Bonds rally as dollar pauses ahead of FOMC

In this week's Macro Insight I discussed...


MARKET ACTION

Stocks and bonds both rallied last week with Asia (ex-China) leading the way on vol adjusted basis, followed by Europe which had a relief rally after Nordstream came back online albeit with reduced volumes.

Industrial commodities rallied led by NatGas (both US and EU) and Palladium whilst Silver and Aggs underperformed.


WEAKER MACRO DATA

The incoming macro data continues to point to recession with EZ PMIs dropping below 50, US Philly FED missing expectations and US services PMI surprising with a contractionary 47.0 print. So far, housing and employment data are holding up better, but with jobless claims ticking up and lead indicators on housing rolling over (housing starts & lumber prices), I suspect it’s just a matter of months until we see these join the weaker trend.

EARNINGS SO FAR

So far 25% of SPX have reported and it is typical for the early part of the season to positive in terms of market performance. From @mrblonde_macro analysis we see that this performance then typically fades as the season progresses.

LIGHT POSITIONING & VOL TARGET

As Nomura’s Charlie McElligot points out, positioning across macro, long-short and mutual funds has been very light (echoed by Hartnett at BoA) making the pain trade higher as everybody waits to buy the “earnings” dip.

We have flagged vol control as a marginal buyer lately and this is likely to continue this week with 3m realized set to lose some chunky moves from its sample.


DEEP MACRO ANALYSIS

Some great research this week from our friends MacroAlf and Darius Dale.

Alf sees equity valuations have been helped recently by the pullback in 30Y real yields, but expects any further downside in yields to be limited given FED guidance on neutral rates. Also, USD strength likely to be a drag on corporate earnings if it persists which seems a fair bet for now.

Darius also found that in past recessions, whilst the market bottoms a good few months before the growth cycle bottoms it normally bottoms a month or so after the inflection in liquidity cycle.


VIX THOUGHTS & ACTIONABLE IDEA

VIX expiry did provide a lift for markets last Wednsday as VIX spot briefly touched a 22 handle. Aug VIX futures still trade above 25 and will likely hold up until after FOMC.

However, with realized vol low 5d (13%) and 10d (20%), if markets can rally above 4000 into long gamma area, we may see an epic vol crush anticipating a quiet August.


DOLLAR PAUSES

Last week the DXY took a much-needed breather and has consolidated back into the middle of the trend channel that has been in place since Feb/Mar.

With the major event of FOMC this week, and markets having priced a dovish pivot in advance of any real

slowing of inflation data, the risk remains to the hawkish side in my opinion.

HUGE MOVES IN EUR RATES

European rates marched higher early in the week, along with the EUR after ECB leaked that 50 bps was on the table. However, poor PMIs hit yields back down some 35bps in a day, the largest 1 day move since Lehmans in 2Y German rates.

US rates also came down hard with US 10Y testing 2.70% which looks to be an important neckline support.


Filmed on on Tuesday 26th July 2022.


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