Traders Market Weekly: Geopolitics and Stormy Weather

Jan 14 to 20, 2024

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The Week That Was – What Lies Ahead?

Contents

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Editorial

Shrugging off last week’s selling the stock market closed higher, the tenth week of gains in eleven weeks. The S&P 500 finally tagged a new all-time high close on Friday, recovering all of last week’s losses. The tech FOMO continued with NVidia tagging a new all-time high and Microsoft taking the biggest company in the world title from Apple. (based on market Cap & fueled by Apple downgrades on Apple watch). While this was going on Microchip Technology (MCHP) issued a Q4 revenue warning that was tied to a weakening economic environment.

With those moves mega cap stocks had an outsized impact on index performance. The Vanguard Mega Cap Growth ETF (MGK) rose 3.9% and the Nasdaq Composite was up3.1%. The S&P 500 gained 1.8% this week versus a 0.2% gain in the Invesco S&P 500 Equal Weight ETF (RSP). The Dow Jones lagged with component Boeing (BA) dumping 12.6% this week after 737 MAX 9 jets were grounded in response to a fuselage blowout on an Alaska Airlines (ALK) flight.

The Treasury market reacted to a hotter Consumer Price Index (CPI) tempered by a cooler Producer Price report. The 2-yr note yield, which is most sensitive to changes in the fed funds rate, sank 24 basis points to 4.15%. The 10-yr note yield fell nine basis points this week to 3.95%. Markets priced Fed rate cut expectations with fed funds futures market priced for a 79.4% probability of a 25-basis points rate cut at the March FOMC meeting versus a 68.1% probability one week ago.

The best performing S&P 500 sectors were information technology (+4.9%), communication services (+3.4%), and consumer discretionary (+1.5%) sectors. The energy sector had the steepest decline (-2.4%), while natural gas prices soared oil prices fell after rising earlier in the week in Mid East concerns. Earnings season kicked off, however not any help for the financial sector which closing down 0.5% for the week. Bank of America reported along with three of the largest U.S. lenders. There were mixed results at the close; Wells Fargo (WFC 47.40, -1.64, -3.3%)Bank of America (BAC 32.80, -0.35, -1.1%)JPMorgan Chase (JPM 169.05, -1.25, -0.7%) were lower while and Citigroup (C 52.62, +0.54, +1.0%) was higher. BlackRock (BLK) also reported. Notably all but BAC exceeded consensus earnings estimates for the December quarter and didn’t sound any real macro alarm bells.

In other news, geopolitical angst was again piqued after the United States and the UK conducted more strikes against military targets in Houthi-controlled areas of Yemen. There was a flurry of Chinese bots and propaganda trying to stir up the Taiwanese Presidential elections. It is almost certain that Taiwan’s Democratic Progressive Party’s (DPP) government will win an unprecedented third term with Tainan mayor Lai Ching-te as president and cementing tensions with Beijing for the next four years. China continues its military threats and economic coercion, as the DPP stands for greater sovereignty for Taiwan.

Given the scale of the risk, precautionary principles require treating existential issues seriously. The good news is that while algorithms dominate, they tend to drive higher or lower than longer. We still have a long distance to go ­before machines match humans in all their cognitive capabilities.

Grasping the Short Squeeze Impact – A Recap:

Week one of 2004 we saw some giveback, how much is averaging or completion? We will find out, watch capitulation and saturation signs. Through all the dribbler hoopla about the yearend rally. Understanding crowd behavior and contrarian factors is crucial. The powerful short squeeze was the kindling, this market dynamic held sway throughout 2023.

  • The Goldman Sachs short index (GSSI) surged 15.9% during Q4, 2023’s third major squeeze rally.
  • From January 3rd lows to trading highs on February 2nd, the GSSI surged 36%.
  • Following a pullback, another squeeze saw the index jump 29% between June 6th lows and July 31st highs. After reversing 36% lower, the GSSI then surged 44% off October 30th lows in a barnstorming career ending making and breaking squeeze to finish the year.
  • Jim Chanos, the dean of short selling, whose career dates back to the 1980s, announced the closing of his hedge funds in November.

Keep in mind liquidity was low as investors looked ahead to another New Years weekend. Markets will be closed on Monday for New Year’s Day. We look back at the end of 2022 the all-time highs at year end and the rapid decline, over 600 handles for the S&P 500. This reason then was the Fed raising rates on an overvalued extended market. The difference this time? The Fed appears to be done raising, yields lower, inflation lower and many are expecting a repeat whereas the bulls were rampaging at year end last year. Over valuation remains and the damage from high rates remains.

Be wary of the best performing sectors being pumped by analysts and dribblers alike. These were general the worse performing sectors the year prior, reminding buy low sell high but also how in stock markets stories are distorted with those not actually in the game and making a story to attract subs, brokerage or clicks. The dovish Fed pivot fueled the at times vertical, powerful year-end rally. The “average” stock Value Line Arithmetic Index returned 11.9% for the quarter and 17.5% for the year.

That said come year end only three sectors declined in 2023: utilities (-10.2%), energy (-4.8%), and consumer staples (-2.2%). Energy was the best performer in 2022, meaning this year corrected some of that. The best performing sectors this year was one of the worse performing the year prior and is entrenched in the gamblers den. Information technology (+56.4%), communication services (+54.4%), and consumer discretionary (+41.0%) sectors saw the biggest gains thanks to the hopes and dreams of AI and the affect that had on their mega cap parties.

The indices were powered largely by seven stocks, the magnificent seven. The Vanguard Mega Cap Growth ETF (MGK) surged 50.8% in 2023 and the Invesco S&P 500 Equal Weight ETF (RSP) logged an 11.7% gain. Do they top out, continue on or new leaders emerge. That is a simple take of what can happen moving forward.

Bonds markets rallied, the soft-landing stories coupled with yearend window dressing and a fear of missing out with more short squeeze and carry trade activity at play. The end of the world narrative pushed by the self-proclaimed experts ran into a list of economic upside surprises. This week’s Housing Starts, Consumer Confidence, Initial Jobless Claims, and Durable Goods Orders support theories that the dramatic loosening of conditions is magical.

Geopolitical risk is alive. Activity in the Treasury market was also supported by some safe-haven trading after geopolitical angst was stirred this week. Specifically, several shipping companies, including BP, rerouted ships away from the Red Sea because of attacks on vessels by Houthi militants.

Simply use your visual framework, evaluate crowd behavior and determine the possible risk macro and micro ahead of the mentioned dribblers. Recall these very same people, in bulk called for the EOW pretty much up onto all-time highs. Some still are. The reality is trade at the market and leave your ego at the door. Welcome 2024 and map out your plan with multipole possibilities and bifurcation in your risk matrix.

Fed fund futures are pricing 156 basis points of rate cuts over the next year. To heck with the Fed speaker’s pushback against rate cut expectations. Six rate cuts are at odds with Fed forecasts and economic prospects following a major loosening of conditions. There is the factor that out-of-control speculative bubbles raise the risk of a crash scenario, the cycle goes on. Given that it’s not unreasonable for the market to price in probabilities of aggressive Federal Reserve rate cuts. Get ahead of the smash and grab so to speak.

Understanding markets is both counter intuitive and understanding crowd behavior, indeed the madness of crowds. The collapse and bailout of New York and Californian banks from negligent management of rate brisk from the Fed “tightening” in the end spawned the ideal backdrop for Wall Street Treasury market intermediation and levered speculation.

This is why we put the genesis of this rally back to March and use the USDJPY as a beacon back then coupled with mass bearishness. From there we have seen a speculative bubble that generated liquidity abundance and loosened conditions, countering higher policy rates and QT. In other words, we got the comfort that the ultimate “Fed put” is alive and well. Sticking with Santa in the stockings we also had “too big to fail” and “Fed secures Treasury and ‘repo’ liquidity’. Talk about kindling!

The emphatic late-year rally saw strong 2023 returns for corporate Credit, salvaged the year for Treasury bonds crushing massive bond short positions in the process. That said one has to think if it in fact loosened conditions and market euphoria underpinning economic activity the likelihood for upside 2024 inflation surprises maybe at hand.

