Former FX trader Richard Breslow is out with his daily missive and it’s a rambling (in a good-ish way) trip across assets and markets.
As regular readers know, Breslow is great at tying everything together in 6-10 well-crafted bullet points. But while Tuesday’s note certainly gets an “A” for effort, it might be a little too ambitious to be completely coherent.
This one’s got everything from black swans, to Fed reaction function musings, to commodities commentary, to OAT-bund spreads, to overconfident carry traders to… well… to damn near everything. By the end of it, you’ll be second-guessing your second guesses.
In any event, he’s always worth a read and today is no exception. More below.
Global bond yields remain very low. No matter that they’ve bounced nicely from the latest panic just last month. In fact it’s fair to say that they still trade very much in crisis territory. It’s not reasonable to talk about U.S. full-employment, impressive European growth and taper timetables without considering the very real possibility that yield levels just don’t reflect reality. That sovereign yields are higher, but the market doesn’t know it yet.
- To be fair, we still have loads of quantitative easing going on and the world remains a scary place. But it’s always been a scary place. We just have selective, as well as short, memories. And if black swans remain your major investing concern, then economic numbers are of very little import
- Much has been rightly made of the caning of commodity prices right back to levels in the Bloomberg commodity index that we saw last November and September. Yet, they remain well above levels seen in most of the first half of 2016. Of course back then we believed this would derail the Fed and it was fundamentally based. It’s more likely now that the FOMC has bigger fish to fry (full employment) and catching major investors massively off-side in their positioning might be a major contributor to downward price price pressures
- If there’s one thing that characterizes commodity price analysis it’s that every big move is described as inevitable, systemic and demographic. And when it frequently reverses we get the other side of the same story. Minus signs are very useful
- But consider the positive effects of lower commodities for developed country economies rather than what it’s doing to your emerging market carry trades
- In addition to outright rate hikes, there’s balance sheet reduction. So rates now have to deal with a potential one- two punch. I know it’s de rigueur to lie to ourselves that cutting these holdings will be painless and surgically carried out. Don’t count on it
- On the U.S. side, investors remain skeptical that the Fed is as far along on pulling the trigger as they claim. When that changes, fixed income trading gets interesting again
- More tellingly, look at European spreads to Germany. Macron won, the economy is great, everyone is saved. Spreads have come in, but haven’t compressed back to the levels we saw before the notion of tapering was broached. It’s simplistic to talk about European aggregate numbers in the context of the ECB balance sheet. It’s all about individual countries and the capital key. When they actually get underway, European bond traders are going to feel like the European Monetary System is back. With a vengeance
- Yield and volatility suppression have been a global phenomenon for years. Remember, in one fashion or another, over time, global rates must move together. We have a lot of supply this week, so the misdirection of message is real. But how sovereigns and IG trade going forward will be more important than any other asset prices for calling the shots on market conditions
- The beauty of the trade is that when it eventually happens there’ll be a lot of juice in it, it will be that elusive trend we’ve lacked and traders will fight it every step of the way