France following just behind) leading Europe into a recession. EURUSD is now on a 10-week losing streak and closing this evening sub 1.0600 as stagflation envelopes the Eurozone. The ECB are done, the region is an energy importer (more below), China is firmly in recession and German EV makers are lagging behind their China/US counterparties. Dark clouds lie on the horizon for households as winter approaches. Clearly the divergence in fiscal policy across the Atlantic has left the Bidenomics fuelled US economy outperforming.
A well-timed podcast has been released by Cognitive Dissidents: Hope is the last Thing that Dies. Jacob Shaprio welcomes Dr Daniel Stelter to discuss the future of the German economy. It's a sober conversation with an expert who thinks Germany is a long-term short. In a similar vein, users of our bespoke research aggregator have been reading...
Noahpinion: Germany needs to stop messing around!
Ashmore: 'Beep-beep!' China's auto industry leapfrogged the West
FT: A multi-speed Europe holds the key to EU enlargement. A Franco-German report proposes four overlapping circles from an inner core to the new European Political Community
#Theme 3: Energy Crisis 2.0?
With Europe, Japan and China all energy importers with weak growth profiles, the pressure in gas and oil markets at this stage of the monetary policy cycle are especially difficult to navigate. Higher for longer leaves the ECB focused on fighting inflation and in fact most likely welcoming a below trend growth period to help inflation return to their 2% target. Steno Research are leading the charge on the potential second wave of the energy crisis (BUCKLE UP FOR THE ENERGY CRISIS 2.0).
However, as consensus shifts for $100 a barrel and beyond, MacroVisors Weekend Edition #105 makes an interesting point on the Saudi Budget estimate .... "OPEC is unlikely to push their cuts much further. They already have almost 5 million barrel per day in spare capacity at the moment. Pushing oil prices past $100 is likely to create adjustments to demand. This means that with higher rates and the global anticipated economic slowdown, volumes will decline even further and that eventually leads to lower revenues for the likes of Saudi Arabia even if prices remain at $100/bbl. This is obviously not what they are hoping to achieve. Brent Crude to land in the region of $80-$85/bbl by the end of the year - this is where Saudi Arabia’s budget is. That means WTI will eventually settle at $75-$80/bbl."
Some further reading of note, the energy squeeze caught some equity traders wrong footed (ZeroHedge: Energy Stocks Surge After Biggest Short Squeeze in a Year) whilst it's interesting to see oil and gold are still in demand despite the US real rates sell off (Saxo Bank: COT: Crude oil and gold in demand ahead of FOMC).
#Theme 4: As the inflationary impact of climate change appears, governments are rolling back (some) legislation and moving the goalposts in an aid to reduce the impact of net zero as well as support growth.
FT: Why Rishi Sunak thinks his net zero gamble will revive Tory election prospects
Mish Talk: A Step in the Right Direction: UK Prime Minister Trashes Climate Change Goals
Reuters: Germany scraps plans for more stringent building standards to prop up industry
ZeroHedge: How The Transition Push Contributed To Higher Oil Prices
#Theme 5: USTs need a recession to bring back demand...
As China/Japan/Fed step back from the yield curve, private investors have a larger impact on setting the price. The Fed Guy in Maxing Out, writes "the marginal buyer of Treasuries, leveraged investors, have stalled out even as coupon issuance is set to steadily increase." Furthermore WSJ (Why Are Tech Stocks Down? Bond Yields Are Up) ... “The marginal buyer of Treasurys is different, if not less,” said Jason Granet, chief investment officer of BNY Mellon. “The Fed isn’t a buyer, banks historically are a fraction of buying and now the banking system is shrinking. Put those together, Treasurys have to clear at a different price. That means higher yields—it’s pretty simple.”
One of the counters to higher yields and the US exceptionalism is the growth headwind from debt repayments...
#Theme 6: Strikes will dominate the US news cycle with Biden (Tuesday) and Trump (Wednesday) visiting striking workers in Washington.
This week's piece from Inflation Guy: Union Power and Inflation examples a key tenet of this walkout. "when unemployment is high, the union would be asking a company to deliver jobs even though there is no work to be done and the company’s viability may be threatened by a weak economy. Consequently, union actions in a recession tend to be less vigorous (the UAW in fact points out that they made concessions in the Global Financial Crisis to help keep automakers afloat), and unionization is less valuable to the workers in those cases. But in inflation, the union is asking the company to give more to the workers it has and needs, out of its growing revenues and profits (even though those revenues and profits look less impressive, and may even be shrinking, after inflation). Moreover, while unemployment hurts the workers who are unemployed (and unable to pay union dues, also), inflation hurts all workers. Consequently, it is inflation and not unemployment that energizes unions."
#Theme 7: Finally, for those who've not done their homework yet, the week ahead channel on harkster.com has garnered some attention this morning...
The Morning Hark: Quieter Week Ahead
S&P Global Intelligence: Week Ahead Economic Preview - 25 September 2023
Christophe Barraud: Week Ahead Preview: BoE, ECB and Fed speakers; US PCE Inflation; Eurozone CPI; French 2024 Budget; China PMIs; China Golden Week Holiday
UBS Top of the Morning: The week in review and preview
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Great work.....
A lot to think about.....
So many cross currents.....
Sunak gets it.....too much, too fast....
Biden doesn't get it....
I agree with all of your Themes...Hope the Saudis are Listening....
I tried to convince a PM, that Stocks and Bonds are now Positively correlated and he looked
at me, like I was from Mars.......of Course, his Bond Fund Investments are down, again.
Hard to teach a old dog new tricks, if his mind is closed to reality....
Thanks, as always, for all the great content!