Heisenberg Report


I’m not sure the headlines are accurate.

Equities (and other risk assets) are not rallying on “virus optimism”. Or, if they are, investors sure do harbor some strange ideas about what counts as a reason to be optimistic these days.

A new statement from China’s National Health Commission says that through Wednesday, there were 28,018 total cases of coronavirus. The death toll rose by 73 to 563. There are 3,859 “severe cases”.

Given those eye-popping totals, you’d be forgiven for suggesting that equities have been buoyant this week despite the virus.

It’s true that you can annotate an S&P futures chart for key virus headlines and clearly identify spikes on ostensibly positive news. But you’d have a pretty hard time making the case that the pandemic story has improved enough over the past 48 hours to warrant one of the best 2-day rallies for US equities in a year (bottom pane).

After 74 straight sessions without any fireworks, things have gotten “interesting”, so to speak.

10-year yields in the US are now 15 bps off the local lows. We’ve gone from bull flattening into a doomsday trade to bear steepening into a massive risk-on move in the space of just a few sessions. This is on track to be among the worst weeks for TLT since Trump was elected.

Meanwhile, the Nasdaq 100 is damn near back into overbought territory. That’s how quickly things have turned around.

As far as bonds go, I spent more than enough time on Tuesday going over the case for a tactical bounce in yields. You can (and probably should) read that if you haven’t here. The data is aiding and abetting the suddenly-resurgent bear case. ADP was a blockbuster, and ISM services beat too. Friday’s job report is obviously key.

But really, the virus news flow is probably going to be the “decider” (to quote George W.) in the near-term, barring some kind of epic meltdown in the data, which isn’t in the cards. There is no chance of an overtly hawkish lean from the Fed – that is, with the virus casting a pall over the prospects for global growth, no upside data surprise would be enough to prompt market participants to start aggressively pricing a rate hike. Given this setup, it seems likely yields will be rangebound, falling when the virus news gets bad, and rising when it’s “improving” – the data will matter, but only at the margins and/or as an upside accelerant.

“Given the coronavirus remains a global health emergency and an array of related uncertainties persist, we’d be remiss to anticipate a complete reversal which would put this year’s 10-year yield peak of 1.943% back on the table”, BMO’s Ian Lyngen, Benjamin Jeffery and Jon Hill said Wednesday, adding that “any credible attempt at 2-handle 10s, while achievable, will have to wait for the balance of February’s data as well as the upcoming Refunding auctions”.

On the Fed, the BMO rates trio note that “It’s challenging to envision a scenario in which the Fed is prompted into further easing [and] we’ve long maintained that the first meetings that will realistically be ‘in play’ won’t occur until the summer [so] for the time being, the bulk of trading direction for Treasuries will remain beholden to factors beyond monetary policy – and to a large extent distanced from the performance of the domestic economy as well”.

With Fed policy for now “inert”, and the data commensurately less important, bonds will probably take their cues from what’s happening in equities (i.e., the ebb and flow of risk sentiment as expressed in stocks), domestic politics and, of course, the coronavirus.

So, while moves in bond yields were eye-popping in January, and equally exciting over the last several sessions, it seems likely things will be more subdued now that the downside overshoot has partially retraced, and there’s no real catalyst for an explosion to the upside.

Speaking of eye-popping, Joe’s in trouble:

And, as for the Macro Tourist’s Tesla short, let’s just say the shares came back down to Earth a bit on Wednesday after one of the more memorable runs in recent market history.

Again: Eye-popping.