I’m clinging to my bullish risky asset and bearish USD view but markets can’t take much more pain from yields here.
Fire is hot
Can you guess the
temperature of the
inside of a campfire?
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am/FX: Hang In There
Current Views
Short USDNOK @ 10.56
Stop 10.92
Take profit 9.88
Long a 3-month USDBRL 4.90 digital put at 20%
Spot ref. 5.1850 on 10OCT22
Expires 11JAN23
October 19, 2022
Hang in there
The market is at a huge crossroads here with US yields again tickling the 4.10% level. It doesn’t matter how many subscribers Netflix picked up in Asia… If yields keep ripping higher, risky assets are going to struggle. Sure, we have come a long way in yields, but given the extreme level of inflation, the uncertainty around the trajectory of inflation, and the dearth of natural buyers in bonds these days… I suppose anything is possible. My bullish equity view is at risk if yields move much higher. Perspective:
US 10-year yield, 1980 to now
As has been the case throughout 2022, it’s all one trade. This next chart shows stocks in black, vs. US 10-year yields (inverted, in blue).
S&P 500 vs. US 10-year yield (inverted)
Hourly back to June 2022
Hotter than expected inflation in the UK and Canada are contributing to further losses in fixed income this morning.
The alternative hypothesis
The tenacity of inflation is kind of mind boggling as people thought it was transitory as recently as November 2021 and the calls for peak Fed and peak USD and peak inflation have been a rolling fail where every prognosticator has taken a shot or two at calling the top over the past twelve months. Bloomberg Intelligence took their shot today with this chart, which I have recreated because I couldn’t get it to come up in a readable format on Bloomberg.
Global money supply, YoY change vs. US PPI YoY
Chart idea from Bloomberg Intelligence, recreated by me
Donde estas el MOF?
I am surprised we haven’t seen the MOF intervene yet. I would think that if 150.00 trades, the odds of intervention rise to almost 100%. Then, you’ll have a JPY-specific move (USD falling elsewhere) plus a huge psychological level, plus a spicy rate of change. I would make a big bet on intervention as we near 150.00. Simplest expression is short-dated USDJPY puts. No need to make it any more complicated than that. Or sell spot with a stop at 150.57.
It is possible, of course, that the MOF saw the rebound off the last intervention and decided to pack up and go home. Perhaps they didn’t like the strong USD-bullish market reaction and have decided to let the JPY get destroyed in a flip of the bird to the BOJ and its YCC policy. I doubt that’s the case, but their absence to this point is more and more wow.
Final thoughts
I am clinging to my tactical two-week bullish equity and bearish USD views, but I feel like that cat in the inspirational posters.
When someone says, “Everyone’s a vaccine expert, now!” or “Everyone’s a Ukrainian geopolitics expert, now!” or “Everyone’s a UK power market expert, now!” or whatever in a sarcastic way… They are missing the mark. The whole point of global macro is to try to understand what is going on in the world and develop a working knowledge of the major themes moving markets. Of course, we’re trying to gain expertise in the domains that are driving global macro. What else would we be doing? That’s a big part of what makes global macro so much fun!
Have a dazzling, white hot day.
good luck ⇅ be nimble
Approximate colors of fire
How hot is a campfire? There are two temperatures to know.
- Internal Temperature: A campfire can reach internal temperatures of 1650°F (900°C) in the flames, known as the continuous flame region.
- Cooking Temperature: Above the flames (called the thermal plume region) where no flames are visible, you can expect temperatures of about 600°F (320°C). This is where you’ll do your cooking. The further away from the flames, the lower the temperature.
Note that aluminum melts at 660°C so be careful with those aluminum tools
HT: O-dawg
