Yields Explode Higher Ahead of the FOMC as Commodities Correct

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


YIELDS EXPLODE HIGHER

Last week we saw large moves higher in short term yields led by Skandi and US. US equities sold off whereas EU stocks rallied after being very depressed. USDJPY broke higher after Kuroda ruled out tightening at the BoJ meeting this week and the FED is set to begin its hiking cycle with 25bps on Wednesday.

EXTREME BEARISH SENTIMENT

Since the invasion of Ukraine, sentiment and positioning indicators have all moved to extremely bearish.

These conditions are typical of those preceding a short squeeze, and should we get a whiff of de-escalation or ceasefire from Russia then it is clear where the pain trade lies.

GLOOMY MACRO OUTLOOK

On a more longer-term view, it is looking increasingly likely that before the year is done, we may see an SPX drawdown of around 30%.

Looking at past data around business cycle peaks, positioning (household equity ownership/net worth) and valuation (real earnings yield) which is currently deeply negative, 42Macro points out that the mean SPX drawdown has been around -33% from the highs which would see the SPX down to around 3250.

CHINESE MARKETS IMPLODE

More COVID lockdowns in Shenzhen, large manufacturing hub, 17.5m population, will extend supply chain disruptions.

Hong Kong listed Chinese stocks had their worst daily sell off since 2008. Beijing’s relationship with Russia and worries over regulations/sanctions capital controls have sparked some panic selling after lessons have been learned from Russian markets.


EQUITY OPTIONS POSITIONING

Markets remain firmly in negative gamma territory, especially in QQQ, but we have seen some put selling flows as we pushed below the put wall. This likely helped to stabilize markets yesterday.


MARCH OPEX THIS WEEK

SPX broke the 4280 support level that we had been watching early last week and reset it’s range lower to 4150/4325 which has held since then. We still chop around in quite violent fashion on headlines and will like stay that way with FOMC and OPEX catalyst this week.


COMMODITIES PULLBACK

After the recent carnage in commodities that triggered massive margin calls and the potential for a liquidity crisis (Zoltan Pozsar). Last week they reversed aggressively, leaving most in the red over the last 10 days. Extreme volatility spikes like this tend to lead to de-risking and we have seen spec positions, particularly in energy come down significantly. Precious metals did however see some spec buying. Even I lightened up on some metals, and uranium in my long-term portfolio!


Filmed on on Tuesday 15th March 2022.


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