Things were going along ok (markets mixed) until just before 6 AM in New York, when US equity futures swooned, European stocks dipped and the bond rally gathered more steam with 10-year yields touching 2.35.
There are other signs of risk-off, as the franc trades the strongest against the euro since July 2017. Oh, and Germany sold bunds with a negative yield for the first time since 2016, so that’s fun.
Generally speaking, market participants remain wary amid the ferocious bond rally that looks set to reassert itself on Wednesday after taking a brief breather.
“Global Rates [are] again foaming at the mouth with another leg of panicky grab, while conversely see risk-assets spooked by the instability seen in the Rates-trade, with Spooz off 16 handles at their lows from earlier best levels”, Nomura’s Charlie McElligott writes on Wednesday morning.
Here are some handy bullet points from Charlie that document the “rates raging” trade as convexity flows/ hedging continue to add fuel to the fire:
UST- / swap spread- / front-end- / front-end flattener- “stop-ins” again “going off” overnight, with likely “exacerbation” culprits again being “negative convexity” types from MBS- and systematic “short vol” strategies-:
- 10Y Swap Spreads trading at levels last seen in Aug 2017
- UST 10Y yields making lows last seen Dec 2017 (2.35 low, 2.365 last)
- EDM9EDZ0 (Jun19-Dec20) now -56.5bps inverted to spread lows and pricing-in over two full cuts through end next yr
- UST 5s30s curve earlier touching 71bps, wides since Nov 2017 (now 69.7bps last)
- US “Real Yields” are further collapsing and indicating the voracious “grab for carry” on the back of a view that “QE is coming” and that Rates vols will be further smashed–5Y TIPS yields are now back to Jan 2018 levels
Rates vol. has of course picked up this week after months spent languishing at new record lows. “Clients were short gamma when rates weren’t moving and since last week, rates have moved a lot, so some of those strangles yield enhancers sold are at the money– they became shorter gamma and started covering”, one strategist said Tuesday, adding that “in the meantime, the street became less long, so vol. had to go up.”
The renewed bout of rates hysteria/bid for bonds comes on the heels of Stephen Moore’s farcical interview with the New York Times, documented here on Tuesday evening.
Moore, apparently, is going to bring Powell around to the idea that Fed needs to get on the Trump train and adopt a more pro-growth monetary policy starting, naturally, with a 50bps rate cut effective immediately.
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Stephen Moore Calls For Immediate 50bp Rate Cut, Was ‘Really Furious’ At Jerome Powell In December
Although he surely doesn’t know it, Stephen Moore was playing right into the post-Fed hysteria in rates to the extent Charlie McElligott is right to suggest the moves are in part down to folks coming to terms with the idea that “when the Fed does indeed ease, they will go ‘bigly'” (and that last bit is an actual quote from Charlie’s Wednesday morning missive).
Amusingly, Kaplan looks to have been trotted out on Wednesday morning to try and calm everybody down. “[We need to see] an inversion of some magnitude and/or some duration” before we think about lowering rates, he told WSJ, adding that “right now we don’t have either.”
Perhaps he didn’t get the memo: Stephen Moore is in charge from now on.
Well I heard that stocks are soft because there are just so many IPOs and so much gosh darn competition, and this oversupply of shares is dampening prices.
I mean, you would think stock buybacks would reduce available shares, and you would think we have fewer public companies now than in years past, and you would think that the last thing an oligopolistic market needed was more consolidation despite the poor, confused traders, but I don’t have a CNBC TV show.
The market is telling you that the economy will slow down further. The market is not always correct, but I would not want to bet against it- 2/3 times or more it is correct. The reaction function of the Fed will be to lower rates, and counter intuitively Stephen Moore will be correct. You know the saying about the blind squirrel….
The inventory of Bullish releases on the (Fed) shelf is getting real low.. We are down to about 2-3 Bullish ones left and a lot of BS in the rest of them. I am glad to read Charlie has an explanation for some of this as I agreed with his synopsis yesterday from an intuitive standpoint. Were it not for his prior assessment(yesterday) today’ s early equity action would more closely resemble two dogs moving a herd of sheep.lol..Any comments anyone???
As unqualified as Moore may be, it’s hard to believe that sophisticated traders think Moore will be calling the shots at the Fed. He will be one of 6 or 7 governors, and the least respected at the table. He will not likely even understand what the others are talking about, except for things like “could you please pass the coffee.”
As an outsider, Moore knows that his only job is to support whatever Trump says. He has already learned this can backfire when Trump quickly changes positions, as when he said that that the last rate increase was good grounds for firing Powell for cause, and then Trump said he couldn’t fire Powell. The big challenge Moore will face as an insider is the same that the other sycophants face. As an outsider, Trump loves you because you blindly support him. Once you are an insider, there will likely come a time when something, somewhere will go wrong. When something goes wrong, Trump has a choice of taking responsibility himself, or blaming others. I think I noticed a pattern about that choice.
As a result, the once loved outsiders get chewed up and spit out. It’s only a matter of time.