Attack the Week (ATW)
January 21, 2024
I often ponder the lengths people go to "gaming the system" in everyday life. Maybe I am too lazy, but it's not uncommon to encounter individuals adept at finding loopholes or shortcuts - be it exploiting a frequent flyer program, finding price mismatches in online retail, or collecting loyalty stamps in exchange for a discount or freebie. This “arbitrage” in daily life isn’t easy to come by, and I applaud those who would spend a considerable time squeezing out a benefit.
After reading a “how-to-save-money” article a friend sent me, I once tried to shop around for a good broadband deal. I spent hours analysing various offers and reading reviews before pulling the trigger - just to save a few quid a month.
Maybe those opportunities simply reflect the imperfections inherent in large, multifaceted systems. Whether it’s due to oversight, latency in updating policies, or simply the complexity of modern life.
Contrast this with the financial markets, an arena where arbitrage opportunities are as rare as they are fleeting. Yes, it is possible to spend hours analysing small-cap stocks where larger pockets of money are disinterested and squeeze out gains. For the global macro environment as a whole, however, the chances of finding “arb” opportunities are basically zero.
The stark contrast ultimately boils down to the nature and scale of surveillance, the speed of feedback loops, and the level of sophistication among participants.
In everyday systems, oversight is challenging, and feedback loops are slower. This environment allows the shrewd observer to thrive. In financial markets, however, the feedback is almost instantaneous, and the level of surveillance and sophistication is exceptionally high.
It is obviously also a question of return and the scalability of such an undertaking. Play small games and win small prizes. I don’t know about you, but I’d rather play larger games with hopefully larger prizes.
In the absence of being able to “arbing” the system, we can only rely on well-thought-through investment processes and our experience in analysing incoming data and possibilities for markets to shift.
A small shift in messaging led to hawkish impulses last week when Fed’s Waller mentioned “methodically and carefully” easing and guided the markets closer to the Fed median “dots” (3 cuts in 2024). We saw continued resilience in US consumer demand, and jobless claims printed the lowest in 15 months.
We are now back to a fairer March Fed cut probability of 50%, while the ECB’s rhetoric still points towards an unlikely sudden shift. The chart below shows the recent 1-week change in G4 bond market moves across the curve.
Looking forward to next week, the BoJ is unlikely to change policy, but you never know with last-minute leaks. PBoC could cut 5y LPRs.
In the meantime, earnings will continue: 16% of the SPX market cap and 19% of Eurostoxx 50 report this week. Auctions include EUR 11bn of EGB supply from scheduled issuance, USD 190bn across UST 2/5/7yr and 2yr FRN, and GBP 8bn across gilts.
Let’s now dig a bit deeper into the details and scan some charts for any setups we need to consider. Friday’s market moves brought up some interesting patterns with it, which I am updating in the charts below.