In a Jumble
Doug Nolan
“Bubbles go to unimaginable extremes, and then double (quadruple for this cycle).”
“Call a Bubble’s demise at your own peril.”
Maxims notwithstanding, has history’s greatest Bubble reached a critical juncture?
Only time will tell, of course.
But I'll tell you, today's environment looks about as I would expect the craziest of endgames to play out.
The unwind of highly levered yen “carry trades” is driving de-leveraging at the “periphery.”
Elsewhere, de-risking/deleveraging has taken hold in the semiconductors and big tech stocks – one of history’s biggest and baddest “crowded trades” – following a historic speculative melt-up.
Meanwhile, a destabilizing short squeeze ensures long/short strategies and the few surviving bears remain on their heels, while a chaotic rotation unleashes frantic performance-chasing speculation.
July 25 – Bloomberg (Ruth Carson and Winnie Hsu):
“The yen’s stunning revival is upending global markets, dragging the yuan higher and hammering assets from Japanese stocks to gold and Bitcoin as investors reassess their leveraged bets.
The yen rose to its strongest mark in more than two months Thursday, reflecting burgeoning wagers that the interest rate gap between Japan and the US will likely narrow…
It lifted the yuan to the highest in over a month, while battering the likes of the Australian dollar as carry trades fall out of favor.
Gold and bitcoin also fell amid signs that traders were unwinding previously popular wagers to embrace the yen.
‘It’s effectively a big deleveraging event caused by the short squeeze in the yen,’ said Kyle Rodda, a senior market analyst at Capital.Com.
‘It’s forcing widespread liquidation across markets.’”
July 26 – Bloomberg (John Parry):
“The short squeeze in the Japanese yen is fueling broad-based liquidation of global carry trades, leaving spot emerging market foreign exchange returns in deeply negative territory over the past month, writes Damian Sassower, chief emerging markets credit strategist with Bloomberg Intelligence.”
July 24 – Bloomberg (Masaki Kondo):
“The yen rallied through key levels against the greenback on Wednesday, leading an unwind in global carry trades that pushed down currencies ranging from the Mexican peso to the Australian and New Zealand dollars…
‘This week has seen more pronounced unwinding of carry trades, underscoring the concentration of short JPY (Japanese yen) positioning that is now facing more intense pressure from MOF (Finance Ministry) intervention to support JPY,’ said Richard Franulovich, head of foreign exchange strategy at Westpac Banking.
‘Local politicians have become more vocal around the economic dangers from unfettered JPY weakness.’”
Over the past 12 sessions (beginning July 11th), the yen has surged 5.2% versus the dollar.
The Japanese currency has clobbered EM currencies.
The Brazilian real is down 9.0% versus the yen in 12 sessions, the Chilean peso 9.0%, the Mexican peso 8.1%, the Colombian peso 6.2%, the Argentine peso 6.0%, the South African rand 5.7%, the Taiwanese dollar 5.6%, the Indonesian rupiah 5.2%, the Turkish lira 5.2%, the Indian rupee 5.1%, and the Philippine peso 4.9%.
It's also worth noting yen strength against higher yielding (“carry trade” targets) developed currencies.
The New Zealand dollar is down 7.9% versus the yen, the Australian dollar 7.7%, the Norwegian krone 7.6%, the Swedish krona 7.3%, and the Canadian dollar 6.4%.
Over this period, the Bloomberg Commodities Index dropped 4.5%.
Copper is down over 11%, Aluminum 7.8%, Lead 5.2%, Tin 15.5%, Zinc 10%, Platinum 5.6%, and Palladium 10.6%.
Crude prices have declined 4.7%.
The yen rally corresponded with a notable deterioration in sentiment for China’s markets and economy, following a less than inspiring third plenum.
China’s CSI 300 index was down another 3.7% this week.
After posting an all-time high on July 11th, the world’s hottest developed equities market, Japan’s Nikkei-225 Index, sank 11.2%.
