Another volatile day on Wall Street found dazed investors reeling anew, as US equities oscillated between gains and losses and bonds sold off sharply, extending last week’s declines.
The line worshippers among you will be distressed to learn that the S&P formed a death cross while falling to its lowest levels since June (figure below).
Headed into OpEx, positioning virtually guaranteed more chop. Nomura’s Charlie McElligott reiterated the point, flagging “epic ‘short delta’ and still dangerously ‘short gamma.'” That, he said, “means the trade will see enhanced volatility, not just on account of convexity into imminent expiration, but too with investors needing to determine whether to replace their optionality, roll it out or let it roll off.”
Despite the risk-off tone, Treasurys were heavy throughout, with yields cheaper by up to 15bps across the belly to start the week. 10-year yields in the US reached the highest since July of 2019, while five-year yields neared 2.10% (figure below).
“This week will be instrumental in Treasurys’ attempt to establish a sustainably higher yield plateau,” BMO’s Ian Lyngen and Ben Jeffery wrote, suggesting a dovish hike from Jerome Powell later this week could see yields retrace a bit.
“The zone between 2.15% and 2.25% will be challenging in terms of selling momentum and, all else being equal, we expect that will mark the upper bound in rates at least until there is greater clarity on the extent of the fallout from Ukraine,” they added.
The market was pricing around seven Fed hikes for 2022, with 70% odds of a 50bps increment at the May meeting. 10-year breakevens breached 3% for the first time in data going back nearly a quarter century.
On the war front, talks between Ukraine and Russia continued, but the bombs were still falling. Russian lawmakers are pondering a move to make it illegal for local companies to comply with Western sanctions. Russia is staring at imminent default and warnings on the state of Vladimir Putin’s economy sound very dire. The conflict has now displaced some five million people. Volodymyr Zelenskiy was poised to address the US Congress. He wants a no-fly zone imposed by NATO, war planes or, ideally, both. Germany said it’s set to buy F-35s and Eurofighters as part of an effort to upgrade its capabilities.
“Short squeezes aside, last week markets started to realize how ugly the Ukraine war is for all of us,” Rabobank’s Michael Every said. “Expect far more of that this week — and attempts at rallies that get rapidly unwound,” he added.
Morgan Stanley’s Mike Wilson reiterated as much. “Recessions occur with the arrival of an exogenous shock when the consumer is already in a weakened state,” he wrote, in a Monday note.
Wednesday’s retail sales data will give investors a fresh read on the US consumer, but “fresh” is something of a misnomer considering all that’s happened over the past two weeks. Consumer sentiment deteriorated further in early March, according to the University of Michigan’s gauge.
The spread between the Michigan index and the Conference Board gauge is now very wide, which typically happens just before recessions (figure in the bottom pane, below).
“Unfortunately, we now have the event that can tip us over,” Wilson went on to write, noting that even if there is a de-escalation or a ceasefire, “it’s going to be very difficult to put everything back together in a way that re-establishes confidence quickly.”
That’s especially true given the oncoming Fed tightening cycle and the fact that sentiment was already sitting at decade lows prior to the war, as Americans mourned the loss of purchasing power.
“While we are hoping for a ceasefire like everyone for humanitarian reasons, we would be sellers of the rally in equity markets that would likely ensue,” Wilson remarked. In the same Monday missive cited above, Rabo’s Every said simply, “History is moving. Markets will be moved too.”
H-Man, there is no spin that can suggest the current situation is good for equities. It is just ugly everywhere you look.
$US wejaker, stocks weaker, bonds weaker… unusual except for EM economies….sell off is gaining momentum. Watch us all get wrong footed again.
I’m probably too caught up in the current news cycle, but everything feels very surreal as we drift along with marmalade skies.
I’m cobbling together pieces of abstract history and blending a weird vision that hopefully isn’t over the edge here, and I’ll try not to turn this into the longest comment ever posted.
As a starting point, assume Putin’s goal is to give the West the rope to hang itself. Assume part of this puzzle is to burn up global cash and cause future liquidity problems.
For perspective, please turn to the bullet point associated with comrade Reagan giving speech about Star Wars and that whole deal with bankrupting mother Russia.
Next slide. Recall comrade Obama and Sleepy Joe tangled in a credit default mess associated with deficit spending, budgets and eventually the Budget Control Act of 2011, which provided a 10 year period to manage deficit spending. It’s too insane to actually understand where that’s currently at, after the pandemic.
Next slide. Recall comrade Trump being unable to obtain funds for his gold plated walk spanning the southern American borderline.
“For fiscal 2019, Trump demanded $5.7 billion in wall funds, but Congress appropriated only $1.375 billion for border fencing projects”
Fast forward. Almost lost my place, dah… Ok, return to Star Wars as metaphorical vehicle, a Deux ex machina that implies crazy Putin is attacking capitalism in conjunction with the pandemic, in order to use economic fragility as leverage for instability.
Essentially, by playing Russian Roulette volatility explodes everywhere for everyone, but if a global war of sorts evolves, the concept of money is somewhat irrelevant. Hitler used slave labor and patriotic innovation as well as illegal derivative instruments, the famous MEFO bonds. He didn’t need money, he had power.
Anyway, perhaps we run into fiscal drama because of a war environment that becomes increasingly destabilizing and highly polarized and politicized.
What if that instability results in a default and global fragility, where the dollar doesn’t seem as secure? Why else would Putin be willing to destroy his economy, but who would actually go along with that? I don’t see China getting itself sucked into a black hole that it can’t escape from and that unfortunately leaves us with the reality of Putin’s madness. It doesn’t make sense!
First, I think we need to all stop assuming Putin is some kind of genius. He schemed an easy takeover of Ukraine from his 500 foot table deep in his bunker leveraging 7 simultaneous fronts (which is militarily stupid). Obviously this invasion has been a catastrophe for him both militarily and now economically. He’s made so many miscalculations that it’s beyond worth considering how he could have come to the conclusion that this was somehow a “good idea”.
Second, the dollar failure idea isn’t preposterous at this point. We have no plan to “normalize” monetary policy and so we continue on the endless printing road until we hit some future state where nobody wants dollars anymore. I think it’s a foregone conclusion this will happen, it’s a matter of when not if. However, to your point about Hitler, power beats money and who has more military power than the United States? Who has more gold reserves than the United States? Answer: No one. So Putin doesn’t win this by breaking the global economy, we’re already setup for that shift in global economics.
Do we go back to some kind of a gold backed currency? Possibly. Some new DeFi that actually passes as a national currency? Either way, the US is setup for success assuming Tucker Carlson doesn’t convince half the country that Putin is their friend and that we need to overthrow our own Democracy to be more like him.
The graphs that point to a peak now based on previous peaks are always funny. You can always cover any one highlighted peak and find a previous peak that didn’t precede the drop that the highlighted peak is purported to portend. It’s like a party magic trick: amusing but not actionable.