Macro

Reading Time: 13 minutes

This Week

• MACRO
  • UK Chaos
  • Germany’s energy U-turn ?
  • US Housing dilemma
  • Global Transport costs
  • Credit Suisse
• TECHNICALS
  • US/EU bonds/rates
  • DXY, EUR, GBP
  • ES, NQ, DAX
  • Precious metals / miners
  • Global cross asset performance heatmaps
  • Momentum, Trend, Exhaustion scores
• “…one more thing…” :

* this is not a trade recommendation and for educational purpose only. please do your own research.

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Keep calm and carry on?

“This famous slogan on a motivational poster was produced by the government of the UK in 1939 in preparation for WW2 and intended to raise the morale of the British public, threatened with widely predicted mass air attacks on major cities.”

Nowadays, it is often used as a meme and in this blog, there are plenty of examples to address it.

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Part 1 – UK

The First 100 days often refer to the beginning of a leading politician’s term in office.

This was coined when US President Franklin D. Roosevelt came to office in 1933, at the height of the infamous Great Depression, to signal his intention to move with unprecedented speed to address the enormous problems facing the nation. Since then, not only US presidents, but global leaders, politicians, and even CEOs of major corporations are often measured by this benchmark.

We all remember how UK Prime Minister Boris Johnson was ousted which led to the Tory’s party internal race for leadership ending with Liz Truss to become the next Prime Minister on September 6th.

Barely 38 days into her tenor and the chaos continues as she sacked her Chancellor (Finance Minister) Kwarteng.

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Well, to be frank, it has been chaotic ever since the EU referendum in 2016: 6 Finance Ministers and 3 Prime Ministers, a cool 2:1 ratio … and counting !

PM Cameron initiated the referendum and resigned afterward. Theresa May, who voted to remain was chosen by her party to become the next PM. A loss in confidence led to a snap general election, resulting in a hung parliament. She also had to go through 2 votes of no confidence and later resigned in 2019. Boris Johnson was then elected internally but was also forced to call a snap election which he won. Controversies during the pandemic led to a mass resignation of ministers and he eventually resigned in July 2022, left the office on 6 September after the internal leadership election took place. And, for now, the PM is Liz Truss, who by the way called for the abolition of the monarchy and also voted to “Remain”.

The revolving doors have even seen six Finance Ministers over the same period of time just 6 years! Hammond, Javid (lasted 6+ months), Sunak (competed later with Truss for PM + leadership), Zahawi (lasted 2 months), Kwarteng (38 days) and now Jeremy Hunt.

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There are only two groups that ultimately lead to decisions which either the opposition or even the own party members take leverage from:

• The public – voting with their feet (currently the “cost-of-living-crisis”)
• The market (investors and speculators) – voting with the sell button.

So, while the crisis is ongoing for a long time, escalating with inflation spiking to 10%, and energy bills tripling, the so-called “mini-budget” was probably the tipping point and will in my opinion eventually lead to another snap general elections sooner rather than later.

A massive fiscal budget of £200bln+ isn’t just a brain child of one person (e.g. the Chancellor), it is derived by a group, led and appraised by the Prime Minister. The refusal to allow the Office for Budget Responsibility to assess the economic impact of the budget and provide a forecast is another questionable decision.

The market hates uncertainty, and the vote was clear = sell bonds, asking for a higher return for higher risk, and sell the British pound for an initially weaker economy higher government deficit. And vice versa, a slumping currency leads to even more imported inflation, leading to higher interest rates.

If that wasn’t bad enough, the rising yield started a chain reaction, the UK Gilt bond market went into a tailspin, led to UK pension fund margin calls as they operated with LDI and were forced to sell more bonds, leading to higher rates creating the perfect storm. The Bank of England had to step in, and started an emergency buy program, and the UK mortgage lenders withdrew a large chunk of their product.

The current situation regarding “Keep calm and carry on”? = More conservative party members may not have enough confidence in PM Truss, the opposition naturally doesn’t have that anyway, the public is even angrier and now the market has spoken. That was the tipping point and her days as PM are numbered.

High uncertainty = high volatility.

Chaos perfection.

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Current market situation:

• Inflation sky-high
• SONIA curve is super steep
• Bond yields catching SONIA rates
• BoE is more hawkish and catching up with the market
• The rate of change in bond yields creates huge uncertainty, much higher refinancing costs
• LDI theme will be scrutinised further and probably result in reforms
• BoE will not be able to put an ultimatum on UK pension funds to “sort out the mess” and will easily be forced to buy more long-dated gilts = an indirect emergency QE program while in a very hawkish hike cycle.
• Bonds are in a bear market, depending on the fiscal budget, but technically show “exhaustion signals”
• GBP remains in a bear market trend as well, creating more inflation via expensive imports. Only the diverging UK-US yield spread is pointing to a possible further rebound of the Pound.

