During liquidity events, the rules change.
View of zebras from overhead. The black shapes are shadows.
highlights
Transitioning to liquidity event
Current Views
Long 05JUN 7.40/7.60 call spread
29bps off 7.2955 spot
NFP doesn’t matter
Never in the history of nonfarm payrolls has there been a less relevant nonfarm payrolls number. Today’s figure is backward looking and has absolutely nothing to do with the current narrative of collapsing confidence, collapsing forward real growth, collapsing commodities, and napkin math tariffs. I would completely ignore the outcome and do whatever you were going to do otherwise.
China’s retaliation is the start of the fallout from the Liberation Day announcement, with more to follow. The drop in US stock markets puts the administration in a difficult position where the allies and adversaries they attacked now see weakness and are less likely to negotiate and more likely to hit back and send a message.
Here’s something to be ready for this weekend:
The moves in credit and vol are big, but as you can see from the charts here, there is still plenty of room for things to get much, much worse.
It’s hard to think of what the solution is going to be here, other than a complete cancellation of the Liberation Tariffs. I suppose the delta of that rises with every 1% in S&P. Eventually, you will get Fed noise and action, but they don’t usually come in until stocks have dropped 20%. It’s hard to believe that SPX was 6146 on 19FEB, and now we’re sub-5400.
A 20% correction in cash SPX is 4916.
The USD is flying all over the place as we are seeing exactly what one might expect: EUR, CHF, and JPY are strong and AUD, CAD, and EM are weak. That’s standard for a credit and equity meltdown. The price action in EUR is getting dodgy and while I like the USD down in general, I would not be long EURUSD right now. When liquidity starts to drain from the system, you tend to see a strong USD. First you get it against the commods, then eventually you get it against EUR and GBP. Recall when the COVID shock first started, EURUSD rallied for a few days, then collapsed as the liquidity got sucked out of the system. Hiding in EUR or gold doesn’t work in these situations. The only safe short USD trade is USDJPY.
Another thing to remember in events like this is that oversold and overbought don’t mean anything. This chart should not make you want to buy AUD.
Final Thoughts
*SWISS TWO-YEAR BOND YIELDS TURN NEGATIVE ON US TARIFF SHOCK. Have a shadowy weekend.
Next week’s calendar
View of zebras from overhead.
The black shapes are shadows. And… Camels…
