Attack the Week
October 2, 2023
I have tried surfing, but I am definitely not a surfer. Secretly, I would love to sit on a board in the sun, waiting for the perfect swell to provide astonishing waves and tubes to ride. I am sure many people have a similar ambition, but it’s not an easy thing to learn. In fact, it is very damn hard. I salute you surfers out there!
The first time I attempted my surfing skills was in San Diego, where I travelled with an Australian friend who not only looked like a surfer, but damn, he knew how to look good on the water too. I took my little paddle board just to be told by the onlooking “Baywatch” guy that the waves were too dangerous to try. I took his word for it and went straight to the nearest bar — a proper kook.
The second time was in a more exotic setting, where both my wife and I signed up for a surf-school experience. It involved a bit of training on the beach and getting drills done to get up and stand on the board before we would then be taken to larger waves the next day and try our luck. It was a great experience, but it was a tough learning curve and ultimately exhausting. I haven’t tried again since. It is not my thing.
The funny thing is that there was a lady from the surf school taking pictures over the two days, and I still have them in my holiday album. When I recently scrolled through the internet, I found the surf school’s website, and to my astonishment, I found a picture of myself featured on it.
Unfortunately, it doesn’t look anything like the picture above. Rather than opt for some photos of me standing on the board on water (yes, I did, for a few seconds), they chose to display a picture of me riding an imaginary wave on my first day of training on the sandy beach. Looking good, right? Like a surfing ninja, ready to attack whatever comes my way.
Riding incoming market waves required equal style, balance and finesse in order to catch one while not getting toppled by it. Being in the water will certainly prepare any investor better than merely trying on dry waters, although the energy required to keep waiting for the perfect wave to arrive will test anyone’s patience.
Looking at the current macro waves, we have quite a few big ones at hand, with some crests forming, increasing the probability of a break. As investors, we want to make sure that we ride the wave but not be taken down by the subsequent swift washout.
We have new cycle highs for US yields and a global steepening focus (see chart below), which has put pressure on rate-sensitive equity sectors. It has the feel of what we witnessed last year but differs in many ways.
Bonds are once again not the needed diversifier a lot of portfolios a relying on. For the first time ever, Bloomberg’s US Treasury index is on track for three years of losses.
Rate volatility is collapsing in shorter-dated maturities while it is being moved further out the curve, with 3m30y swaption volatility (3-month expiry on 30-year SOFR swaps) experiencing its largest monthly move in over two years, rising back to levels seen during the March mini-banking crisis.
Meanwhile, equities faced the worst month this year, boosting the relative attractiveness of money market funds where you can comfortably find yields north of 5%, pretty much risk-free. Money market fund balances have risen $ 830 bn YTD to $ 5.6 tn, according to ICI data.
Shutdown shenanigans culminated in Congress averting a shutdown, adopting a stopgap bill that keeps the government open through November 17th, meaning data releases (including Friday’s jobs report) will proceed as scheduled. That makes it more likely that Fed officials proceed with a 25bp hike at the November 1st meeting if that’s what they are planning to do. The market currently attaches a 20% probability of such an outcome, with another 20% priced for December.
Friday’s charts should have given you plenty of ammunition and set-ups to prepare for as we venture into the first week ahead. The first couple of weeks are what I call macro weeks, as important data sets the tone for the month ahead. Using the above analogy, you can think of it as the first important wave rolling in, and we want to make sure we capture that one well.
That’s why I lay out a “quick run” further below, which looks at the most important economic and central bank data releases coming out across the G-10 world. Further, we again look at the most important charts for the week, which focuses on what I think are the most interesting set-ups to consider. Finally, I put together a watchlist of additional patterns that are worth considering but are possibly less relevant for the immediate week ahead. All this is put together with a view to give you all the information needed to equip you for what’s to come.
Now, let’s get ready and attack some of those coming waves.