Former FX trader – and man who has generally had quite enough of your senseless bullshit – Richard Breslow, is out with his latest daily missive and we like it.
Somehow, the importance of Janet Yellen’s dovish lean on Capitol Hill earlier this month seems to have escaped a lot of folks, even to the point where we’ve seen at least one ostensibly “smart” commentator actually get the date wrong (by two full days, no less) when identifying it on a chart.
But Richard gets it, that’s for sure, and he’s going to make sure you know he gets it this morning.
Make no mistake, the “Sintra hiccup” (as it’s come to be known at at least one sellside desk) did indeed reinforce the extent to which, if you’re looking for places where a rates tantrum might start, bunds are probably at the top of the list. Draghi’s “I’ll look through transitory weakness in inflation” comments on June 27 clearly catalyzed a rates mini-tantrum that started in bund yields and spread to Treasurys and gilts in a matter of minutes.
That said, if you look at what we’ve seen in risk assets since Yellen’s prepared remarks were released earlier this month, we’re clearly trading on the Fed – indeed, you could even say that the weak CPI print we got two days later was magnified by Yellen’s dovish tone 48 hours (almost on the dot) earlier.
On Tuesday, there was a lot of chatter about the extent to which rising yields were signaling something about expectations for today’s Fed statement – and maybe they were. Or maybe the bond selling was just what it appeared to be: a predictable reaction to a blockbuster German Ifo print and upbeat earnings out of multiple bellwethers in the US, all accelerated by a series of notable block trades.
So with all of that in mind, do consider the following from Breslow because it’s spot-on…
It’s easy to forget, I do it all the time, that the Fed remains the single most dominant force for global financial conditions. It doesn’t fit the current story. Many, maybe even most, people like to muse upon the notion that the U.S. is sinking fast into itself and others, China, Germany, are stepping in to fill the breach. It sure makes sense. But looking back on how asset prices have behaved over the last two weeks, you’d be hard pressed to make that case.
- Just this past Monday, the IMF, the fount of all wisdom concerning the world’s economy, further made the point that the global economy is relying less on the U.S. to sustain the global recovery. In the ultimate irony, Germany is now being hailed as the leader of the Western world. But, if you want to understand what has actually been happening in markets, rewind to the before and after of the most recent Brainard and Yellen speeches
- It’s worth a look because, seemingly, everything moved in tandem in response and reclaiming those earlier levels will signal the important pivots of whether the mood remains lower, longer and timid or we are back to the happy notion that global rates are indeed moving higher
- The bond market, on the back of a somewhat extraordinary amount of really chunky block trades…
… has made a good show of reversing the post-speech yield slide.
- It has also done wonders for bending the commentary and whisper expectations for today’s FOMC announcement. And we’ve been handed a flashing set of lights demarcating where asset prices are signaling what message investors are in fact internalizing
- Governor Brainard sent up the rate-path warning flairs on July 11. Chair Yellen followed up before Congress the next day. There’s no denying they took markets by surprise, and it was off to the races after that. Forget every other event economic, political and geopolitical, the charts don’t lie
- Once Brainard spoke, 10-year Treasury futures didn’t look back for two weeks. Yields fell over 15 basis points. Take your pick, yields back above at 2.40ish or the September futures below circa 125 have to be considered enormous levels
- And lest you think this is some U.S.-specific phenomenon, bund futures did exactly the same thing. Forget the ECB and Sintra and Turkey, Yellen kicked off a fall of over 12 basis points, until the 0.50% level held on cue from Treasuries. Use 0.61% in yield or 160.60ish in futures
- Not surprisingly, the dollar index began the latest leg of its plunge precisely at the same time. And 2 percent moves in a straight line are nothing to sneeze at. The dollar is up today. Won’t mean anything until we get back above 96. Gold? Same thing, use $1210
- If you needed any more proof that rig counts and production quotas are just masks covering the fact that oil is nothing more than a financial asset, WTI was sitting happily at $44 before getting the all-clear and launching itself up to $48. I guess those comments that broke the S&P 500 out of its torpor and on to multiple new all-time highs meant there was a stronger trickle of wealth to use in filling up the yacht fleet. Use boat sales at 30 metres as the pivot
- Emerging-market currency traders got a real gift from the about-face. I’ll leave it to you to take a look at the MSCI index
- As far as financial assets are concerned, we’re still all in this together