SignalPlus Morning Briefing 17 Oct 2022
Staying true to form, markets did its best to inflict maximum pain on trading participants, with the SPX closing -2.4% (-3.5% from intraday peak) after a wild CPI day just 24 hours ago.
Thursday’s ferocious rally was blamed on the convexity impact of OTM short dated calls, with option trading volumes continuing to increase and influence the day to day price action despite markets being in a bear market.
Friday’s sell-off was sparked by yet another strong US economic print along with a number of market moving headlines. The European session began with news of Chauncellor Kwarteng being ousted for the collapse of the Gilt market, along with further confirmations of a budget policy U-turn in the upcoming weeks. Unfortunately, this was of little reprieve to bonds as 30yr gilts had a near 60bp round-trip as the last day of BoE QE saw only about ~￡19bln of bonds being bought vs ￡65bln expected.
US Treasuries saw an early rally where 10yr yields dropped to a low of 3.84%, before some conciliatory headlines from Putin on Ukraine and a much stronger than expected UMich expectations (1yr inflation expectations surged to 5.1%) took yields higher to close +7bp higher at 4.02%. Hawkish Fed speak from George and Daly continued after the data, stating that “a higher savings buffer suggests the Fed may have to raise rates to a higher peak than would otherwise be the case”.
As bear-market rallies are often the most vicious types, we should expect markets to remain exceptionally choppy into year-end given thinning market liquidity, low conviction, weak market sentiment, and lack of PNL buffer after a tough 2022.
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Global inflows to both equities and bonds are at multi-decade lows and worst since 2008, with global bonds registering the worst net?outflows?on record.
Looking forward to the week, the main econ releases will be on Tuesday with NAHB housing index, US Housing starts, China data (retail sales, IP, GDP, unemployment), and German ZEW all on the same day. On the earnings side, JPM led the way a better than expected earnings performance?, with the rest of the banks reporting this coming week along with Netflix on Tuesday and Teslda on Wednesday.
Good luck & good trading!
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