We harp on about bonds and stock markets running the show and stock markets last to kick in. This year proves that rule of laws is alive and well as unfettered leverage and speculation reigns supreme. The Treasury market at $26 Trillion is the largest and most liquid marketplace in our ambit. We have the carry trade, but we also have the ‘repo market’. One can finance Treasury purchases in the “repo” market with minimal margin requirements. Hedge funds are said to have “repo” financing of Treasuries at 50 to 100 times leverage.

The “basis trade” is singularly systemically important. Last month, the Bank of England out the size at $850 billion. A Reuters article headline earlier in the month, “Praying for ‘Soft Landing’ of $1 Trillion Basis Trade.”

The Kings of a Colossal Bond Trade That’s Spooking Regulators,

A little gift from Santa to help understand the beast beneath these markets from a Bloomberg article, “The Kings of a Colossal Bond Trade That’s Spooking Regulators,” by Nishant Kumar, Donal Griffin, and William Shaw.

“As part of a core group of 10 or so firms, they rely on vast sums of money borrowed from Wall Street banks — often 50 times what they invest themselves — to pump tens of billions of dollars into the trade and supercharge returns. So colossal are their bets that some say they’ve become central to the buying and selling of Treasuries, it’s the cornerstone of global capital markets.”

The Bloomberg article highlighted ringleaders from three prominent “basis trade” firms, ExodusPoint Capital Management, Millennium Management, and Citadel. Other major players were Capula Investment Management, Symmetry Investments, Balyasny Asset Management, and Kedalion Capital Management.

“A senior Wall Street figure who’s worked for years with the core players estimates they account for roughly 70% of hedge fund basis-trade bets. The firms and traders named in this piece all declined to comment.” “Now regulators have the hedge funds in their sights, fearing a repeat of March 2020 when the bet blew up spectacularly — just before the Federal Reserve had to jump in to resuscitate the Treasury market…”

“But regulators are in a bind. Crack down too hard and they could threaten the orderly running of a US Treasuries market that’s ballooned to $26 trillion since the pandemic… The size of the traders’ positions means the Fed may have to intervene if they hit trouble again.” “‘There are only a couple of players and these players have made themselves too big to fail,’ says Kathryn Kaminski, chief research strategist at AlphaSimplex Group… ‘If you limit this arbitrage, you weaken market liquidity.’”

“Because the gap [differences in price between Treasuries and Treasury futures] is usually mere fractions of a penny this is only worth doing at scale, ramping up returns through the use of leverage. That largely limits the activity to a few trusted individuals at hedge funds with enough clout to borrow big from banks in overnight money markets. As the availability of this short-term lending has surged this year, the basis trade has boomed.”

“Critics ask whether it’s wise to lean so heavily on a few hedge funds, pointing to Covid’s early days in March 2020 when market turmoil forced them to rapidly unwind their positions… The Fed had to intervene to keep markets running, pledging trillions of taxpayer dollars… The 2020 episode may have fed a belief among some in the group that the central bank will always ride to the rescue, market participants say.”

“’There’s an implicit ‘Fed put’,” says Eric Rosenfeld, formerly of Salomon Brothers’ government- arbitrage desk in the 1980s and a cofounder of Long-Term Capital Management… But it’s not a question of ‘too big to fail,’ he asserts, more that the ‘Fed is responsible for maintaining a liquid, free-flowing Treasury market.’”

“Enabling all this is the group’s abundant access to the magic ingredient that lets it happen: leverage. Wall Street giants such as JPMorgan… and Bank of America Corp. lend to them in massive volumes in exchange for fees. Banks have only a fixed amount of leverage to dole out, so they tend to favor their best clients. Multi-strategy hedge funds such as Millennium, Citadel and ExodusPoint are a perfect match because they have other high-turnover businesses attractive to Wall Street lenders… For hedge funds, part of basis trading’s beauty is that they often borrow at ‘zero margin’ from banks, meaning no extra collateral has to be put up and they can take more profit.”

As a reminder, markets are closed on Monday for Christmas Day.

Rate Cuts?

The fed funds futures market is pricing in six rate cuts beginning in March, the market had been pricing in two rate cuts in 2024 ahead of the FOMC meeting. The other major central banks played along for the most part. The ECB left its corridor of key policy rates unchanged, as expected, along with the Bank of England, the Swiss National Bank and Hong Kong Monetary Authority. Notably though ECB President Lagarde and officials at other banks indicated that they are further away from rate cuts.

The result was new all-time highs for the Nasdaq 100 and the Dow Jones Industrials with the S&P 500 not far behind closing above 4,700 at its highest level since January 2022.

Markets are fixated on “soft landings” and the next easing cycle. In addition to the short covering, we are seeing latecomers to the rally coming on board as the squeeze dynamics pressure and the new longs present market fragility which is also evident in crowded longs. We see the short squeeze in bonds and stocks but also longs being hurt in markets such as oil and gas.

We are seeing continued weakness in China with Moody’s downgrade of China’s credit outlook to Negative from Stable, in part to concerns about structurally weaker growth prospects.

Pump it Up! Federal borrowing dominates system credit expansion.

Federal borrowing dominates system Credit expansion providing the perfect instrument for levered speculation. Ongoing historic expansion of speculative finance as suggested by the extraordinary expansion of “Repo” lending. Traditional sources of finance have tightened, with a notable pullback in bank lending, along with diminished corporate and household debt growth.

  • NFD expanded nominal $942 billion during Q3, with Treasury Securities gaining $901 billion, or 13% annualized, to a record $28.649 TN.
  • Treasuries inflated $2.180 TN over the past year, with two-year growth of a staggering $4.399 TN, or 18.1%.
  • Over 17 quarters, Treasuries ballooned $10.835 TN, or 60.8%.
  • Since 2007, historic excess has seen Treasury growth of $22.598 TN, or 373%.
  • Government-sponsored enterprises (GSEs) declined $70 billion (FHLB Assets contracted $50bn) to $11.902 TN.
  • GSE Securities expanded $460 billion, or 4.0%, over the past year, and $1.366 TN, or 13.0%, over the past seven quarters.
  • GSE Securities ballooned an unprecedented $2.638 TN, or 28.5%, over 17 quarters.

Basis Trade Unwind

Shorting Treasury futures is part of global speculative leverage. It surged from $650 billion to $800 billion to $1 TN.

“The Bank of England stepped up warnings about hedge funds shorting US Treasury futures, saying its measure of the net position is now larger than before the ‘dash for cash’ crisis in March 2020. The net short position has grown to $800 billion from about $650 billion in July, the central bank said, citing calculations based on Commodity Futures Trading Commission data. That suggests a jump in the so-called basis trade, which is where investors seek to exploit price differences between futures and bonds. The trade is particularly risky because returns are bolstered by borrowing money in the repo market.” December 6 – Bloomberg (Greg Ritchie and William Shaw)

“Hedge funds look to be scaling down their record short position in U.S. Treasury futures, marking the beginning of the end of the so-called ‘basis trade’ – an unwind that regulators have warned could pose severe financial stability risks… They ‘short’, or sell the bond future, and go ‘long’, or buy the cash bond. The trade is funded in overnight repo markets and highly leveraged. If the unwind is now underway, the question for authorities – and financial markets at large – is whether the $1 trillion position can be unwound in an orderly manner.” December 8 – Reuters (Jamie McGeever)

We have spoken much of the resilient selective consumer spending, solid corporate earnings in the third quarter as being factors in what has caught many short. Other factors that have eased investors’ minds are the containment of the war between Israel and Hamas, Ukraine and Russia out of the news cycles and a quieter partisan battleground in US politics.

Recall in the past weeks we delved deeper into consumer finances. This bears repeating given recent data and market action. “What we see is they indicate an ability to pay. We are at a 22-year low in the debt-to-income ratio, record low debt payments as a share of incomes, locked-in low 30-year mortgage rates (something we harp on about, why would you move or refinance if you don’t have to?) and still high cash balances even if saving rates have normalized. Many habits changed after the pandemic and the uncertainty perpetuated by politics of hate has people more reliant on their own development.”

The bond market is reacting to economic data week that continues to look consistent with a soft-landing scenario. We are seeing latecomers to the rally coming on board as the squeeze dynamics pressure and the new longs present market fragility which is also evident in crowded longs. We see the short squeeze in bonds and stocks but also longs being hurt in markets such as oil and gas.

