September 25th, 2022
As trading opened this past week, traders were closely watching the U.S. 2-year Treasury yield as it hovered just a few basis points below 4%, levels not seen since 2007. It was being viewed as a harbinger for the expected message to come from the midweek FOMC meeting. Concerning inflation readings in EU and Asia, an aggressive Riksbank rate hike announcement, and rising tensions around escalatory moves by President Putin weighed heavily on investor psyche. Stocks remained heavy, led by rate sensitive technology shares. The U.S. dollar continued to make multi-decade highs amid weakness in cryptos and most other commodities, leading into the Fed’s 75 basis point rate hike announcement on Wednesday. Chairman Powell’s blunt messaging on inflation was fortified by a host of central banks globally that, too, raised rates aggressively the following day. The U.S. 2-year yield jumped towards 4.25%, suggesting markets were indeed heeding the Chairman’s acknowledgment that the fed funds rate will likely find its way to the median FY23 Fed dot in the updated SEP projections, which was boosted above 4.6%. Importantly, long rates also moved up aggressively, which could also be viewed as a nod to the Chairman’s proclamation that real rates will likely need to get into positive territory across the entire curve in order to temper demand enough to tame inflation. The notion of any kind of “softish” landing by the U.S. Federal Reserve quickly dissipated in the wake of Powell doubling down on his Jackson Hole message. Namely, rates still have to go higher, and stay there for some time which will cause intended economic pain before ultimately forcing inflation back towards the 2% goal. Stocks and risk assets in general remained under heavy pressure into the week’s end jolted by new signs of slowing global growth in Europe and the UK announcement of large, debt-funded tax cuts. WTI crude prices plunged below $80 for the first time since January, as markets clearly focused more on the prospects of looming global recession rather than the relief lower oil prices will provide regarding inflation. By Friday, stocks were exhibiting short-term oversold conditions according to a growing number of sentiment and contrarian indicators, but real alternatives in the form of enticing risk-free rates, as well as geopolitical issues and recession fears amid tightening financial conditions remained significant headwinds. The Dow dropped below 30K, the S&P was within 50 handles of the June low and the VIX jumped back above 30. This past week, the Nasdaq dropped 5.1%, the S&P lost 4.6%, Asian equity indices retreated between 1.3% (in India) and 4.4% (on the HK Hang Seng), and European bourses gave back either side of 4%. Your BSD Global Tech Hedge Fund out performed the global equity indices with a gain of 0.6% for the past week; Thanks to our overweight short equity indice hedge. The UK 10-year Gilt rose above 3.5% for the first time since 2011 after the BOE hiked rates and announced plans to sell Gilts on Thursday. The Pound plunged 3% the next day and 2-year GILT yields surged another 50 basis points on Friday alone, as the new government offered an aggressive debt-financed “mini” stimulus plan. The destabilization caused by the UK government announcement dramatically raised expectations for BOE rate action and drove some analysts to call for an immediate inter-meeting hike to restore credibility. Separately, the BOJ remained on an extremely divergent path this week, leaving rates and YCC unchanged. One way volatility in the Yen forced Japanese officials to intervene in FX markets for the first time since the late ‘90s. Meanwhile the Euro plunged back below parity and the USD/CNH surged above 7.13 amid the acceleration of U.S. dollar dominance globally, generating some speculation that global financial officials could seek coordinated action to stem the rising Greenback, harkening back to the 1985 Plaza Accord. In corporate news this week, Ford said it anticipated $1B in unexpected inflation-related costs in Q3 and announced later in the week it plans to restructure its supply chain. Homebuilders Lennar and KB Home posted beats on earnings but said orders slowed due to inflationary pressures and higher interest rates. Costco earnings surpassed estimates but margins disappointed the street, as the retail giant maintained it has no plans to raise membership fees. Maersk reported September transpacific and transatlantic volumes lower month on month as consumer spending patterns have softened and shifted away from goods-heavy pandemic-era patterns.
Investors have definitely experienced a reality check with major equity averages having fallen in five of the last six weeks with the Federal Reserve maintaining a hawkish position on interest rates and recession fears cropping up again. Soaring bond yields and a strong U.S. dollar have reset valuations and earnings expectations on nearly every sector. The week ahead will see a flurry of U.S. economic releases including the latest updates on durable orders, consumer confidence, new home sales, GDP, and PCE prices. In Canada, the release of July’s GDP will draw the most attention. Judging from industry-level reports published to date, economic output may have retracted roughly 0.1% in the month. Elsewhere in the world, September’s Consumer Price Index will be released in the Eurozone alongside August’s unemployment rate. In Japan, we’ll be treated to a score of July indicators, notably industrial production, retail sales, housing starts and the jobless rate. On the corporate calendar, Twitter will depose Elon Musk, Intel will hold a key innovation event, Amazon will showcase new products, and Tesla will hold its highly-anticipated AI Day in Palo Alto, California.
At the close Friday, our BSD Global Tech Hedge Fund is 88% invested across a couple dozen tech vendors and tech end-users, thereby allowing the Fund to participate if this stock market moves higher, and We have an 95% short equity indice hedge on the notional value of the invested stock portfolio that will incrementally grow (from the laddered Nasdaq put options strategy) if the market deteriorates. Your BSD portfolio management and risk management team is of the belief that a stock market recovery is coming, so expect a reduction in our short equity indice short position.