Broad-Spectrum #25: Rolling into Q4
Are we getting the year-end rally upside? or the geopolitical tension lead downside with the trifecta?
Welcome to Broad-Spectrum Finance!
A lot has been going on in the markets since the last time we were here. Care to look around what’s going on and what might be coming next in the financial markets?
First of all, are you buying the dip in equities? Citigroup says you should! Do you think we are out of the woods, and the economy is strong, and the jobs market is strong, and the consumer is strong, and they have a lot of excess savings, and they will continue to spend and keep the economy active, and we are not going to have a recession at all...
Or do you think dominoes have finally started to fall?
Let’s have a look.
First of all, just for a second let’s check where we are at in the SPX, year-to-date.
Looks more or less fine, doesn’t it?
Well, we indeed have seen a lot of whipsaws across the board in the indexes. But for the long-term investors, it has been more or less all right.
Q3 Earnings have started to come in,
Assets of safe havens and crises’ have started to show signs of taking off too.
We were completely lacking an all-encompassing narrative out there. The Russian-Ukrainian thing have long stopped to affect the markets in a profound way...
Aaaaand we have a new war.
Obviously the first thing that comes to mind when it comes to any kind of conflict or tension in the Middle East is oil. Israel might not be biggest oil producer, or oil transit hub, or a facilitator in global oil trade, but Middle East is Middle East. And all the major players are there. This might lead to something interesting. Any kind of upswing in oil prices will put more inflationary pressure on the risk assets and the budget of petrol importing countries.
VIX is still yet to respond to any of that. This only means there might be a lot to happen ahead of us.
The VIX, a measure of implied equity volatility, is biased much higher in the coming months as the lagged impact of tighter financial conditions ripple through the economy and markets. Also, the VIX curve has flattened over the last month, meaning there is less negative carry on long VIX positions.
From the vantage point of an equity investor, inter-day implied volatility has been remarkably subdued. While the MOVE (fixed-income vol) and the CVIX (FX vol) are both notably above where they were in late 2019, the VIX is barely higher than its level just prior to the start of the pandemic.
SOURCE: Simon White at Bloomberg
Things might be brewing under the surface already...
Benchmark Yields, especially towards the long-end of the curve are almost at historical highs since the great financial crisis.
Long bonds are the ultimate pain trade now, with losses rivaling some of the most storied equities crashes in recent history — such as the collapse after the dot-com bubble burst. Wall Street was left struggling to explain the rout: Fed hawks obviously had plenty to do with it, but a growing chorus flagged the return of the “bond vigilantes”. With the US budget deficit swelling — and little sign it will be brought under control — speculation is growing that investors are seeking greater compensation to hold government debt as the inflation rate remains elevated.
SOURCE: Bloomberg
And it can play out in a whole bunch of ways.
Now, obviously these are all serious threats to consider that can easily put pressure on the risk assets. And majority of the assets have already been under pressure for the major part of the year.
But. You know how it is. The markets also have a tendency to shrug off these things quickly (bad news are good news kind of thing).
We are already closing in on the end of the year. And there might be a year-end rally incoming. November usually favors money inflows into the market.
But you know, if you are going to try and base some of your assumptions on the off chance that historically it repeats this way when times are like this or something like that, you need to watch out for this one too.
Even though no one is expecting a scenario like this to play out, they probably did not expect something like this to happen back in the day either. But you know, you still need to watch out for the trifecta. The bond yields, the US dollar, the Energy prices. The key fundamental macros that are in play here precede seasonality factor.
Oh yes, speaking of narratives.
While we keep watching the news flow out of the Middle East and have our eyes on the overall market, oil, the yield curve and the US Dollar, we are going to have a lot of Gold-talk coming in.
Finally the Gold gets all the attention it has been waiting on for a long time. It had a death cross and was in the oversold territory just a week ago. Now it’s preparing to be a dear in the limelight.
Broad-Spectrum Finance will be back shortly with more content and a lot of gold talk soon.
Stay tuned.