A reminder “Hedge funds betting on a decline in US and European stock markets have suffered an estimated $43bn of losses in a sharp rally over recent days. Short sellers, many of whom had built up bets against companies exposed to higher borrowing costs over the past year or so, have been caught out by a ‘painful’ rebound in ‘low quality’ stocks this month, said Barclays’ head of European equity strategy Emmanuel Cau. That has come as the market has grown more confident that the US Federal Reserve’s cycle of rate rises is finally over.” The Financial Times George Steer

What Chair Powell and others have noticed is higher prices are not holding back consumption given that consumer spending was a sizeable driver of the 5% Q3 GDP growth rate. Consumers are paying higher prices, just being more selective. This was borne out in this muttering post FOMC. What many pundits have failed to grasp is massive U.S. government debt growth underpins incomes and corporate earnings, bolstering system-wide Credit. Further to those years of government sector liability expansion through the Treasury and Federal Reserve have created unprecedented gains in household and corporate sectors cash and bond holdings (along with inflated equities and real estate. The pandemic also changed the habits of many, locked in lower mortgage rates for example, lowered surplus spending and invested in dividend paying assets.

Some of This Week’s Main Stories We Covered

Risks Being Ignored or Opportunity Being Repriced?

With the swings of psychology and dominance of unemotional algorithm models dominating markets more than ever it is critical to stay unemotional and devoid of bias where best you can. For the next six months, we stick to our technical outlook via KnovaWave, watch the curve and EURUSD and USDJPY.

A reminder in these markets don’t get married to a view, leave biased partisan opinions at the door and find a leader. Right now, NVDA and TSLA continue to give us give good insights into crowd behavior. Note the divergence and convergence with it and other instruments. Be proactive.

These markets are constantly evolving, the important things is why we are here and it isn’t a surprise.

Where is the fear?

We got some movement these past weeks out of the tight range in markets but as we can see from the VIX chart it quickly reverted back after the initial breaks. We are aware of built-up energy ahead of key central bank decisions and potential fundamentals to set-up rate hikes or not. There is discontent globally with central banks and politicians. Many are confusing today’s market structure as that of the past and applying rational thought. Algorithmics and market forces haven’t been caught by the disconnect on a longer than normal” lag between rates rising and economic growth slowing. Throw in the explosion in short-dated stock options, the main Vix index is not giving a true picture of risk for pricing models it seems clear.

With optionality dominating markets along with quant funds, algorithms, systematic trading and automated trading volatility has collapsed as has been focused on at KnovaWave. Driving quant funds is a self-reinforcing dynamic, when market volatility drops, they add which causes those funds that have paid higher volatility to cover and hence we get the churn.

Yet analysts warn that ostensibly tranquil markets have a habit of breeding instability as investors increase their equity positions and leverage.

To break out of this requires a continuing break in a major down, or up move to ignite delta chasing or covering.

So-called vol-control and risk-parity funds, which tend to automatically load up on riskier assets during calmer periods, ramped up equity exposure, according to the Deutsche Bank data, available through May 18. Other quants, such as trend-following CTAs, or commodity trading advisers, have similarly piled in.

The dominance of quants has helped explain previous periods of calm trading, including long stretches in 2017 and 2018. Those periods were punctured by rapid selloffs, including the 2018 selloff dubbed “Volmageddon” when the dynamics exerting calm on the market suddenly went away. Some warn a repeat could be ahead.

Caitlin McCabe WSJ

Cboe Daily Market Statistics

Cboe Daily Market Statistics

Talking about manic behavior it is not hard to argue the punter is overwhelming and influencing markets like no other time, well until the next time. Swirling greed and know it all came home to roost. FOMO (fear of missing out) and TINA (there is no alternative) ended how they always do.

Over the past five years the Vix has only been at or below a reading of 12 on 25 trading days, of which five came in January 2022 at the start of last year’s bear market, according to DataTrek. Cboe Global Markets show trading volumes in options tied to the Vix are on track to hit a record this year.

When the VIX is highly reactive, VIX related products can serve as potentially effective hedging tools, when the VIX is not very reactive, traditional hedging techniques may be a better choice.

The VOLX`s underlying instrument is the Mini VIX™ Future. The CBOE Volatility Index (VIX) is an up-to-the-minute market estimate of expected volatility. The VIX is calculated using a formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls (options) on the S&P 500.

Worth repeating again in the low VIX environment.

Well, 2008 redux didn’t happen in the last few months, so the Fed moves have worked for now, much to Xi and Putin’s chagrin. The doomsayers may be right, but we are seeing constant surprises to that theory. For example, early signs that the US housing market slump is finding a base are emerging, pending home sales having risen for a third month and to a 6-month high. we will keep an eye on consumer sentiment and business activity. We are far from being out of the woods, remember the market is not the economy. Saying that we got quite the distorted job picture per our main job stories which we reprise below. Are we simply taking some air out or is the beginning of the great meltdown?

What we continue to notice is how this market is still being treated by ‘experts’ as those in the past, hence the volatility and extreme in bulls/bears. Understanding crowd behavior is essential in these markets. The moves have caught analysts and strategists by surprise with the uber bear running amok in the past few weeks. Typical thinking is this from Morgan Stanley strategists a month ago; “Given the events of the past few weeks, we think … equity markets are at greater risk of pricing in much lower estimates”, noting that earnings estimates were 15-20% too high even “before the recent banking events.”

What non-traders are failing to grasp is this market with so many variables is not trading as they expect and they are constantly wrong. S&P 500 earnings for the first quarter are estimated to have fallen 5% from 2022, followed by an expected 3.9% drop in the second quarter, Refinitiv data shows. During recessions, however, earnings tumble at a 24% annual rate on average, according to Ned Davis Research. However how important is that in such a chaotic market? There is the answer structure your thinking around game theory or even chaos theory.


Week Ahead: More Bank Earnings, Bond auctions and Retail Sales

Eyes will be on top macroeconomic reports that will emphasize the health of the US and global economies. Eyes and ears will be on central bankers given the market turmoil and the direction of rates.

More Macro and Micro data points, some highlights include elevated calendar-based risk.

  • In the United States retail sales, Michigan consumer confidence, and export/import prices along with a slew of housing data including building permits, housing starts, and existing home sales are out, along with speeches from various Fed officials.
  • Canada will release December’s inflation data, retail sales, and housing starts. In the United Kingdom, inflation, the jobs report, and retail sales. In the Euro Area, industrial production, final inflation data and balance of trade, as well as Germany’s producer, ZEW Economic Sentiment indexa nd wholesale prices. ECB President Lagarde will make a speech.
  • China data including Q4 GDP growth, retail sales, industrial production, unemployment rates, and the house price index. Japan inflation figures are out along with January’s Tankan index, and machinery orders for November. Bank Indonesia will decide on its policy rate, while India December’s trade Balance and wholesale inflation figures.
  • Australia, Westpac consumer confidence index for January, labor market data for December.

Earnings reports featuring the major financial sector; Morgan Stanley, Goldman Sachs, US Bancorp, Charles Schwab, PNC, and ProLogis. The US stock market will be closed on Monday in observance of the Martin Luther King Day holiday.

How is the Consumer Hanging?

The US relies on services for up to 90% of GDP. it relies on the consumer who is being battered by the California and New York regional bank debacle. On top of that is cumbersome if not ignorant politicians, with no clear regard for main street the evidence suggests in their behavior. Key retailers all gave a cautionary note with tightened household budgets continue to hit demand for big-ticket items and curb discretionary spending.

We get more data to help us gage the consumer: Weekly MBA Mortgage, Weekly Initial and Continuing jobless claims and housing and retail sales and consumer sentiment reports.

Earnings season gives us an insight into how the consumer is coping.

Click here to see the Full Week Ahead List Below

Some things never change, when you think Greed is Good

So how Screwed are We?