Increasingly, it appears we’ll look back on July 11th as a critical day for global markets.
U.S. June CPI was reported at a weaker-than-expected negative 0.1% (core 0.1%), with y-o-y CPI declining to 3.0% from 3.3% (core 3.3% from 3.4%).
Currency traders believe Japan’s Ministry of Finance used weaker U.S. inflation data as an opportunity to get the most bang from their intervention buying (yen support).
The yen rallied a notable 2.0% versus the dollar on the CPI release (ended the session up 1.8%).
Ten-year Treasury yields fell seven bps to the lowest level (4.21%) since March.
Curiously, big tech fell under selling pressure.
Nvidia traded at $136 at the open on the 11th, only to close the session down 5.5% at $127.
After opening the session at all-time highs, the Semiconductor Index reversed sharply lower (down 3.5%).
The Nasdaq100 closed the session 2.2% lower.
Meanwhile, a big short squeeze took hold.
The Goldman Sachs Short Index surged 4.0% on the 11th.
The KBW Regional Bank Index jumped 4.1%, with the Homebuilders ETF (XHB) rising 5.9%.
The small cap Russell 2000 rose 3.6%, diverging notably from the S&P500’s 0.9% decline.
Nvidia is now down 16.2% over 12 sessions, with the SOX sinking 13.6%.
The Nasdaq100 has declined 8.0%.
Meanwhile, the Goldman Sachs short index has gained 9.0%.
The KBW Regional Bank Index has surged 18.7%.
The small cap Russell 2000 has risen 10.2%, versus the 3.1% decline in the S&P500.
These big moves have a common thread.
It’s no coincidence that tech stocks retreated as the yen surged.
De-risking and associated losses in crowded yen carry trades created vulnerability and risk aversion in the hyper-crowded AI/tech trade.
Similarly, the concurrent tech selloff and intense short squeeze are not coincidental.
The leveraged speculating community shifted to aggressive de-risking, reducing overall exposure by selling longs and buying/covering short positions.
July 22 – Bloomberg (Natalia Kniazhevich):
“Hedge funds spent last week selling their winners at the fastest pace since the meme stock craze in January 2021 as the world’s largest technology companies got hammered.
The cohort ‘aggressively unwound risk across their long and short books’ for the week ending July 19, according to Goldman Sachs… prime brokerage desk.
The move… is a continuation of a trend since May of funds unloading shares to have more cash ahead of the US presidential election.
‘Overall, the week was filled with painful unwinds and violent moves lower in semis, mega caps, AI momentum winners,’ Goldman’s US shares sales trading team wrote…”
I believe July 11th likely marks the beginning of what will prove a major de-risking/deleveraging episode.
An unwind of leverage in two major speculative Bubbles (yen “carry trades” and big tech equities) comes with major market ramifications.
Typically, we would expect to see contagion (waxing risk aversion and waning liquidity) from “risk off” at the “periphery” begin to gravitate toward the “Core.”
But there is every reason to be on guard for the atypical.
The Fed meets next week, and I and most others fully expect the Fed to signal a likely September rate cut.
July 26 – Bloomberg (Bill Dudley):
“I’ve long been in the ‘higher for longer’ camp, insisting that the US Federal Reserve must hold short-term interest rates at the current level or higher to get inflation under control.
The facts have changed, so I’ve changed my mind.
The Fed should cut, preferably at next week’s policy-making meeting.
For years, the persistent strength of the US economy suggested that the Fed wasn’t doing enough to slow things down…
Now, the Fed’s efforts to cool the economy are having a visible effect…
Although it might already be too late to fend off a recession by cutting rates, dawdling now unnecessarily increases the risk.”
It was a strikingly abrupt shift by the former New York Fed President and Goldman Sachs managing director.
For his article, Dudley cherry-picked some weaker employment and inflation data.
Pushing back is easy.
