SignalPlus Morning Briefing 18 Aug 2023
Recently, both the US stock and crypto markets have experienced retracement. From a news perspective, there are new updates every day, but there hasn’t been any significant news that could impact the overall trend. The recent retracement, in my opinion, is more due to concerns about rapidly rising risk assets leading to worries about future liquidity shortages, which in turn triggers selling. The volatility surface of the crypto options market has also seen a long-awaited increase, reflecting the concerns of option participants about future liquidity. I maintain my previous view that it will be difficult for the market to generate a major rally until the rate hike cycle ends.
So much for a quiet end to the summer.
Treasury bonds saw the 6th consecutive day of sell-off, with 30y yields rising to nearly 4.40%, breaking the panic highs in 2022 and approaching levels last seen in 2010/2011.?The pandemonium started with the weakest 20y JGB auction in recorded history with a 7bp tail, causing their yields to spike by 7–10bp across the curve and catalyzed the global fixed income sell-off right from the morning.
Over in China, the PBoC has been intervening in FX markets, with the CNY seeing the 2nd strongest fix versus Bloomberg survey on record (with ~918 pips to the strong side), squeezing out some late USDCNH longs as spot CNH squeezed from 7.35 down to 7.28 as of the time of writing. Furthermore, the PBoC published its 23Q2 Monetary Policy Report yesterday, in the midst of the recent rapid RMB depreciation. Outside of the consistent rhetoric with the Politburo’s earlier guidance to “enhance the magnitude of macro policy adjustment”, the MPR also explictly mentioned to “firmly prevent exchange rate overshooting risks” (堅決防範匯率超調風險) as an official guideline for the very first time. Finally, official and state-supported buying in Chinese stocks / H-shares were also evident yesterday, with significant southbound flows record in the HK-Connect yesterday, and HSI rebounding from a ~2% sell-off intraday to close flattish versus the previous session.
Unfortunately, the temporary lull in China-led risk-off was no panacea for the US bonds sell-off, as a stable initial claims (-11k to 239k) and rebound in Philly Fed pushed bond yields higher throughout much of the session. Philly Fed rebounded +25.5 points to print a +12 headline for the first positive print since a year ago, significantly above forecast. The move was led by general improvements across all sub-components, but particularly with a 30-point surge in new orders. 30yr real yields (inflation adjusted) went to fresh highs at 2.10%, while the yield curve continued to bear-steepen as well as the move higher in discount rates is now being led by the back-end and economic improvements, rather than a hawkish Fed. 10yr yields hit cycle highs at 4.33% before rebounding somewhat into the close as equities continued falter, with the fear of a large risk-off move causing traders to pare some of their short bond positions.
The higher-for-longer narrative continued to weigh heavily on equities, particularly on high-growth sectors and unprofitable companies. Energy was the only SPX subsector to be in the green yesterday, with Tech (-1%) and consumers (-1.6%) leading the move lower yesterday. Citi’s index of “unprofitable tech” index fell by -3.3% yesterday, while the Russell 2000 dropped for the 8th consecutive session to the lowest levels since July.
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In a true ‘take-no-prisoners’ approach, the general risk-off tone finally spilled over to crypto, where a break of spot gold <1890 coincided with a late session crash in crypto prices towards the NY close. After flat-lining at ~29000 for BTC and 1850 on ETH for seemingly an eternity, a large volume flash-crash saw prices fall by almost -15% in a straight line on extremely thin liquidity. Unsurprisingly, the swift crash lower liquidated long future positions by the largest amount in many months with over 32k BTC long futures being stopped out, adding to the reflexive downward spiral. To complicate matters further, prices recovered about half of its losses in a semi V-shaped bounce as news headlines broke that the SEC appears ‘poised’ to approve Ethereum futures-based ETF based on “people familiar witht he matter”.
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