  • Non-Financial Debt (NFD) expanded at a 5.24% annual rate, down from Q2’s 6.27%, but higher than Q3 2022’s 4.53%. (Annual NFD growth never reached 5.0% during the period 2009 through 2019.)
  • Total Household debt growth slowed from 2.71% to 2.52% during the quarter, with mortgage borrowings expanding 2.51% (down from 2.88%) and Consumer Credit slowing to 1.05% (from 2.08%).
  • For the second straight quarter, federal borrowings completely dominated NFD growth. At 10.60%, the growth in federal debt slowed from Q2’s 12.67%, but was more than double Q3 ‘22’s 4.19%.
  • In seasonally adjusted and annualized dollars (SAAR), NFD expanded $3.775 TN, down from Q2’s SAAR $4.445 TN, but ahead of Q3 ‘22’s $3.123 TN.
  • Prior to pandemic 2020’s colossal $6.804 TN, 2007 held the annual record for NFD growth at $2.529 TN. For Q3, Household Debt expanded SAAR $495 billion and Business Debt SAAR $322 billion.
  • Federal borrowing expanded SAAR $2.968 TN.
  • NFD ended the quarter at a record $72.950 TN, having expanded $3.297 TN over the past year, $7.964 TN over two years, and an incredible $17.802 TN, or 32.3%, during the past 15 quarters.
  • NFD expanded nominal $942 billion during Q3, with Treasury Securities gaining $901 billion, or 13% annualized, to a record $28.649 TN.
  • Treasuries inflated $2.180 TN over the past year, with two-year growth of a staggering $4.399 TN, or 18.1%. Over 17 quarters, Treasuries ballooned $10.835 TN, or 60.8%. Since 2007, historic excess has seen Treasury growth of $22.598 TN, or 373%.
  • Government-sponsored enterprises (GSEs) Securities declined $70 billion (FHLB Assets contracted $50bn) to $11.902 TN. GSE Securities expanded $460 billion, or 4.0%, over the past year, and $1.366 TN, or 13.0%, over the past seven quarters. GSE Securities ballooned an unprecedented $2.638 TN, or 28.5%, over 17 quarters.
  • Combined Treasury and GSE Securities ballooned $2.640 TN over the past year, $5.766 TN over two years, and $13.473 TN (49.8%) over 17 quarters. At $40.551 TN, combined Treasury and GSE Securities ended September at 147% of GDP – up from 55% to end 2007.
  • Bank Assets contracted $132 billion during Q3 to $25.738 TN, led by a $260 billion drop in Debt Securities holdings (Agency/MBS down $193bn, Corporate Bonds $38bn, Munis $28bn).
  • Bank Loans increased $95 billion, slightly lower than Q2’s $101 billion, and down big from Q3 ‘22’s $347 billion. Bank Loans expanded a respectable $640 billion y-o-y – which compares to the annual average of $363 billion for the two-decade period 2000 to 2019.
  • Liability side of the banking system’s balance sheet, Total (Checking and Time/Savings) Deposits contracted only $49 billion, down from Q3 ‘22’s $179 billion fall and the smallest decline since Q1 2022. Total Deposits dropped $696 billion y-o-y, or 3.3%, to $20.145 TN.
  • Total Deposits were still $4.611 TN, or 29.7%, higher over 15 quarters. Net Interbank Liabilities dropped $97 billion during Q3 to $632 billion.
  • Broker/Dealer Assets declined $52 billion from Q2’s record level to $4.757 TN. Debt Securities Holdings gained $30 billion to a 14-quarter high $435 billion, with Agency Securities jumping $34 billion to a 13-quarter high $121 billion (up $52.4bn y-o-y). “Repo Assets” fell $23 billion to $1.604 TN.
  • Over the past year, Broker/Dealer Assets inflated $333 billion (7.5%), with “Repo Assets” surging $274 billion, or 20.6%. Treasury holdings jumped $121 billion, with Agency/MBS Securities rising $52 billion. Loan Assets fell $171 billion to $635 billion. After beginning 2020 at $1.073 TN, Broker/Dealer Miscellaneous Assets ended September at $1.701 TN.
  • On the Liability side, “Repo” borrowings increased $13 billion during Q3 to a 13-year high $2.067 TN. Over the past year, “Repo” borrowings surged $454 billion, or 28.1%. It’s worth noting that Broker/Dealer “Repo” borrowings surged $326 billion, or 22%, (to $1.781 TN) in the five-quarter Q1 2018 through Q2 2019 period, leading up to summer 2019 repo market instability – and the Fed’s resumption of QE.

The Credit cycle downturn is coming to the surface.

We have the reflective destabilizing Monetary Disorder. Take a peek at China and the markets collective cognitive dissonance to the property market there, the shadow banking as just one example. Have a look around the world. The hope is the collective mass continues to evolve and survive, while each time the destruction is evident in massive disproportion shifts of wealth and attempts of mind, if not physical control of the masses. Dial that back and try and get in the minds of those trying to right the ship and the market components that matter, not what the dribblers think matter.

Here’s a thought, knowing about the power of cognitive dissonance does not necessarily protect you from its effects. Traders are only too aware of this eureka moment when you grasp it. Why some of the best trades you ever do, are the ones you don’t. In option parlance, being delta neutral sometimes is the best trade.

Key this coming week will be the commencement of the next round of such indicators that will test whether these gains were one-offs or something that is sustainable. The key will be the extent to which downside risks to the US economy have been reduced enough to influence global central banks, and how markets react.

The Fed’s aggressive tightening cycle has had little effect on loose financial conditions.

Where to from here? It’s also okay to acknowledge and process any difficult emotions or experiences that you may have had during the past year. Looking back on the past year with perspective can help you to gain a greater understanding of what you have been through and how you have coped. I hope that you are able to find ways to manage any challenges that come your way and that you continue to feel fine moving forward. Embrace the chaos that is headed your way in 2023!

China; Behind the Iron Curtain

A big shift in 2022, China’s population is now falling and below that of India. China’s population fell for the first time since 1961 as births have steadily fallen in recent years despite the removal of the “one child policy”. The stalling working age population and its likely decline ahead means that potential growth in China is down from around 10% or so in the 2000s to around 4-5% now.

Growth in China’s metric of system Credit growth, Aggregate Financing, dropped to $175 billion, down significantly from March’s $773 billion and only 61% of estimates. It was also the weakest monthly growth since last October.

January 12 – Bloomberg: “China’s exports posted the first full-year decline since 2016 as global demand faltered and prices fell, hurting a major pillar of growth for the world’s second-biggest economy. The country sold $3.38 trillion worth of goods to the rest of the world last year, a 4.6% drop from the record a year earlier… Full-year imports fell 5.5%, leaving a surplus of $823 billion for the year.”

January 11 – Bloomberg (Linda Lew): “China’s auto production and exports climbed to record highs in 2023 as its domestic market recovered and manufacturers filled the void left by Western companies that pulled out of Russia. Carmakers churned out 30.16 million vehicles last year, and wholesale deliveries… rose to 30 million, according to China Association of Automobile Manufacturers data…. Both surpassed previous records set in 2017. Exports surged 58% to 4.91 million units.”

January 8 – Bloomberg (Jackie Cai and Dong Cao): “One of China’s biggest auto dealers is working with bankers to explore repayment options as its dollar bond comes due soon, highlighting how cash woes are spreading beyond the ailing real estate sector. China Grand Automotive Services Limited is mulling various strategies for its 9.125% note maturing Jan. 30… The move underscores efforts by China’s high-yield issuers to preserve cash as they struggle to refinance debt.”

The Market Tripod of Destruction.

  • Firstly, financial asset overvaluation has swung way past any sound underlying economic wealth structure.
  • Secondly over-leverage in crowded bets.
  • Thirdly we have greed enthused, as always in these cycles, risk engineering, transfer and management that ignores or understands bifurcation and contagion outcomes.

Leverage has become toxic, a development that if not addressed will have deep and with far-reaching sequels. It’s not too farfetched to suggest that the markets are on the verge of a rupture that would be difficult to contain. Should the crisis of confidence dynamics that hit Britain feed into other markets a powerful global contagion could be unleashed. The markets are dislocated, and financial stability is at risk. A sobering thought is the UK is just the initial first world pension system in this cycle facing the harsh reality of a steep devaluation of assets and the prospect of widespread insolvencies and debilitating negative sentiment.

