24/08/18

Nomura: Here Are The 3 Signs Stocks Are Becoming Concerned About Excessive Fed Tightening



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Nomura: Here Are The 3 Signs Stocks Are Becoming Concerned About Excessive Fed Tightening
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By Charlie McElligott, head of cross-asset strategy at Nomura

Momentum Parties While Softer US Dollar, PBOC Actions Boost Risk-Assets

Global risk-sentiment in one asset: Offshore Yuan sees a powerful reversal STRONGER again overnight and is back through the "centrifugal pull" of 6.85, to 6.827 all the way from ~6.90 earlier (!)  

And this is why, just out now: *PBOC SAID TO PLAN RESUMING COUNTER-CYCLICAL FACTOR IN YUAN FIX, which will likely contribute bias towards a STRONGER Yuan fixing vs Dollar

Along with a broadly weaker USD (G10 and EM), this is risk-asset stabilizing, with the "virtuous cycle" back in-play: firmer Commodities / higher "Inflation Expectations" (5Y Breakevens back above 1.985) and stronger Emerging Markets see better global Equities / higher UST Yields overnight

Macro-wise, the key STRUCTURAL "go forward" themes for risk-assets come down to aforementioned

  1. "USD Direction" (near-term) and
  2. U.S. Yield Curve "shape" (medium-term), as any "steepening" will likely be signaling that the market is "sniffing-out a slowdown" from "Peak Cycle," and beginning to REMOVE rate hike projections from the front-end—this is why we've pushed the 1y and 2y expiration curve-caps as broad risk hedges

To this latter-point, I remain fixated on the inversion of EDZ9-Z0 spread, as well as the recent precipitous decline in March '19 hike probabilities—going from 63.5% to now "just" 45% in less than a month

Tactically however, I remain ...

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