This week’s stronger-than-expected (2.8%) Q2 GDP and Services PMI (high since April ’22) are not suggestive of imminent recession.
But I doubt data are behind Dudley’s newfound concerns.
His previous career responsibilities surely created acute sensitivity to changes in financial conditions.
The former Fed President must be closely monitoring the yen squeeze, unwinding “carry trades”, and the faltering tech Bubble.
He knows what trouble looks like.
I see big trouble.
Yet, there remains a most critical issue of the course of de-risking contagion from the “periphery” to the “Core” – with U.S. Credit the epicenter.
We must be mindful of the common dynamic whereby instability at the “periphery” tends to initially underpin the “Core.”
Two-year Treasury yields dropped 13 bps this week to 4.38%, the low since February 2nd.
The two-year/10-year yield inversion narrowed to 15 bps Wednesday, the smallest inversion in two years.
Benchmark MBS fell nine bps this week to 5.56%, approaching the lowest level back to February.
Trading at an all-time high Friday, the Homebuilders ETF’s 4.3% gain for the week boosted 2024 return to 22.6%.
While risks are mounting, “Core” financial conditions remain loose.
The iShares Investment Grade Corporate Bond ETF’s (LQD) small weekly gain (0.2%) gain pushed y-t-d returns to 0.35%.
The iShares High Yield ETF (HYG) gained 0.4% this week and is up 4.33% y-t-d.
At 51 bps, investment grade CDS are up only two bps from July 10th levels – and not far off multi-year lows.
High yield CDS prices were little changed on the week at 332 bps, up only four bps from July 10th, while down 25 bps from the start of the year and almost 200 bps below highs from last October.
Importantly, debt issuance – corporate, municipal and, of course, spendthrift Washington - remains strong.
July 24 – Bloomberg (Josyana Joshua):
“Blue-chip companies sold bonds this month at the fastest rate for any July in seven years…
US investment-grade bond issuance has reached almost $92.2 billion this month, the biggest July volume since $123 billion was issued in 2017.
That’s well over the top end of $85 billion dealers expected to be sold, with about a week left to go…
Investment-grade US companies borrowed $867 billion in the first half of the year, the second largest haul… behind only 2020 when the pandemic set in.”
July 26 – Bloomberg (Erin Hudson and Amanda Albright):
“The $9 billion-a-week market for new sales of state and local government debt is now so crowded that investors are being forced to get creative in their hunt for value.
There’s been a record onslaught of issuance from municipal borrowers this year, with sales totaling $269 billion marking an increase of 38% from 2023’s volume.
That supply… has been met with a surprising amount of enthusiasm in the $4 trillion muni market, frustrating long-time investors because it’s harder to get allocations of securities they want.”
Bottom line: the “Core” is booming.
Seven straight months of corporate issuance surpassing forecasts.
Leveraged speculation in all things U.S. Credit is feeling good – Imminent Easing Cycle Exuberance.
“Carry trades” might be faltering, but the colossal Treasury “basis trade” is (for now) resilient.
Leverage is generating solid returns in MBS, agency debt, corporate Credit and munis.
When we think of late-cycle parabolic “Terminal Phase” excess, we need to look no further than runaway Treasury issuance and near record corporate issuance.
The historic expansion of non-productive Credit runs unabated.
I believe the Fed months back erred by signaling the end of rate hikes despite ongoing excessively loose financial conditions, a speculative equities melt-up, and general asset Bubble inflation.
A dovish Federal Reserve stoked historic late-cycle excess.
Now, the Fed will signal an imminent rate cut with Markets in a Jumble.
A dovish Fed might now stoke some market chaos.
It all seems too fitting.
A big tech “crowded trade” beating concurrently with a big short squeeze and big rally in the under-owned sectors, including the small caps.
Acute instability.
Our central bank was determined not to let its “tightening” cycle “break” things and spark a market accident.
When it comes to accidents, the Fed is not out of the woods.
0 comments:
Publicar un comentario