Inflation Matters

Inflation with Henry Kaufman

Kaufman is the legendary chief economist and head of bond market research at Salomon Brothers is someone who knows Inflation.  Henry Kaufman in an interview with Bloomberg’s Erik Schatzker Jan 14, 2022:

 “I don’t think this Federal Reserve and this leadership has the stamina to act decisively. They’ll act incrementally. In order to turn the market around to a more non-inflationary attitude, you have to shock the market. You can’t raise interest rates bit-by-bit.”

“The longer the Fed takes to tackle a high rate of inflation, the more inflationary psychology is embedded in the private sector — and the more it will have to shock the system.”

“‘It’s dangerous to use the word transitory,’ Kaufman said. ‘The minute you say transitory, it means you’re willing to tolerate some inflation.’ That, he said, undermines the Fed’s role of maintaining economic and financial stability to achieve ‘reasonable non-inflationary growth.’”


Independence – Never Take It for Granted Traders

“In aggregate, the market goes from order to disorder, and on that journey little pockets of order can form, including in commodities, bonds, stocks, currencies that circle back and reorder disorder. Then there is us the market player that reflects through order and disorder in an ever-evolving loop towards independence. It all starts with gravity and ends with equilibrium and back we go.” KnovaWave “The rules of market flux”

The Fed has kicked off its first real tightening campaign since 1994, with securities markets already at the brink of illiquidity and dislocation. Markets could soon be screaming for assurances of the Fed’s “buyer of last resort” liquidity backstop, while the Fed is prepared to begin withdrawing liquidity by selling Treasuries and MBS.

Another important aspect is the Fed doesn’t Control corporate pricing or wage decisions. Let us be clear geopolitical, climate change developments and what an out of depth, politically motivated administration are outside the Fed’s sphere of influence. There has been over $5.1 Trillion new “money” in 126 weeks, it’s a reasonable conclusion the Fed has lost control of Inflation.

We need to grasp all the risks to be wary off and received plenty of flak from it. We always talk here about expect the unexpected and now that is front and center, gage the market’s reaction, the market is always right and that’s why we focused on the crowd psychology aspect over the past few weeks.

“We have a market trying to interpret the Fed who is trying to find out how they can interpret their long-only portfolio at a risk parity where rates cannot rise.”

– MoneyNeverSleeps

This move has crept up on many, to the extent the S&P 500’s is over the traditional measurement of a new bull market typically measured as a 20% gain from a significant low. The index above 4292.438 got that 20% move. That ended the longest bear market since 1948. The DAX and CAC40 have seen all-time highs recently also.

Our weekly reminder for risk. The downside is clear with the absence of moral hazard from repeated Federal Reserve market bailouts in an environment of some would say obscene liquidity pumps. Pure greed is the other part, not wanting to miss out on fees. The obvious question is, how deeply ingrained is this attitude through the markets? How do we ween the markets off this continuous dip feed? At this point the Central Banks have kicked that answer down the road.


Part A – Stock Markets

Weekly Highlights – USA

Indices

  • S&P500 rallied 1.8% (up 0.3% y-t-d),
  • Dow increased 0.3% (down 0.3%).
  • S&P 400 Midcaps recovered 0.6% (down 1.9%),
  • Small cap Russell 2000 was little changed (down 3.8%).
  • Nasdaq100 rallied 3.2% (unchanged).
Major US Stock Indices

YTD Report Card for the S&P Sectors

Sectors

The best performing S&P 500 sectors were information technology (+4.9%), communication services (+3.4%), and consumer discretionary (+1.5%) sectors. The energy sector had the steepest decline (-2.4%), while natural gas prices soared oil prices fell after rising earlier in the week in Mid East concerns. Earnings season kicked off, however not any help for the financial sector which closing down 0.5% for the week. Bank of America reported along with three of the largest U.S. lenders. There were mixed results at the close; Wells Fargo (WFC 47.40, -1.64, -3.3%)Bank of America (BAC 32.80, -0.35, -1.1%)JPMorgan Chase (JPM 169.05, -1.25, -0.7%) were lower while and Citigroup (C 52.62, +0.54, +1.0%) was higher. BlackRock (BLK) also reported. Notably all but BAC exceeded consensus earnings estimates for the December quarter and didn’t sound any real macro alarm bells.

A breakdown of the performance of the S&P 500 sectors this week:

  • Utilities dropped 1.9% (unchanged).
  • Banks fell 3.1% (down 2.0%),
  • Broker/Dealers lost 1.9% (down 3.2%). Transports slipped 0.2% (down 2.7%).
  • Semiconductors recovered 3.0% (down 2.9%).
  • Biotechs slumped 1.9% (down 2.1%).
  • Though bullion recovered $4, the HUI gold index was little changed (down 4.1%).
SPX Sector Performance Y/Y W/E Jan 5, 2024

Biggest SPX Stock Winners and Losers Last Week

Major US Indices

Global Stock Market Highlights

Highlights – Europe Stocks

Week/y-o-y/2023

  • U.K.’s FTSE equities index declined 0.8% (down 1.4% y-t-d). (Up 3.8% in 2023).
  • France’s CAC40 increased 0.6% (down 1.0% y-t-d). (Up 16.5% in 2023).
  • German DAX equities index gained 0.7% (down 0.3% y-t-d). (Up 20.3% in 2023).
  • Spain’s IBEX 35 equities index dipped 0.7% (down 0.1% y-t-d). (Up 22.8% in 2023).
  • Italy’s FTSE MIB index little changed (up 0.4% y-t-d). (Up 28.0% in 2023).

Germany’s benchmark Blue Chip DAX 30 index (Deutscher Aktienindex) expanded to 40 companies on 20 September 2021 adding 10 new members to the German stock index from the MDAX which will be reduced from 60 to 50 members.

Highlights – Asia Stocks

Friday/Week/YTD

  • Japan’s Nikkei Equities Index surged 6.6% (up 6.3% y-t-d). (Up 28.2% in 2023)
  • South Korea’s Kospi index dropped 2.1% (down 4.9%y-t-d). (Up 18.7% in 2023)
  • India’s Sensex equities index 0.8% (up 0.5% y-t-d). (Up 18.7% in 2023)
  • China’s Shanghai Exchange Index fell 1.6% (down 3.1% y-t-d). (Down 3.7% in 2023)

HighlightsAustralian Stocks

  • Australia’s S&P/ASX 200: -0.1% on Friday to 7498.3, (+0.1% for the week) (+7.8% in 2023)
  • Follows last week’s ASX worst start to the year since 2007
  • Friday: 7 of the ASX’s 11 industry groups closed down, and utilities worst hit, down 1.4%. Consumer staples fell 1.2%.
  • The energy sector gained 0.5%, Beach Energy was up 2.9% at $1.57 and Santos gained 1.5% at $7.55 Uranium plays Boss Energy and Paladin were also higher, climbing 5% to $5.09 and 1.7% to $1.20

Highlights – Emerging Markets Stocks

Week/YTD 

  • Brazil’s Bovespa index lost 0.8% (down 2.4% y-t-d) (up 22.3% in 2023)
  • Mexico’s Bolsa index fell 1.1% (down 3.1% y-t-d) (up 18.4% in 2023).
  • Turkey’s Borsa Istanbul National 100 index surged 4.7% (up 6.9% y-t-d) (up 35.6% in 2023).
  • Russia’s MICEX equities index gained 1.6% (up 2.8% y-t-d) (up 43.9% in 2023).

Technical Analysis

S&P 500

Daily: The daily SPX closed above the previous roof (Key Spits) which were also at 7/8 and clustered around the 50% & August breakdown. With energy and with a very low VIX it has mirrored the get cloud to get through overhead. The bullish take is that we completed the correction off last year’s high at the low and this is a larger 1-2 to go higher with support at the previous resistance and cloud. The bearish outlook is this move becomes a rising wedge and we are working out the uber bears before new lows.

When we talk about crowd psychology this is a great example. The market after spitting the 4100 and 38.2% retracement broke to capture the Tenkan. This underscores the power from the SPX spat of June & October lows with impulse through the tenkan and Kijun energized by the daily cloud twist that fueled this rally. The completive wave came off extreme fear and bear that ended with relief. Now we have sated much of the greed phase and short fear phase. We have completed that cycle and from here we measure the alternatives.

