In this week's Macro Insight I discussed...
RATES DRIVING EQUITIES LOWER
More wild moves in rates last week after Powell confirmed 50bps in May and mentioned front loading hikes. HY Credit spreads also higher showing sign of stress as curves flatten.
Stocks reversed sharply lower after a positive start to the week with large cap tech down heavy after Netflix missed and was down 25%(now closer to 40%)
EARNINGS SO FAR
Earnings have so far been ok, in line with previous quarters with nearly 80% beating expectations. Obviously, the big miss from Netflix has been punished making people a bit concerned about the other large cap techs reporting this week given there large weighting in the index.
BANKS UNDERPERFORMING ON POOR HOUSING OUTLOOK
I had flagged that we need to watch how stocks trade post earnings and Banks have been quite weak relative to the market despite higher rates. The housing market looks to be topping out with higher mortgage rates hitting home sales, credit card balances haven’t grown much after pandemic fiscal transfers , loan defaults/credit expenses are likely to rise now that moratoriums have expired. Previous divergence in 2018 resulted in rates reversal.
YEN COLLAPSE TRIGGERS CHINA DEVAL
We mentioned a couple of weeks ago that the Yen move would like put pressure on the CNH as China competitiveness would suffer.
Since then, we have started to see a real move lower in the Yuan, devaluing close to the speed it did in 2015, which was met with a violent risk asset sell off.
MORE CHINA LOCKDOWNS MEAN MORE SUPPLY DISRUPTION
The latest round of COVID lockdowns in Shanghai have created havoc with the supply chain as ships waiting to load or discharge are more than double the average. Whilst demand destruction from the lockdown has impacted commodity prices, this kind of supply disruption may also have inflationary consequences a few months down the line.
SPX PUT SELLING AFTER VIX CURVE INVERTED
Last week we saw SPX grind up towards 4500, taking VIX back to around 20 from which point markets reversed sharply on Powell comments around front loading rate hikes. The vol trigger of 4450 once broken, opened the market up for more turbulence as dealer gamma flipped negative.
WORST BOND MARKET IN 40 YEARS
Yields continue ripping higher across the curve. We had seen some steeping on longer dated inflation expectations rising but now curves are flattening again after “front loading” talk from Powell.
Commodities correcting across the board this week with standout losers being Uranium (crowded long) and Silver.
China lockdowns and demand destruction was the main narrative behind this move and also a need to flush out more speculative positioning.
Filmed on on Tuesday 26th April 2022.
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