In this week's Macro Insight I discussed...
Higher CPI print at 4.20% vs 3.6% expectations triggers a sell off in bonds and equities, particularly tech stocks. Dealers got caught short gamma as SPX broke below 4130 which led to a spike in VIX. However markets managed to bounce off key supports and recover into a more comfortable region of 4150-4200 on SPX. NDX also held onto uptrend support around 13000.
Inflation expectations surveys are spiking higher, labour market shortages are forcing up wages due to stimulus checks disincentivizing people to work and a mismatch between job openings and qualified workers. Corporate earnings calls citing inflation as a major risk and saying they will be passing higher prices onto customers. All this signs that inflation could be more sticky. Treasury yields seem to be supports by FED buying and short positioning for more speculative traders.
The great macro investor Stanley Druckenmiller last week was seen commenting on the FED emergency policy of lower rates and QE as inappropriate for the current economic reality. This criticism also refers to the lack of credibility in the dollar and the decrease in foreign demand for US treasuries.
With inflation as the major risk on investors minds, the correlation between bonds and equities is at multi decade highs, suggesting increased risk in portfolios that no longer benefit from cross asset diversification. This in turn led to more aggressive volatility spikes when markets turn down due to a faster de-risking from portfolio managers particularly those running risk parity models.
The dollar continues to break down as FEDs loose policy seems inconsistent with growth. No safety bid for DXY last week as markets sold off. Support zone at 88/89 under attack soon. GBPUSD looks like breaking above 1.42 which opens up the way for a bigger move towards 1.50 over the longer term.
Gold breaks above downtrend resistance at 1860. A confirmation above 1875 I needed to target 1960 and then potentially much higher long term levels. Inflation breakevens have been rising faster than bond yields which has kept real yields falling and fuelled this Gold rally, also helped by the weaker dollar. Oil still bullish and testing 67/68 resistance which could propel it towards 75. Copper has a small consolidation as Peru and Chile discuss hiking taxes on copper production. Grains such as Corn and Wheat pullback 10-15% after parabolic rallies since March.
Filmed on on Tuesday 18th May 2021.
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