It is worth looking back at the completive highs (all-time highs) and how we played out so far. Tracing back from highs the fuel from the top of the channel after completing 3 waves off ATH, accelerated after broke the Tenkan through to the 4600 OI where it reversed with impulse back to Tenkan. Bulls, this is likely a (ii) of a 5. Bears this is 1-2 of (i) completive V of degree. We watch if this low was a (iii), (a) or C. We have to respect the number of alternatives of degree of 5. With such trends keep it simple. From no fear to panic is the driving element.

On the downside the Kijun and those June lows now critical and is our trading Bear/Bull pivot in a high vol scenario. Watch each measured 3 wave move on the 240 & Murrey Math highlighted in the podcast. The prices pulled through the downward cloud pulled by the twist ‘helium contusion’ on the completive. For fractal purposes, SPX completed 5 waves up where it reversed with impulse. Energy fueled from the power impulse down from +1/8 ATH spit of a spit fail. On the way down (just like up) it accelerated after it broke the Tenkan through the rejected Kijun and then through the median after tapping 8/8.

Weekly: The SPX has a clear channel off the lows on the weekly timeframe off the sphere of influence and has ground higher since it closed over the cloud above the Tenkan. Key support is the Tenkan, channel and +1/8. Power initially came from launching out of the sphere of influence as one would expect in a 3 or C. We had the Kijun spit also. Above is the channel and +3/8.

In the bigger picture we are playing out S&P 500 energy after it held the sphere of influence from Nov 2020 reversed higher after spitting the 38% and key lows. At the time we opined “We do have a weekly cloud twist; however, the energy is waning without sharp impulse.” We got the sharp impulse right to weekly Kijun. For major cycles we watch the S&P 500 over 4,231, the 50% retracement of losses from the Jan. 3 & June 16 close. Since 1950 there has never been a bear market rally that exceeded the 50% retracement then gone on to make new cycle lows. Is this time different, as we tested and spat those June lows?

On the way up each new high evolved after testing Tenkan key support on the way and we are now getting a retest as resistance. We reiterate this needs to be recovered for a resumption of the uptrend meanwhile the bear market plays out. Watch Tenkan this week and watch for Kijun reaction. Extensions are difficult to time, keep it simple.

THE KEY: Key for the impulse higher was the spit or retest of MM 8/8 and Tenkan San, which held with the previous highs and Tenkan.  To repeat “We look for 3 waves down and reactions to keep it simple with the alternatives in the daily.”  Keep an eye on the put/call ratio with recognition to the sheer size of contracts AND keep in mind the stimulus distortion. The spit per channel fractal and Adams rule launched back over the cloud where we were encased AND we are back testing it. Watch if a spit or clear break support as Chikou rebalances.

A reminder that Apple Inc $AAPL, Microsoft Corp $MSFT, Amazon.com Inc $AMZN, Facebook Inc $FB, and Google-parent Alphabet Inc $GOOGL make up approximately 23% of the total weight of the S&P 500. With that comes gyrations that are an outsized impact on broader markets

NASDAQ 100

The down move saw Nasdaq spit the weekly Kijun and a 1-2 off tenkan we spat MM 5/8 after holding the key 61.8% Fib. We watch the Tenkan & Kijun confluence above, the breakup level and between the 38/50 Fibs. The Nasdaq is well behind the S&P pace with the weekly cloud and 50wma well above. Support the 61.8% retest.

Recall ATH was after it broke and held the weekly Tenkan to see a spit of a spit fail which is completive of 5 of some degree with Chikou rebalancing. Watch Chikou for divergence for continuation or failure. Divergence with Russell also a clue.

Russell 2000

The small cap Russell RUT bounced in double bottom off 1600 5/8 confluence which was the Nov 2020 breakup. Russell 2000 Resistance Tenkan and Kijun, note previous rejections. This is the index showing more of the fast money crowd and is trading like it. Needs to get traction in here for bulls. 7/8 & 8/8 support collapsed on the way down and is now major resistance.

Russell Index Negative Divergence to NASDAQ

Dow Jones

The Dow led the indices and closed above the weekly Tenkan after closing and testing last week. Prior test after the reaction off the June lows and sphere of influence. Support is the channel and Fibs. Tenkan and Kijun after the reaction empowered. Support is the channel and Fibs.

Semiconductors

NVidia $NVDA

Nvidia NVDA stock chart

NVidia surged 179.3% in H1 2023. It has been relentless since earnings and is the focus of the AI craze. With all manic moves beware of the pullbacks and topping potential. That said the extensions have played out and so far to +2/8 on the weekly. This was a classic set up as we can see. It has a textbook of KnovaWave methodology and rules from the 61.8% break and reverse through the sphere. NVDA accelerated after it broke the double top spheres at 5/8 giving is a near 4/8 move. A reminder that the dominance was in.

NVDA took off after the breakup retest from May 2021. NVidia is a clear leader of SOX & SMH look for cues there and ABC failures for changes. NVDA never looked back after the Key Break (mauve) and Tenkan to a flat cloud and holding support the recent low at the 61.8% extension.

Apple $AAPL

Apple AAPL Stock Chart

Apple has consistently driven upwards after it held the sphere of influence after retesting 6/8 & break up. Kijun and Tenkan crossing and then the 50wma with the cloud twist have been magnetic. Apple & other mega-cap names dominant the major indices, and a plethora of funds that hold it as a core position. The Vanguard Mega-Cap Growth ETF (MGK) delta is important to watch.

A firm rejection at $175 at +2/8 triggered a waterfall down for Apple last year. We regathered that and more and broke the weekly bull flag higher. On the way up Apple gently motored up to new ATH over the massive $160 then $170 thru to $180 gamma level on the way down these levels became key energy levels all the way to $132. Support held at the May break (just like NVDA) where from there it spat the cloud pulled by a flat Tenkan and Kijun as it rebalanced Chikou. The old channel break and MM +2/8 is now key. Remember the impact $AAPL has, at least short term on all the major indices.

MicroSoft MSFT

Microsoft hit a new all-time high testing the outer trend line from the previous spike. Key now is the weekly trend it has been in all year.

ExxonMobil XOM

ExxonMobil Weekly Chart

XOM has completed 5 waves from -3/8 to +3/8 on the weekly. with a double top. Alternatives 5 complete of degree. We are in a 1-2 (A-B depending on degree. Support is the cloud which has held 3 times since the high and the 50WMA resistance the tenkan and Kijun. Pattern wise we are in the bull flag until proven otherwise.


Part B: Bond Markets

Bond Watch

Treasuries

U.S. Treasuries rallied this week with ten-year yields reversing 11 of the previous week’s 17 bps jump, while MBS yields reversed all of the 24-bps surge. Two-year Treasury yields sank 24 basis points this week, with yields 11 bps lower over two weeks. This week’s action alleviated some more pressure on the 2s10s spread, expanding it by 15 bps to -20 bps. Market expectations for the policy rate at the December FOMC dropped a notable 30 bps this week to 3.65%, implying 168 bps (six plus) of rate cuts between now and December 18th. Friday saw solid gains in shorter tenors after headline PPI for December (actual -0.1%; consensus 0.1%) pointed to the third consecutive month of slight deflation while core PPI (actual 0.0%; Briefing.com consensus 0.2%) showed no sequential change for the third month in a row.

Treasury Yield Watch

Friday/Week

  • 2-yr: -12 bps to 4.15% (-24 bps for the week)
  • 3-yr: -11 bps to 3.90% (-25 bps for the week)
  • 5-yr: -6 bps to 3.83% (-18 bps for the week)
  • 10-yr: -3 bps to 3.95% (-9 bps for the week)
  • 30-yr: +2 bps to 4.20% (UNCH for the week)

Bonds wild ride in 2023

10-year Treasury yields

  • Began the year at 3.88%, dropped to 3.37% by January 18th.
  • Jumped to 4.06% by early March (pre-banking crisis),
  • 10-year yields were back down to 3.31% a month later.
  • Yields then chopped higher, peaking at 5.02% on October 19th.
  • A major squeeze helped push yields 119 bps lower to 3.80% on December 27th before ending the year at 3.88%.

