The Weekly Hark - 20 May 2023
Markets let out a large sigh of relief this week with risk premium being unwound ...
#1. Debt Ceiling: despite a little brinkmanship into the weekend, the debt ceiling negotiations are heading in a positive direction, with McCarthy set to bring something to the house next week. Having an edge is quite difficult as everyone expects it to be raised, but what if it isn't... that 0.01% chance leaves little risk premium to fade the uncertainty and why US CDS was indicating a higher probability of default than Brazil over the past week.
#2. Global fixed income sold off: Terminal in NZ close to 6% as local banks raise their expectations for the RBNZ hiking cycle (despite lower inflation expectations), whilst better US data (#whatrecession) continues to defy low expectations. The retail sales control group (0.7 vs 0.4% exp), as well as lower initial claims, led to US2s selling off back to April highs of 4.3%. If the consumer is spending and credit is not an issue, then the Fed will need to do more. Fed's Logan also helped push the June odds to 50-50.
#3. KRE Consolidation: With Washington dominating the headlines, there has been a noticeable lack of tension around regional US banks... if the risks are ringfenced and contagion is limited, then the probability of cuts / recession priced into US fixed income needs to unravel and converge back towards the Fed's end of yr dot. #higherforlonger
#4. Global stocks breaking out: Japan (led by Buffett's boost), Dax and US indices all broke out of the top of their range. The breadth of the US equity rally is narrow/worrying some, but the 13f filings from the family offices of Druckenmillier, PTJ and Tepper saw increased exposure to companies (Nvidia, Apple, Alphabet and Microsoft) with AI products.
#5. Cross Asset Vol: Move Index, CVIX and Vix continued their drift lower and increased the market's appetite for beta…
Important pieces that captured the key narratives of last week...
Bloomberg: Stan Druckenmiller, David Tepper Lead Family Offices Betting on AI
Macro Tourist: Flat is a Position Too
Pepperstone: Run away moves in US equity ahead of debt ceiling vote
Pepperstone: Digesting The Drop in Volatility
RIA Advice: Monetary Support Suggests Bear Market Is Possibly Over
WSJ: Fed officials Suggest June Rate Rise Will Be Close Call
Nomura Podcast: The Week Ahead - FOMC Minutes, Flash PMIs, UK CPI, RBNZ, BI and BoK Meetings
JPM Podcast: EM alpha competes with beta for attention
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May 19th:
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PBoC easing, BoJ easing, Fed QT neutralised by their liquidity push to support regional banks .... there is still a lot of money flushing through the system which will only put pressure on terminal rates and global CB's to do more.
Source: RIA Advice
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I guess I can understand why the Japanese stock market is doing well...
Japanese companies seem to be doing well and looser Monetary policy, but
why is the DAX in Germany doing so well ???
I thought Inflation and Interest Rates in Europe, were still going up ???