It’s quiet out there. Too quiet.
The US is closed, but S&P futs are at their highest levels since September, 2006 – a reflection of the market’s continuing complacency even as political risk is running higher than ever both at home and abroad.
Perhaps today is good day to sniff around for potential canaries in the coal mine. And before anyone chides me for inappropriately mixing metaphors (“come on Heisenberg, one can’t ‘sniff’ a canary“), remember the immortal words of Ray Stantz (Dan Aykroyd): “Listen! Do you smell something?”
So with that, I’ll bring in former FX trader turned Bloomberg contributor Richard Breslow with more on where the risks might be (note the bit about watching German bunds as a risk proxy and the bolded passages about HY).
Via Bloomberg’s Richard Breslow
It’s been a quiet start to the week. And appropriately so. The U.S. is off, with the predictable effect on volumes. No one immediately had a strong opinion on how to interpret the wider Japan trade deficit nor why exports to the U.S. and China should have slowed the way they did. Especially since it was on volumes, not currency. Those export numbers may not be actionable today, but should be filed away for close monitoring. There will be news this week, but as the pastry chef said, “It’s for later”.
- Besides, Sweden is safe, equity naysayers have thrown their hands up in despair and you get the sense that traders would like one morning of calm before the politics of another European country sends peripheral spreads into a tizzy. But don’t get too relaxed, the on-again, off-again talks to unify the French left are reportedly…on again
- So on a morning of relative calm with S&P 500 futures trading at all-time highs, I thought I’d take the opportunity to focus on a few potential canaries in the coal mine of risk-on to watch. Why? Because it’s been the right strategy not to fight the risk bandwagon. Don’t beat your head against the wall and wait until these trades actually do something wrong. The early warning signs won’t come from the obvious majors
- The MSCI emerging-markets currency index has defied all expectations and embraced the Trump trends with gusto. Hoped-for global growth has overwhelmed higher dollar and interest rates in the investing zeitgeist. If this turns, it could do so quickly: with global ramifications. Watch last Thursday’s high as a potential pivot. Comes to mind as the Philippine peso breaks lower today from its three-month range
- Globally, high-yield credit spreads have compressed in a way that suggests either the world is in great shape or central banks will remain activist liquidity providers. Is that your central case? Why fight the trend? But on a strictly visual look at the charts, one has to wonder
- As people tie themselves into knots over the range-bound Treasury 10-year, make life simpler and watch German bunds. Where and how they trade reflects Europe, not Germany. They failed pretty badly above 40bps. Through the Jan 9 low at 0.278% would not be a bullish comment on the state of things. And could make a break above that famous Treasury trendline less imminent
- Everyone has their favorite birds to watch. Pick yours and otherwise, respect the price action