SignalPlus Morning Briefing 26 Sep 2022
Good morning and welcome to SignalPlus’s morning commentary.
After a quiet Asia open, markets had a ominous start in the European hours with the UK announcing the biggest tax cut since 1972 — an unfunded ￡220bln policy blitz with cuts to various taxes and a cap on energy prices.
The plan will incur significant funding needs and will result in large increases in Gilts supply over the next few years. Markets reacted violently with 2yr Gilts moving up by +45bp on the day (>3 sigma, largest since Lehman), and GBP selling off by almost 4%.
To make matters worse, and for the first time in decades, bond yields and the currency gapped in opposite directions (yields higher, FX weaker), which is highly uncommon for developed markets and reflects significant concerns over the UK’s long term fiscal sustainability.
The black swan like moves in the UK was too much for markets to handle after what is already a tough week, with the SPX off about 2.8% at the lows before rebounding to close down 1.7% on the day. US 2yr Treasury yields saw a straight line gap +15bp to a high of 4.25% before settling to close the session at 2%. Crypto prices actually held out relatively well by comparison, as ETH managed to hold its previous day lows at ~1260 despite TradFi assets cliff-diving everywhere else. 1m Skews on SPX futures continue to elevate on the downside with reported put-money flows at close to record highs.
Looking ahead, the market is quickly putting the Fed’s tightening convictions to test with 10yr real yields reaching the highest levels since 2010?, equities breaking the YTD lows, and Credit CDS breaking June highs on concerns over refinancing costs.
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Next week will see an important Core PCE release on the 30th, the first significant inflation datapoint post the FOMC meeting and something that the market will scrutinize over.
Finally, as mentioned in previous comments, we are heading into some of the most difficult trading conditions in this cycle, where uncertainty abounds and clustered capitulations might start to happen. Please trade responsibly and be cognizant of your risks, and feel free to speak to us here at SignalPlus if you want to ping some ideas on how to manage your positions into a turbulent year-end!
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