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Part 2 – GERMANY

“Keep calm and carry on” or “Bleib ruhig und mach weiter” ?

Carry on with the Green party doctrine or adjust to cheaper energy via nuclear power? Robert Habeck, party leader, Minister for economic affairs and climate action and vice Chancellor (Prime Minister) of Germany held an emotional speech with a narrative “Nuclear power and fossil fuels brought us here. They caused this crisis, they are not the solution” – and got a standing ovation. Of course. From the party. What else to expect?

It was Chancellor Gerhard Schroder SPD-Green coalition who initiated to phase out nuclear power and made Germany so dependent on Russian energy supply, in case someone has forgotten this.

Clean energy is a nice thing to have, but solar and wind power alone will never be enough to compensate for demand. After a group of then EU-countries, led by France, tried to convince the European Commission to recognise nuclear power as low-carbon source, Germany / Habeck hit out to label nuclear and gas “green”.

Well, France still has nuclear power stations and the inflation is 5.6%, Germany’s energy crisis deepened after Russian’s invasion of Ukraine and the resulting sanctions, Germany’s inflation stands at 10%. Oops.

FFS, even Greta Thunberg “u-turned” ! From “False solutions” tweet in July to a recent interview with well-known ARD journalist Maischberger “If we have them, it’s a mistake to close them in order to focus on coal”. Which actually made me chuckle… yes, Greta, the poster child for Climate Change, a teenager who skips school every Friday for her protest, has no electrical engineering or science degree is the one to ask.

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The interest rate landscape in Germany is still relatively low, compared to other countries, but rates have been rising too, and very fast indeed. ECB’s QE program has ended, and even though there is this new “quasi QE for some” in place, it also raises the same question as everywhere else: what about refinancing risks? The property market and set up in Germany is very different from e.g. UK or US. In Germany, there is no such “climbing the property ladder”, which is partly driven by speculation as house prices go up, homeowners sell with profit, and buy a bigger home with a larger mortgage. The typical German home buyer is there for a long term, probably until old age, and gives the house as an inherence to the children.

Here in the UK, a lot of people take interest-rate-only mortgages with a tenor of 2 years, hoping to catch the price rally and move on. This now creates a huge problem: many hardly pay back their mortgage, and will be forced to refinance now or in the next months with much higher rates. In Germany, the typical mortgage is accompanied by a larger deposit/equity, 2-4% annual mortgage repayments, and a much longer duration, e.g. 10 years. If there is a housing bubble and problem in Germany (e.g. Munich, Hamburg…), it’s mostly driven by international speculators.

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Current market situation:

• Inflation sky-high, especially in Netherlands and Baltic countries in the Eurozone
• EURIBOR curve is only relatively steep
• Bond yields catching EURIBOR rates
• ECB is more hawkish and catching up with the market
• The rate of change in bond yields creates uncertainty, higher refinancing costs
• Peripheral countries are on the radar again (Greece, Italy etc)
• Bonds remain in a bear market for now
• EUR remains in a bear market trend as well, creating more inflation via expensive imports. Only the diverging EU-US yield spread is pointing to a possible further rebound of the EURO.

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Part 3 – USA

“Keep calm and carry on” – or, how tight will the market accept until they scream STOP!

The chart below shows 3months loans on a forward basis, FRA (Forward Rate Agreements), and it really is astonishing how fast the rates have gone up. Every DCF modeler is scratching their head about how often they have to adjust their data. IMHO, we already have reached a questionable height and speed while the Fed continues to hike. Nobody here can seriously keep calm and carry on as usual. This will end in tears.

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While bond and loan issuers continue to hold their breath with rising yields and rising spreads, for bond investors it has started to create interest (see dashboard charts of Corporate bond yields/spreads).

But, the US housing market remains under pressure and the first chart reflects the problem: US mortgage loans near 7%, not only more than doubled from post CV19 shock (naturally with so low rates), but they are also much higher than pre CV19. Purchase price affordability dropped like a stone.

That causes obviously selling pressure, higher inventory, and longer listing times, but there is a seasonality effect as well (at least shown here for the previous 3 years). Redfin is doing a great job here with publishing these charts, unfortunately only for 2020, 2021, and 2022. CV19 year is an extremely low base and 2021 as a follow-up year where every asset rallied to the moon, isn’t representative either. Would be nice to see those lines for the last 10 years.

Anyhow, it’s not rocket science to predict a slowing housing market (or worse), but as house prices and rents are coming off, this is relevant for the 32% weight in the CPI basket (= shelter).

