Little in the way of news today. Tomorrow is another story. UK july retail sales and US initial jobless claims. US weekly jobless claims numbers have been more or less driving the market lately. Expectation is 478k which tells me the market has definitely lowered outlook on the job market.
Yield curve
• In US, Europe and UK the theme among central bankers is clear – if we have to pick a fight then we would rather fight inflation than deflation.
• Inflation is a villain that central banks have experience fighting and beating. Deflation is an unknown and Japan has been stuck in it for 20 years. If I had to choose I would pick inflation too.
• So what we are seeing is that central bankers are doing whatever it takes to avoid deflation – by keeping rates at zero as far as I can see. These guys aren’t looking to just walk the batter. They’re throwing the ball some 20 feet away from the batter just to make sure no chance of hit ever comes up.
• If anything I believe there is greater risk of additional QE in both US and Europe and this can push long term yields down in short to medium term.
• I am not even going to pretend to have a clue what might happen more than 6 months down the road. But I believe at the moment we have not seen the lowest points for yield curve yet. If I have to make a bet I would go long bonds even from here.
• I think this monetary loosening eventually would have little impact on fighting deflation because consumer credit growth remains weak and balance sheets are broken everywhere. Lowering interest rate on people who already are broke wouldn’t do much good. But central banks would keep the spigot running because this is what they can do to fight deflation – this is why I think in the medium term rates go lower. Further down the road I think something really bad would happen but I don’t know what that would look like.
Credit
• Fundamentally speaking corporate credit is the sweet spot with tons of cash and little drive to spend it.
• However, the run up has been great both due to falling discount rate, flight to safety (relative to stocks) and yield chase. Buying LQD or HYG doesn’t seem all that attractive from here although I would still advocate switching out of long equity positions into credit even at this point.
• I think there are some good trades to be made in selling CDS on corporate names but this isn’t our capacity at this point.
Oil
• Today’s DOE announcement was more or less inline with expectation.
• Crude and refined products inventories – at least the onshore – remains stubbornly high and has been rising this year.
• IEA reports suggest that inventory level is extremely high for the OECD in general.
• Supposedly there has been a massive fall in floating storage but hard for me to confirm. I am even less sure how that affects the market.
• I will try to look into RBOB and heating oil see if I can see something interesting there.
Currencies
• GBP and CAD are intrigue me the most. But need to do more digging.
No comments:
Post a Comment