The MBS marketplace was that on steroids.

Benchmark Fannie Mae MBS yields

  • Began the year at at 5.37%, were down to 4.66% on February 2nd
  • Jumped to 5.73% by March 2nd, down to 4.85% on April 5th,
  • Up to 5.80% on May 26th, down to 5.43% and then up to 5.96% on July 6th,
  • Down to 5.43% on July 13th, up to 6.23% on August 22nd, down to 5.86%,
  • Then up to 6.66% on October 3rd, down to 6.38%
  • Then up to a 6.81% peak on October 19th.
  • Yields then collapsed into year-end, sinking 165 bps to 5.16% on December 27th – before ending 2023 at 5.27%.

Higher for longer is a serious threat. (Reprise)

Surging market yields are a serious issue for a banking system loaded with long duration securities portfolios. This may well be a push over the cliff for troubled commercial real estate (CRE). Leveraged lending and leveraged finance gets more costly. Simply there are trillions of floating rate loans among individuals, speculators, businesses, and nations.

For our complete Weekly Fixed Interest Analysis and Outlook visit our Bond Traders Weekly Outlook:

Mortgage Market (Prior Week)

  • Freddie Mac 30-year fixed mortgage rates declined six bps to an almost eight-month low 6.42% (up 1bp y-o-y).
  • Fifteen-year rates dropped 11 bps to a seven-month low 5.80% (unchanged).
  • Five-year hybrid ARM rates fell six bps to a six-month low 6.36% (up 74bps).
  • Bankrate’s survey of jumbo mortgage borrowing costs had 30-year fixed rates down 18 bps to a seven-month low 6.97% (up 38bps).
Mortgage News Daily

Global Debt Monitor

Highlights Unprecedented and Ongoing Surge in Global Debt

Last week, the Institute of International Finance (IIF) released their Q1 2023 Global Debt Monitor (GDM), highlighting the unprecedented – and ongoing – surge in global debt.

GDM Highlights:

  • “The global debt stock grew by $8.3 trillion to a near-record $305 trillion in Q123; the combination of high debt levels and rising interest rates has pushed up debt service costs, prompting concerns about leverage in the financial system.”
  • “Total debt of emerging markets hit a fresh record high of over $100 trillion (or 250% of GDP) – up from $75 trillion in 2019.”
  • “At close to $305 trillion, global debt is now $45 trillion higher than its pre-pandemic level and is expected to continue increasing rapidly.”
  • “Rise of private debt markets: Non-bank financial institutions (NBFLs) continue to gain prominence in global credit intermediation. The so-called ‘shadow banks’ now account for more than 14% of financial markets, with the majority of growth stemming from a rapid expansion of U.S. investment and private debt markets.”
  • “The Size of Private Debt Markets Surpassed $2.1 Trillion in 2022, Up From Less Than $0.1 Trillion in 2007.”

From the end of Q3 2019 through Q1 2023, Total Global Debt jumped $52.3 TN, or 20.7%, to $305 TN.

Over this period, “Mature” economy debt expanded 13.4%, while “Emerging” economy debt surged 38.9%. It’s worth nothing that in the “Emerging” category, “Household” debt surged 41.7%, “Non-Financial Corporate” 35.1%, and “Government” 55.7%. Since 2016, total global debt-to-GDP has surged from 210% to 360%. Global financial conditions remain loose. When they inevitably tighten, be prepared for serious dislocation.


Part C: Commodities

Highlights

January 5, 2024

Key Long Term Commodity Charts

Copper

Copper Supply Crunch

Gold

China added to its gold reserves for an eighth consecutive month. People’s Bank of China holdings of bullion rose by 680,000 troy ounces last month, according to official data. That’s equivalent to 23 tons.

Gold in Perspective

Energy

For complete Oil and Natural Gas Coverage please visit our dedicated publications ‘Around the Barrel’ and ‘Into the Vortex.’ – Weekly Analysis and Outlook for Energy Traders and Investors

WTI Oil

WTI Weekly KnovaWave Shape

Natural Gas

Energy Market Closes

BDI Freight Index

Baltic Dry Index Weekly

For our complete Weekly Commodity Analysis and Outlook visit our Commodity Traders Weekly Outlook:

Charts and commentary via KnovaWave on:

  • Grains: Wheat, Corn, Soybeans
  • Metals: Copper, Aluminum
  • Precious Metals: Gold Silver
  • Lumber
  • Oil and Natural gas are covered separately (see below)

Part D: Forex Markets

John Maynard Keynes, 1920: “There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction and does it in a manner which not one man in a million is able to diagnose.”

Highlights

December 27 – Wall Street Journal (Anna Hirtenstein): “Some major emerging economies are dabbling in trading commodities without using the dollar, as they seek to reduce their reliance on the U.S. currency. Faced with U.S. sanctions and other restrictions, Russia and Iran in particular have stepped up oil sales in alternative currencies, and have found buyers in China, India and elsewhere that are happy to buy these exports, often at lower prices. The need is less pressing for other commodity heavyweights. But some of these countries, including Brazil, the United Arab Emirates and even Saudi Arabia, have recently taken steps laying the groundwork for trade that sidesteps the dollar. ‘The U.S. dollar is getting some competition in commodities markets,’ said Natasha Kaneva, head of global commodities strategy at JPMorgan… She estimated that the proportion of the world’s oil that is bought and sold in other currencies has risen to about 20%.” December 27 – Wall Street Journal (Anna Hirtenstein)

  • For the week, the U.S. Dollar Index was unchanged at 102.40 (up 1.1% y-t-d). (Down 2.1% for 2023, 2022 gains were 8.2%
  • For the week on the upside the Brazilian real increased 0.4%, the British pound 0.3%, the Norwegian krone 0.2%, the South African rand 0.2%, the South Korean won 0.1%, the euro 0.1%, and the Mexican peso 0.1%.
  • On the downside, the Australian dollar declined 0.4%, the Canadian dollar 0.4%, the Swiss franc 0.3%, the Swedish krona 0.3%, the Japanese yen 0.2%, the Singapore dollar 0.1%, and the New Zealand dollar 0.1%. The Chinese (onshore) renminbi declined 0.28% versus the dollar (down 0.94%).
Weekly Foreign Exchange Price Change

For our complete Forex Weekly Analysis and Outlook visit our Forex Traders Weekly Outlook:

Charts and commentary via KnovaWave on the US Dollar, Euro, Japanese Yen, British Pound, Euro Pound, Swiss Franc, Canadian Dollar, Australian Dollar, New Zealand Dollar, Turkish Lira, Mexican Peso. Currency dynamics are complex. There are myriad facets to analyze and contemplate that influence all markets.

Cryptocurrencies

Bitcoin

Bitcoin continues to be plaything of levered speculators; these past few months we saw the markets turn against those short. Where did this come from? Forced coverage from yield curve punts blowing up. Yen shorts and levered “carry trades” at risk.

It had been a churn following the FTX collapse. BTC had been stuck in the sphere of influence in continuation awaiting a catalyst, and it came. Continues to perform technically to perfection. Impulse begets impulse. To understand panic, understand greed. $BTC tested the top of a rising channel after the preceding sharp downturn which was the downside breakout of an earlier bearish flag, after breaking downside a H&S top and then down it went….

Recall Bitcoin exploded higher following its correction impulsively upon completing 5 waves up at +2/8. Each Tenkan and Kijun tap saw an explosive kiss of death until we completed 3 waves to around 28,000. From there we have seen extreme volatility.

Bitcoin KnovaWave Weekly Outlook

Looking back Bitcoin put in a high of $63,000 around Coinbase, the largest US crypto exchange successfully went public which signaled profit-taking. The high over $68,000 came after the launch over the Bitcoin ETF. From that high we have 2 main alternatives a V of a 1 of a V. For bears it a completive five with impulse right to the 50wma – an incredible 26% fall in a Friday night session. That’s impulse!

Bitcoin Mania in Perspective

On the Risk Radar

Fed Warnings on Possible Medium To Long Term Risks

 Geopolitical Tinderbox Radar

Turkey Geopolitical
Turkey Risk Monitor

Economic and Geopolitical Watch

Banks

Earnings season kicked off with the major Banks each quarter. Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), JP Morgan (JPM), The Bank of New York Mellon Corporation (BK), and Blackrock (BLK) this week.

