Lost Lives, Lost Money. In That Order

Markets felt tentative and vacant Monday, as traders eyed a sparse docket in the US, where Fedspeak and recession banter will fill the data void.

Jerome Powell may cement expectations for a 50bps hike at next month’s FOMC when he speaks alongside Christine Lagarde on Thursday at an IMF event.

Rates will remain the focal point. Real yields are solidly positive beyond the 10-year sector, where the rapidity of the recent rise is remarkable. 10-year reals were -1.04% on March 8. They’re flirting with zero now (figure below).

That’s very challenging for risk assets, especially in an environment where you can’t plausibly attribute the move to improving economic prospects. It’s solely down to policy — a “pure” tightening impulse, if you like.

If it continues, it’ll undermine an already fragile outlook. “There’s a feedback loop between long-end real rates, financial conditions and the outlook for the economy,” TD’s Priya Misra remarked.

To be sure, reals aren’t “high” by any stretch, but the rapidity of the move is a headwind. Equities are struggling now, Bitcoin is the lowest in a month and so on. And just in time for speculative bets in US, European, EM and Japanese equity futures and options to jump the most in nearly two years (on CFTC’s latest weekly data).

“Efficient” markets are pulling forward future outcomes again. You’re supposed to “sell in May,” but so far, they’re selling in April. Global equities have fallen in seven of the last 10 weeks (figure above).

On the geopolitical front, Russian bombs are falling on Lviv, which is perilous. In addition to its proximity to NATO territory, the city is a base of sorts for some Western media outlets. A volley of missiles hit the city Monday, killing at least a half-dozen people. A car repair shop was destroyed, according to local officials.

Humanitarian corridors were closed despite Ukrainian government efforts to secure safe passage for civilians desperately trying to flee Donetsk and Luhansk. They didn’t get the Kremlin’s message about being “liberated” it would seem. “Russian shells are falling everywhere,” Luhansk governor Serhiy Haiday said.

Government forces holed up at a steel plant in Mariupol were the city’s last remaining defense. The port was all but certain to fall to Russian forces. It looks like Aleppo now. That’s not a flattering comparison. “The city doesn’t exist anymore,” Dmytro Kuleba said, during an interview with CBS.

The crude calculus got more complicated when Libya shuttered its largest oil field amid political protests. There are calls for Haftar (a former CIA asset) to block crude exports. Suffice to say the country remains unstable more than a decade on from Gaddafi’s (YouTube’d) demise. Some 535,000 barrels/day of production was shut down.

Coming quickly back to Ukraine, the Lviv situation has the potential to irk the West, and Russia’s willingness to strike the city bodes ill for Kyiv, where Spain, France and Italy are keen to reopen embassies in an effort to make a political statement. As one mother of two who escaped Kharkiv for Lviv put it, “there is no longer anywhere in Ukraine where we can feel safe.”

The financial concerns of those fortunate enough to reside in nations not beset by war are trivial by comparison to the plight of refugees fleeing missiles, but coming full circle to the bond discussion, it’s worth noting that TLT is now mired in its biggest drawdown on record — almost 30% from the highs hit in late summer 2020. There’s no safe harbor for investors. Thankfully, that just means lost money, not lost lives.

Speaking of lost money, Elvira Nabiullina had bad news for Russian lawmakers on Monday. Asked how Moscow might go about replacing hard currency reserves frozen by the US and its allies, she said simply, “I am at a loss to give suggestions.”

Apparently nobody told her about the “new monetary world order.”