E What A Difference A Day Makes - 24 Little Hours

Markets

In your typical "Turnaround Tuesday" fashion, US equities recovered TuesdayS&P up 1.5% after the 1.6% fall Monday. US10Y yields also up 3bps to 1.22%, and oil recovered 1.5%. The quick snapback led by Cyclicals and the Reopen trade accompanied by reportedly high ETF volumes again suggesting hedges are getting reduced as quickly as they were increased yesterday. Financials flows also leaned generally bullish after the move higher in US yields. 

A bounce in UST 10y yields provides an " Alka Setzer" moment for the global reopening trade. But beyond the US  risk-on trading rebound, global growth concerns should continue gurgling in the background, with the Delta variant looming large in investors' minds. That explains the underperformance of Asia equities today. It also spells out the underperformance of both commodity currencies and GBP over the past week.

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Bonds

US 10y yield is back above 1.20 area, catching up the rebound in Equities. The more exciting thing is UST 5s30s is steepening ahead of the Fed next week as the front-end market is repricing Fed hike expectations. The recent rise in delta variant concerns will give the doves in Fed more reasons to argue for a longer accommodative monetary policy. But will they delay the QE tapering because this is a big question mark? Also, there are no Fed speaks in the next week due to the blackout period. So, it seems the street is less inclined to chase the dollar further. 

Still, this week's risk-off tone in markets, which is unlikely to abate for a while, has triggered further positioning unwinds, rising volatility, unstable FX betas, and significant risk premia in stock market valuations. And despite a considerable bias to own the US dollar as a safe have to hedge, it's not implausible that currency markets are leading equities or commodities here, which warns against chasing the dollar higher on these specific market correlations. 

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William K. 1 week ago Member's comment

Truly it is amazing the difference a day can make. But trying to fully understand exactly what happened can be a hard challenge. Thus mostly folks get it a bit wrong.