Major US Banks for Q4, 2023

America’s big money center banks kicked off fourth quarter earnings with a softer start.

Q423 Reports

Akio Morita mistakes

The Week Ahead – Have a Trading Plan

What Macro and Micro Risks and Opportunities Lie Ahead this week

  • Next Week’s Risk Dashboard via Scotiabank
  • Taiwan’s election could stoke tensions with China
  • Comparing Biden to past Presidents on the economy and markets
  • Trump is poised to crush the start of the US election calendar
  • Why Biden’s base is deserting him
  • Middle East tensions on heightened alert
  • Canadian inflation expectations likely to remain too high
  • Will underlying Canadian inflation come in hot again?
  • US earnings season accelerates
  • China’s central bank is expected to ease
  • Chinese GDP, activity readings to inform momentum
  • Are UK wages and CPI still trending cooler?
  • Australian job market has been on fire ahead of an update
  • Hoping for stability in Eurozone inflation expectations
  • Bank Indonesia likely to stay on hold
  • Global macro reports
  • US shut for M.L.K. Jr Day on Monday

Central Bank Watch

All quiet with holidays …

Eyes and ears will be on central bankers. We have the backdrop of a more dovish Fed Chair in the face of escalating systemic risk. How will this affect Fed policy given the massive treasury positions out there and the risk of uninsured funds? In this environment we get pivots daily. How much damage is the Federal Reserve willing to do in the guise of controlling inflation?

This Week’s Interest Rate Announcements (Time E.T.)

In the week ahead we get two central banks delivering policy decision.

  • Sunday, January 14, 2024 PBOC Meets Sunday night
  • Wednesday, January 17, 2024 02:30 BI Interest Rate Decision

For our complete Central Bank Analysis and Outlook Visit our Central Bank Watch:

U.S. Economic Data Watch

US Data Focus

  • Monday: Bond and equity markets closed for Martin Luther King Jr Day
  • Tuesday: Nothing of note
  • Wednesday: Weekly MBA Mortgage Index (prior 9.9%) at 7:00 ET; December Retail Sales (prior 0.3%), Retail Sales ex-auto (prior 0.2%), December Import Prices (prior -0.4%), Import Prices ex-oil (prior 0.2%), Export Prices (prior -0.9%), and Export Prices ex-agriculture (prior -1.0%) at 8:30 ET; December Industrial Production (prior 0.2%) and Capacity Utilization (prior 78.8%) at 9:15 ET; November Business Inventories (prior -0.1%) and January NAHB Housing Market Index (prior 37) at 10:00 ET; and $13 bln 20-yr Treasury bond reopening results at 13:00 ET
  • Thursday: Weekly Initial Claims (prior 202,000), Continuing Claims (prior 1.834 mln), December Housing Starts (prior 1.560 mln), and Building Permits (prior 1.460 mln) at 8:30 ET; weekly natural gas inventories (prior -140 bcf) at 10:30 ET; and weekly crude oil inventories (prior +1.34 mln) at 11:00 ET
  • Friday: December Existing Home Sales (prior 3.82 mln) and preliminary January University of Michigan Consumer Sentiment (prior 69.7) at 10:00 ET; and November net Long-Term TIC Flows (prior $3.3 bln) at 16:00 ET

US Stocks Watch Earnings and Event Watch

Earnings Highlights This Week:

Earnings reports

  • Monday includes Markets to remain closed in observance of Martin Luther King Day.
  • Tuesday includes Goldman Sachs (GS), Morgan Stanley (MS), The PNC Financial Services Group (PNC), Calavo Growers (CVGW), Fulton Financial (FULT), Hancock Whitney (HWC), Interactive Brokers (IBKR), Pinnacle Financial (PNFP), Progress Software (PRGS)
  • Wednesday includes Alcoa (AA), Charles Schwab (SCHW), Citizens Financial Group (CFG), H.B. Fuller (FUL), Synovus (SNV), Wintrust Financial (WTFC), Prologis (PLD), U.S. Bancorp (USB), Kinder Morgan (KMI), Discover Financial Services (DFS),
  • Thursday includes Taiwan Semiconductor Manufacturing (TSM), Fastenal (FAST), First Horizon (FHN), Home Bancshares (HOMB), KeyCorp (KEY), M&T Bank (MTB), Northern Trust (NTRS), Texas Capital (TCBI), WNS (WNS) Bank OZK (OZK), F.N.B Corp. (FNB), J.B. Hunt Transport (JBHT), PPG Industries (PPG),
  • Friday includes Schlumberger (SLB), Ally Financial (ALLY), Comerica (CMA), Fifth Third (FITB), Huntington Bancshares (HBAN), Regions Financial (RF), State Street (STT), Travelers (TRV),

Investors (and algos) will focus on the conference calls and outlooks. Last quarter everyone expected the worse, we saw critical updates on production in supply chain impacted regions and if there is extended halting of operations weighing on multi-nationals. 

Events

Notable conferences running during the week include:

Monday

  • All day – U.S. markets will be closed for the observance of the Martin Luther King Day holiday.
  • Three-day National Retail Federation Big Show will feature speeches by Walmart U.S. (WMT) CEO John Furner, Honest Company (HNST) CEO Carla Vernon, FedEx (FDX) CEO Raj Subramaniam, Salesforce (CRM) CEO Marc Benioff, Signet Jewelers (SIG) CEO Gina Drosos, and Under Armour (UAA) CEO Stephanie Linnartz. Executives with Levi Strauss (LEVI), BJ’s Wholesale Club (BJ), PepsiCo (PEP) and Dollar General (DG) will also make appearances.

Tuesday

  • IPO Companies with blocks of share rolling off their IPO lockup period during the week include Oddity Tech (ODD), BioNexus Gene Lab (BGLC), and Abivax (ABVX). Of the three, Oddity Tech is the only one trading above its IPO pricing level.
  • The Needham Growth Conference will feature presentations and fireside chats by a large number of companies. The conference has led to some share price jolts in the past off of guidance updates. The list of participating companies includes Freshworks (FRSH), BlackBerry (BB), Chegg (CHGG), Beachbody (BODY), Planet Labs (PL), Fubo (FUBO), and MongoDB (MDB).
  • Monster Beverage (MNST) will host an investor meeting.

Wednesday

  • Samsung (OTCPK:SSNLF) will hold its Galaxy Unpacked event to showcase new products in the Galaxy S24 series and unveil Galaxy AI. The company has previewed that the AI system will be a comprehensive mobile experience and provide universal intelligence on users’ phones. Cloud connectivity is expected to provide advanced capabilities for Galaxy AI.
  • Compass Diversified Holdings’ (CODI) Investor Day,
  • Ryman Hospitality Properties’ (RHP) Investor Day,
  • Charles Schwab’s (SCHW) business update call.
  • OPEC Monthly Oil Market Report.
  • Ethereum (ETH-USD) developers have a Goerli public testnet for Dencun scheduled. Ethereum has rallied 15% over the last week as part of a crypto rally tied to bitcoin ETF approval.

Thursday

  • Annual meetings for Intuit (INTU), Micron Technology (MU), and Costco Wholesale (COST).
  • Circana will release U.S. video game results for a period (November 26-December 30) covering much of the holiday shopping season. The report could be of interest to game developers Microsoft (MSFT), Electronic Arts (EA), Warner Bros Discovery (WBD), Sony (SONY) (OTCPK:SNEJF), Take-Two Interactive (TTWO), Roblox (RBLX), Ubisoft (OTCPK:UBSFY), as well as Hasbro (HAS) and GameStop (GME).
  • IEA will publish its monthly Oil Market Report.
  • The ten-day Sundance Film Festival will begin in Park City, Utah. The acquisition decisions made by production companies can have big financial implications for movie studios down the road.

Friday

  • Shareholders with Spirit Realty Capital (SRC) will vote on the acquisition offer from Realty Income (O).

IPO Wrap

US IPO Week Ahead:


Focus on yourself and what YOU CAN INFLUENCE, set your trading plan and goals in be set for 2022.

-comment section below data-

Real Time Economic Calendar provided by Investing.com.

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