Attack the Week (ATW)

October 27, 2024

Sunday Thoughts

Last weekend I attended a classic circus performance with friends and family. I haven’t been to an old-school circus in a few decades. I don’t count Cirque du Soleil as a classic performance. This was a rather simple occasion, with young artists performing quite astonishing manoeuvres in a small tent. I didn’t expect it to be so mesmerizing and breathtaking.

After all, attending a circus performance is a sensory experience like few others. The sights, sounds, and energy fill the tent, creating an electric anticipation for what’s to come. One could feel the growing excitement as the performers took to the stage, each act more daring than the last. Trapeze artists soared through the air, gymnasts twisted in impossible directions, and fire-breathers danced with flames. The crowd’s gasps and murmurs of disbelief crescendoed with each act as we all surrendered to the spectacle, letting our senses be swept up in the moment. A shining spotlight guided all spectators, transporting their vision to a specific area and keenly anticipating what was next.

This is not too dissimilar to us all looking at financial markets and being guided by the lights of narratives and outsized moves, which help us all look one way while the next act is already being prepared in the shadows. As for now, it’s all about geopolitics and the upcoming US election. I will release the second part of the three-post series during the week. Here is the first part.

US Treasuries are on the back foot and again defied a tempting rally late last week just to close on a weak price behaviour even as rumours of an immediate Israeli attack on Iran circulated. I wonder whether we are going to be in a bit of a rough ride. The Skew (ratio of TY 1m put implied vol vs 1m calls with 25 deltas) reached levels seen in the sell-off episode last year and has recovered a bit since (see chart below). This by no means is a signal that the sell-off might be over.

US 10-year Treasury yields are holding above the 200 ema line, which was tagged twice late last week, indicating a resistance for a rally in the current environment. I will look into more detail below as to what our models are telling us.

Ultimately, the real lesson from both circus and market behaviour lies in understanding the power of crowd psychology. If everyone is looking at the same act and marvelling at its nature, chances are you have a little edge to see something different from everyone else. It’s much wiser to prepare for the next act. That’s what I am focused on when covering our model updates for more than 250 assets. Similarly, while people are looking at the two contenders for the next US presidency, I am looking at what markets are doing ahead of it and what setups are likely going to make winning bets in the weeks ahead.

Let’s now read Macro D’s latest musing before we analyze the upcoming calendar for the most important macro events. We will then look at the 10 most important charts before exploring what the assets allocation model’s latest output is telling us as we enter the closing days of October and enter the penultimate month of the year.

Let’s go!