The Squirrel's market thoughts. 

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This weekend SABA CIO Boaz Weinstein observed that “The most striking thing to me right now is the differing expectations for volatility and systemic risk between markets over the next month. I’m pretty sure the relationship between vol in rates vs. vol in equity and credit has never been this stretched in history.” 

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Nvidia (blue) and QQQ (turquoise), upper pane vs MOVE (pink, lower pane).  Source: Tradingview.

With the MOVE index (treasury volatility) back in the 170s, the bond market is still screaming “DEFCON 1”.  Meanwhile, Nvidia is having a think about re-testing all-time highs with the broader universe of large cap tech also catching a bid.  It all feels a bit like the Christmas Day entertainment between the Western Front trenches in December 1914.

Another weekend of speculation about the health of the banking sector on both sides of the Atlantic.  However, most global equity indices ended the week in positive territory and the corporate debt (investment grade) new issue markets reopened after an uncomfortable hiatus.  High yield bond new issuance, however, remains frozen.  Credit contraction appears to be happening in real time.

Jerome Powell delivered the 25 bps rate hike that had been priced by the money markets.  He seems determined to carry on the Fed’s unspoken role as a suppressor of macro volatility.  If it had not been for Mrs Yellen’s flip-flopping on bank deposit insurance mid-week, risk assets might have closed the week even higher.  The move in interest rates certainly infuriated that up-and-coming new boy band “Bill Ackman and the Palo Alto Squealers”. 

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This Friday brings US PCE inflation data.  Another hot reading will have the inflationistas out on the street with their pitchforks.  I told you I did not want Jerome Powell's job.

The US regional bank crisis still appears to be short of a medium-term fix to stem the incessant flow of deposits from the smaller players to the G-SIBs (systemically important banks).  The Fed’s new BTFP facility may be a helpful source of liquidity for underwater treasury and mortgage bonds but is not going to help out a mid-size bank’s treasurer with his outsized commercial real estate (CRE) loan book.

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On the topic of CRE, this chart from Morgan Stanley (h/t The Market Ear) illustrates the extent to which public CRE asset values have already adjusted down.  We expect “true” loan to value calculations on real estate facilities to be a matter of hot debate in the coming months.

In Europe, the Twitter vigilantes have set their sights on Deutsche Bank.  At risk of looking foolish tomorrow morning and to butcher Mark Twain, we think that reports of DB’s death are greatly exaggerated.  Terrific overview thread from Johannes Borgen argues convincingly about the strength of Germany’s banking crown jewel.

We have a hunch that the banking scare is all a bit of a red herring.  It is of course human nature to look to the last crisis in order to identify the origins of the next one.  Notwithstanding Credit Suisse in Europe and SVB/Signature/FRC in the US, it is hard to see a classic banking crisis being the root cause of the next financial meltdown.  Banks these days are much better capitalised and better regulated.  The risks have gone elsewhere. Last November, we wrote the following:

“The recent failure of FTX has highlighted risk management failings in the private assets space and the Squirrel has a hunch that this illiquid and opaque world has the potential to become the ‘patient zero’ of the next financial crisis.”  Full report here.

In the meantime, global investors have leaned in to the ‘muscle memory’ of the past 10+ years.  Financials and cyclical equities have been unceremoniously dumped in favor of a “flight to safety” back to large cap technology stocks.  Technically, the Nasdaq is behaving as though a new long term uptrend could be anticipated.

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Nasdaq100 futures, daily chart.  Source: Tradingview.

This is being driven by the index giants (AAPL, MSFT and META in particular – AMZN is still lagging).  It will be interesting to see if this holds into Q1 earnings season.  What happens if that is a damp squib?  The safety trade could unravel very quickly. We can see plenty of reasons to be tempted but are not yet ready to short tech equities aggressively.

Commodities

We finally have some decent data on futures positioning data (thank you Ole Hansen at Saxo).

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Some observations from us:

• Gold is finally building some momentum.  See Scrooge McSquirrel for a new actionable trade idea.
• Copper is still net short notwithstanding increasingly dwindling exchange inventories (-30%+ year over year).  Trafigura and Goldman Sachs both making noise on this over the week.
• Crude positioning ABSOLUTELY CRUSHED (WTI -42%, BRENT -27%).  These moves in spec positioning seem extreme.  Refining spreads also looking supportive.

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Crude product ‘crack spreads’.  Source: Tradingview

• This is incredibly bullish for oil bulls like the 🐿️.  We are mainly positioned in Dec 2024 and Dec 2025 futures and remain patient.  Pierre Andurand agrees (but then again he would do I suppose….)

https://twitter.com/AndurandPierre/status/1639391899994804226?s=20

• In grains, the short position in wheat sits at near record levels.  For all the arguments described here, we do not understand the continued complacency.  This feels like a tinderbox.

Weekly Acorn review and Portfolio Update now available on the main site.

More By This Author:

Scrooge McSquirrel; Monetizing Polarization; A Convex Play On Gold
CoCo Pops: Only Half Price? Some Thoughts On Bank Capital
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