Friday Chart Book
Rotation & Curves / Macro Week in Review / 250+ Chart Updates
I am off to enjoy a week of rest. I was first tempted to take the chance to enjoy the stunning snow conditions in the Alps, but the fact that Britain has seen nothing but rain and cold, damp conditions makes me long for something I haven’t seen in a while. Good old sunshine and warmth. I’m looking forward to some vitamin D reboot as I keep on watching markets from afar.
Markets are currently in washing-machine territory, with too much noise infecting our ability to filter for the next big macro trade. Too many cross-currents are at force after we set off the year in a relatively predictable fashion. We are grappling with the aftereffects of a question yet to be answered about the impact AI will have across various segments of the global industry and related economies. Equity indices are weaker, yet under the hood, huge dispersions are appearing
Energy companies (XLE, white line) are outperfomring Technology (XLK) sector by more than 25% while the growth/value factor is down 15% YTD. That’s a very sizeable rotation.
I thought about the impact of AI at length over the past week and dedicated a brainstorming piece to the winners and losers I currently see, both in companies and global economies. See details below.
Yield curves have continued flattening, with the US 2-30s curve turning lower. Could the disinflationary impact of AI, coupled with a more hawkish tone from the FOMC, turn the very popular steepening trade upside down?
With Gold retreating and behaving more like a risk-on asset following its large volatility event at the end of January, are US long-end Treasuries the new safe asset? What was unthinkable just a few months ago is now considered a worthwhile look. It’s cheap on the charts and provides enough carry and convexity for a disinflation and/or slowdown scenario.
Are hikes really on the table? Many are looking at the late 90s as a parallel to today’s conditions. The internet back then drove a productivity boom, with nominal GDP printing well above 5%, lifting equity valuations amid stable inflation. Back then, the government ran surpluses, which then made issuance scarce, lifting the allure of longer-dated assets. That’s quite a different setup from today, where large deficits are here to stay.
When looking at 5y5y rates (white) and 2-year Treasuries (blue), you can see that we rarely traded higher over 2 years relative to 5y5y forwards, indicating that the market is giving monetary policy credibility in setting appropriate short rates. The exception was the early 2000s, when the Fed likely waited too long to ease, and the recent inflationary episode (core CPI in red), when the Fed waited too long, thereby needing to raise the short rate above the forward rate to ensure inflation returns to the target. Now, we are sitting below the forward curve, similar to conditions in a normal easing cycle. 5y5y rates, however, are stubbornly high, possibly indicating that short rates do not need to be adjusted lower.
There are many moving parts, but the most important thing is to build a resilient portfolio, which I have attempted to do this year by choosing appropriate hedges (long volatility) to participate in upside while protecting downside. 30-year US Treasuries are part of the portfolio. See here for details. So far, we are comfortably beating US equity indices (ES blue and NQ red ) and are up more than 8% YTD.
The current setting is not only about traditional macro. Geopolitics is a key factor in investment considerations. As I type this post, pretty much everyone is expecting an attack on Iran as the US is moving plenty of assets into the region. The financial world is now also paired with the geopolitical reality, which is yet to unfold. Macro D has written a great piece on this phenomenon and on how to prepare for it. See below.
Let’s now read Macro D’s latest thoughts on recent macro data and central banks and his Macro FX positioning before we open the floor to the entire chart book, consisting of 250+ charts, spanning the entire global macro universe, from rates, FX, curves and commodities to crypto, equity indices and single stocks. It’s all there.
Enjoy a wonderful weekend. Peace be with you. I shall share my observations from a warmer climate over the next week.
