Huge non farms miss dampens the case for tapering

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

The miss on NFP last week was met with higher bond yields, which was somewhat surprising. Average hourly earnings were higher and this week we have new issuance in US treasuries, both factors that might explain the counter intuitive price action. The outlook for both consumer demand and inflation looks weak due to unemployment assistance expiring and this will likely cap any significant upside in yields. Goldmans and MS have recently lowered Q3 growth forecasts expecting service sector recovery to be sluggish.

Momentum divergence are appearing in both SPX and NDX, which may signal a pause or correction of some kind. The dealer gamma positioning only really falls away below 4440, where we could see some more volatility. For now, realised vol remains around 7% on SPX and VIX has managed to bounce off the mid 15 level. Upside exposure can be achieve with low premium outlay by selling call ratio structures on things like QQQ.

Now that some kind of soft taper is well priced, implied vols in rates have started to come lower as a taper tantrum seems unlikely. If rates vol does remain low then we may see less dispersion in equity sectors and this could support index volatility going forward. Large cap tech names have been holding up the market for months as they have de-correlated from more cyclical stocks, we may need more breadth to get a continuation of the rally. Implied correlation has found a local bottom.

Recent US data shows signs that we could have seen the peak in US delta variant, which would give cyclicals a boost, particularly travel and leisure stocks. The NKY 225 in Japan which is considered one of the more cyclical indices globally, has started to break higher above downtrend resistance. A catchup trade in Japan may be on if virus concerns abate, as positioning in Japan remains a decent underweight.

Dovish lean from the FED and recent data weakness have led to a dollar pullback. This pause in the dollar rally should be good for risk assets in general, provided we stay below 94 in DXY. EURUSD may get a positive catalyst in the ECB meeting this week, a break above 1.19 could trigger upside towards 1.22 over coming months.

Whilst Oil and Gold have remained quite muted, the action has been in NatGas and Uranium lately. Energy prices have been soaring and this is dragging up Coal, Power & Carbon emissions, etc. Broadly, commodities forward curves remain in backwardation which signals a tightness in markets which in generally bullish for the short term outlook. We like being dips in commodities such as Oil, Uranium & Copper as we believe there are structural deficits and a strong long term demand story.

Filmed on on Tuesday 7th September 2021.


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