Last week’s price action was one for the history books, or at the very least, it will be up there among the more “memorable” sessions. Events like this leave investors and analysts dazed, confused, and probably, a bit bruised too. The obvious question now is: what happens next? To which the only obvious answer is; who knows. That said, I reckon this question itself has to be answered in two parts. The first is whether it’s time to buy the dip in risk assets, a question that invites all sort of cliches. It probably depends on your timeframe, not to mention the more obvious point; do you fell lucky? For the record, I re-arranged the portfolio slightly last week, raising cash levels, and selling short-term U.S. bonds in favour of select forays into existing, and a few new equity positions. Time will tell whether this was a good decision. It certainly seems premature when considering the terrible Chinese PMIs released overnight Friday, though I think last week’s swoon has more to do with the spread of Covid-19 outside China. In any case, when Vix has a sniff at 50, I reckon that I have to do something. To evaluate whether to buy the dip a bit more thoroughly, I had a look at the put/call ratio on the S&P, which is now teasing short-term traders with the strongest buy-signal since the 2010 Flash Crash and the late summer panic in 2011.
Read MoreIt’s difficult to get past the obvious at the moment. Markets have made their bet on further monetary easing, and they’re now waiting for central banks to deliver. Policymakers have been showering markets with promises to “act if needed,” and assurances from those stuck at the zero bound that the toolbox is far from empty. But they haven’t done anything yet, though this is a position that will be closely examined this week. Mr. Draghi will be at the spotlight first today when he delivers his introductory statement at the ECB forum in Sintra. The nebulous 5y/5y forward inflation gauge has crashed to new lows recently, and it seems to me that the consensus now expects a signal from Mr. Draghi that the ECB will cut its deposit rate, or re-start QE, as soon as September, which incidentally will be Mr. Draghi’s last meeting as ECB president. Meanwhile at the Fed, the only question seems to be whether The FOMC cuts by 25 or 50 basis points in the next few months, setting the stage for an interesting June meeting this week. To the extent that markets have priced-in monetary easing in response to the deteriorating trade negotiations between the U.S. and China, it would make the most sense to assume that the much anticipated Osaka sit-down between Mr. Trump and Xi—at the end of June—to be a catalyst for something in markets.
Read MoreIt’s easy to trip over trying to formulate a market narrative at the moment. One interpretation of the dramatic decline in global bond yields is that the smart money is de-risking their portfolios ahead of global slowdown and a rout in equities and credit. The ramp-up in the global trade wars, and still-soggy economic data seem to confirm this version of the narrative, but it is also a somewhat naive story. The global economy is not in perfect shape, but it is hardly on the brink of a recession, especially not since it is usually coordinated tightening by central banks that push the major economies over the edge in the first place. The market is now pricing-in one-to-two rate cuts by the Fed this year, and three in 2020. The money market curve in the Eurozone is even starting to price in the idea that the ECB will further scythe its deposit rate below -0.4%. The argument in the U.S. is particularly delicious. Last year, the consensus was angling for a recession in 2020 based on the idea that the Fed was in search for a “neutral” FF rate at about 3%. Now that the Fed has thrown in the towel, the idea is that it will cut rates to prevent the recession that it itself was supposed to have sown the seeds for in the first place, by hiking interest rates.
Read MoreI think that I am on record somewhere for saying that I would sell everything if the 2s5 inverted. Well, it just did—by a slender margin of 2bp—and for that reason alone, I should have a view. It isn’t easy, though, to add something that hasn’t already been added by the cacophony of comments on the back of recent gyrations in U.S. bonds. If a falling tree in an empty forest doesn’t make a sound, does a yield curve inversion matter if everyone has been talking about it for a year? As it happens, the tree does make a sound, and the yield curve inversion does matter, though not for the reason that you might think. Rick Reider, CIO of the investment manager Blackrock, is a smooth operator, and he delivers the goods in a few tweets. The significance of a yield curve inversion is not about its ability to predict a recession in the U.S., or elsewhere—more about that in a bit—but about the following three points. First, the Fed has some questions to answer; second, an inverted yield is as much a statement of markets’ perception of the Fed’s neutral/terminal rate as it is about its ability to forewarn about a recession, and third; bonds are finally offering a bit of protection for balanced portfolios. This week, I’ll go through each of these points in turn.
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