The Name is Bond
The Quotedian - Vol VI, Issue 12 | Powered by Neue Privat Bank AG
“Brevity is the soul of wit”
— Polonius in Hamlet, Act 2, Scene 2.
Short not today, as indicated by the QOTD …
Let’s do the unusual in today’s Quotedian, and start with the fixed income asset class. But why, you would ask? Coz Mr Bond has been warning for days what is going to happen, but EM did not listen (EM=Equity Market, of course).
Ever since the FOMC last hike three weeks ago, where Powell failed to push back on easening financial conditions, economic data has been coming in “hotter” than expected, starting with non-farm payrolls two days after that meeting. Here’s what 2-year yields have done since the last hike:
Zooming out on the same chart, we get to realize that this particular part of the yield curve just hit a fresh 16-year high:
Further along the term structure the 10-year yield has not yet hit a new cycle high, but the fractal pattern we looked at a few weeks ago remains in force and continues to point to a 5% yield target for the current leg underway:
Meanwhile, stocks had been ignoring all the warnings from Mr Bond market, happily drifting higher and often so in the most speculative (and long-duration) corners of the market (see also today’s COTD). Until, Tuesday, where after a long weekend the S&P Global US Services PMI not only came in above expectations (47.3), but actually was reported above fifty (50.5), hinting to economic expansion:
This seemed to be too much for equity markets and the S&P 500 recorded its first 2%-plus drop in the ongoing year:
On the daily chart, including yesterday’s move, which was the fourth consecutive decline for the index, this looks as follows:
The current zone around 4,000 for the S&P seems all important now, not only given the psychological importance of round numbers, but also the congestion point between 50- and 200-day moving average. Watch this space …
Mind you, yesterday’s sessions had some positives to it in that a) volumes were pretty low, b) the index rebounded from its 50-day MA (blue line) and c) breadth was negative at an ‘only’ 2:3 ratio. To visualise this last point, here is the S&P’s heat map from yesterday:
But mind you, nervousness as expressed by volatility has gone up in both, equity
and the bond market:
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Another corner of the bond market that equity investors had chosen not to listen to was the high yield segment (here proxied by HYG), which had also given a warning sign several days ago:
Let’s finished today’s abbreviated letter with a currency observation. The chart for the Greenback looks increasingly bullish, and on the US Dollar Index a break above 105ish could mean the Dollar Wrecking Ball is swinging again:
Strangely enough, that translates on the EUR/USD chart to 1.05:
Have a great rest of the week and make sure to tune back in on Sunday.
CHART OF THE DAY
A fascinating study reaches us from money manager AJO Vista today via the always insightful John Authers at Bloomberg. The chart shows the returns an investor would make by consistently shorting the most expensive 10% of US stocks, and putting the money into the 10% cheapest (using trailing P/E). Such a strategy would have been overall pretty successful, but what is really interesting is what happened after periods of underperformance, as usually a huge snapback rally took place.
In that context, the recent period of underperformance was the longest and surely not came from central bank mingling (QE) around with financial markets (couple of tongues in cheek). As John concludes: “If the past is any guide, it’s fair to expect cheap stocks to keep outperforming the rich ones for a while yet. “
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Everything in this document is for educational purposes only (FEPO)
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Past performance is hopefully no indication of future performance