Attack the Week (ATW)

December 15, 2024

Sunday Thoughts

It’s the Christmas season, and markets should be normally quiet and in a festive mood. While risk markets are generally exhibiting such behaviour, bonds are not feeling like calming down anytime soon. After starting December in a positive overall mood, global bonds saw quite the turnaround last week. Despite delivering on market expectations, European bonds triggered a cascade of bond yield moves globally following Thursday’s ECB meeting. The sell-off continued and then intensified on Friday.

What’s going on? It would appear that a lot of the STIR professionals had positioned for more than 25 bps cuts in early 2025, which then Lagarde shot down. This also came when expectations for more front-loaded rate cuts were gaining momentum (ERZ4Z5 below). So, the sell-off seems justified, given positioning and levels. Luckily, our reversal model indicated a severe reversal potential over the past week in European fixed income, which I hope some of you could capitalise on.

US CPI also showed a bit more stickiness than bond bulls have hoped for. This caused a quick sell-off of around 25 bps over the week, with US 10-year yields (see chart) now back at 4.4%.

Has this altered the allocation model’s stance on Bonds? You will find the answer in the paid section below.

Risk markets are juiced, and so is the Crypto universe. People are growing their asset base, which in turn supports consumption. The wealth effect is the reason growth is not showing any signs of slowing. That’s all great as long as wealth is being created. It’s astonishing, though, how sensitive spending behaviours are to the marginal wealth effect. I have seen an analysis by Visa stating that the pre-pandemic wealth effect would mean 9 cents of spending for each dollar of wealth created. This has now jumped to an astonishing 34 cents. As long as this psychology holds, risk assets can rally. What will 2025 bring for stocks? Households are long. What can possibly go wrong?

Source: Bloomberg

The Christmas season is also meant to give and support those who need it most. If you have been lucky and blessed this year, why not share some of the love and give back? There are many less fortunate people who don’t have the environment or circumstances to feel merry. Think of them and do give where you can.

As it is the season of giving, I will be giving away two annual subscriptions to Paper Alfa to subscribers who send me an email. First come, first serve.

Let’s now read Macro D’s latest thinking before we briefly scan the week’s upcoming calendar. We then check out the 10 most important charts for the upcoming week before scanning the latest output of our asset allocation model.

Let’s go!