Attack the Week (ATW)

September 4, 2023

Monday Thoughts

This is the 101st post I have produced. I didn’t realise it when I posted last Friday’s August Review. Celebrations are in order. Thank you again to everyone reading my hopefully useful posts.

I enjoyed this achievement over the weekend while celebrating my niece’s belated 21st birthday. There was a cricket match, followed by drinks and a full-on party at her parent’s garden. I was helping out on the grill. Two BBQs manned by myself and another uncle. We hit one grill with sausages and the other one with chicken drumsticks. I like to keep things simple. We smashed it, and although my later batch produced excessive charring, it still tasted delicious, and nobody of the younger generation noticed.

The music was playing until about 5 a.m. There was no particular DJ, just the birthday girl’s phone connected to a HiFi. The music was getting a bit random, so she asked me to take over and hit out some bangers. I happily took over. Quickly scrolling through Spotify, my brain was frazzled. What do you play to mostly 20-somethings at around 2:30 a.m.? I panicked and queued Electric Six’s “Gay Bar” to keep the speed up. That proved an instant hit with the crowd. I got excited and then chose to follow it up with Fleetwood Mac’s “The Chain”. The floor emptied, and I handed the phone back to my niece. A short DJ set. Sometimes, old tunes don’t work for the younger generation.

As in investing, old strategies and concepts need to be adapted to the new regime and environment. What has worked previously might not work again. Yes, experience and long market exposure account for a lot. It is mostly useful to understand and deal well with risk and inevitable setbacks. But like a good DJ, an investor needs to read the room well and play different beats and tunes to keep the wheels spinning.

Last Friday’s NFP was softer than expected. As such, the initial move in Treasuries was what I expected. I looked at all the other screens and was happy to leave for a few hours and hit the gym. As I returned, the bond market flipped. The sudden pop in US 10y and 30y yields was a head-scratcher. I checked in with a broker friend who mentioned that it would appear that some steepeners were going through into the long US weekend. A trader I am frequently in contact with hasn't seen any outright selling in the belly (10-yr) or long end but has seen structures, like 5s30s and 10s30s, put on.

I guess some repositioning after the "dovish" payrolls report made sense, especially with the long weekend ahead. It's hard to gauge where positioning in cash is. Watching how 10s30s trades with 2s10s and 2s30s, as well as 2s10s30s butterfly, should be monitored as the steepening takes hold.

I would expect curves to continue steepening as we adjust to "higher for longer" and/or end-of-cycle trades. This is also technically supported by what the momentum model is telling us. In addition, there may be as much as $40bn of corporate issuance coming up this week. This might be putting pressure on long-end Treasuries.

US 2-10s

Meanwhile, Oil is breaking to new highs. In fact, last week was the best one in five months. Crude oil prices have been boosted by the prospect of further OPEC+ supply cuts. Russia already committed to a cut of 300k bpd for September, while Saudi Arabia is expected to extend a 1mn bpd oil supply cut into October (not confirmed). A reminder that OPEC-driven gains have been short-lived this year.

Source: Bloomberg

China's property announcements and the FX RRR cut show policymakers upping the ante. This confirms a bottoming in the property sector, but markets need to assess broader policy effectiveness in the coming months. We shall be monitoring the situation closely over the coming weeks.

Remember liquidity? Well, it’s back, and it’s mostly related to China’s efforts to stabilise markets. This has obviously also impacted general risk appetite globally.

Now, let’s attack the week!