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Current market situation:

• “Inflation has peaked” is a wrong narrative. The rate of change may have peaked, but the basket of goods and services is yet again +8.2% higher than same time last year, Core CPI was actually higher than expected 6.6% . Or in other words headline inflation is 4x higher and core inflation 3x higher than Fed’s wishful magical 2% target.
• FF, SOFR and LIBOR curves are still steep coming into next year in anticipation of a very hawkish Fed
• Bond yields chasing STIR rates and have NOT rolled over or rolled through
• FED remains very hawkish and is still catching up with the market
• The rate of change in bond yields creates uncertainty, higher refinancing costs
• US housing market on high alert
• Bonds remain in a bear market for now, though show “exhaustion” signals. Every nibble to get long in small risk has been either a day trade or a slap in the face.
• US$ Index DXY remains in a bull market trend, creating more problems for e.g. US$ funding emerging countries.

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The elephant stays in the room.

NFP was relatively strong, the unemployment rate back to 3.5%, jobless claims relatively low = tight labour market.

PPI stays relatively high, but it was yet again the CPI last Thursday back in the spotlight. Headline slightly higher than expected, but lower vs last month, core CPI however made a new high at 6.6% = inflation remains sticky.

The combination is pretty clear = Fed has no reason to slow down, let alone pause. Another +75bp for the next meeting was immediately priced in nearly 100%, and another +75bp 70% chance for the December meeting.

The result intraday Thursday was surprising though: while yields went up, bonds fell, yield curves bear-flattening, and stocks nosedived… all as one would expect after the CPI. However, it was the sharp rebound of stocks that surprised me, e.g. Nasdaq rallied 6% off the low on that day. Some excused, it was the 50% CV19 low-2021 peak retracement in SPX and 61.8% fibonacci for Nasdaq. Others argue, gamma hedging goes both ways and resulted in a massive short squeeze.

Whatever that was, volatility is the trader’s best friend and portfolio manager’s worst enemy.

Is there a techncial bear market rally on the cards now ? Sure.

Is this already the final bear market bottom ? Most likely not at all.

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RoW / Global

Global Transport from China

I have read an interesting article from my FinTwit friend Uresh and wanted to add a bit more colour because one of the main charts from him was the Xenata Shipping Indices from Far East to North Europe and US West Coast.

The lockdown, the insane money supply, then the re-opening, the global supply chain disruption all caused the enormous inflation spike. Visualised in the chart below, e.g. shipping costs absolutely exploded, but have fallen sharply, but are still higher than pre CV19 shock.

This raises the question:

Are they coming down due to improved imbalance or are they crashing due to potential global recession due to too hawkish central banks, and too high interest rates ? The ultra strength of the US$ certainly intensified e.g. emerging market countries, who embarked on cheap US$ loans expansion and now facing a dilemma.

Meanwhile, the US yield curve signals a potential US recession, and as the sample of some countries’ FX reserves table below shows, the top 5 countries with the most declines (China, Japan, Singapore, India, Russia) have an aggregated $720bln drop. Selling US$ to support their own weak currency ? Selling US Treasuries as well ?

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Credit Suisse

“Keep calm and carry on” ? – errr, nope. But it’s a bear case since years.

I have a mini long term thread running on Twitter, when $CS started to make some headlines.

The CDS curve has inverted since, but so far spread widening is at a moderate pace, no panic. Default probability 1Y rose from 3% to now 9%, 5Y is up to 27%. If something would be dangerously / imminent, CDS would trade north of 3000-4000bp and 5Y closed around 375bp.

The share price is in a bear market since… 2009 GFC.

However, the latest story of the Fed providing a $6.5bln swap facility (via SNB to CS?) raised further concern. On the chart below is the debt maturity profile of CS, and in 2022 $10.8bln are maturing. Was this one reason for the emergency swap ? As almost all banks prefer to borrow shorter maturities, CS isn’t alone and $41bln are set to expire next year 2023. Now, this is substantial, but also old news, everyone is aware of the share price pace since years, aware of the debt profile and CS is literally a restructuring, reorganisation case since years.

Bail-out, asset sales will continue to be on the agenda. A Lehman 2.0 default is highly questionable, so this is probably not a black swan event then.

The most risky part of the bond capital structure are the perpetual bonds, and the chart below shows how they have performed recently. Of course sell-off, in line with wider spreads, tanking share price, and also an illiquid market for perps.

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TECHNICALS

Precious Metals

Quite a big move last week in Silver (-9%) and Palladium (-8%), while Gold fell too.

This year really is a “cash is king” year, stocks are in a bear market, bonds are in a bear market, no save haven bids or theme, even precious metals are in a bear market. The miners don’t only suffer from the underlying assets, their operating / funding costs deteriorate too as interest rates shot up.

GLOBAL CROSS ASSET PERFORMANCE TABLES

performance snapshot wk41

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weekly performance snapshot wk41

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monthly performance snapshot wk41

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outright Momentum/Trend/Exhaustion snapshot wk41

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spread/ratio Momentum/Trend/Exhaustion snapshot wk41

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…oh, One More Thing…

“Easy stock picking/trading when interest rates are zero and there is QE”

*  as always, please check the DashBoard for the bigger Macro picture and connect the dots

Das war’s , thanks for reading, vielen Dank und good luck, Kai