Risk markets treaded water the past week as we head into the final stretch of the US election, with both parties bombarding mainstream media with last minute political drives, including an unprecedented 3-hour Trump-Rogan interview with 25M+ views on YouTube alone. Furthermore, perhaps in response to recent US pressures, a late Friday Isareli strike on Iran turned out to be more restrained than feared, offering Tehran a political exit-ramp as Iran has explicitly not responded to the strike through official channels.
The absence of macro risks and a cooperative inflation backdrop continued to compress risk premium into year-end. US investment grade spreads have tightened close to a 43-year low, with equities pricing implying a near-0% chance of recession on the horizon.
In terms of recession expectations, bonds and equities have been diverging in their expectations, with the latter being more correct up to this point, leading to a +60bp jump in 10y UST yields in the past month with bond managers reporting one of the largest duration reductions going back 25 years.
Yields have risen 5 out of the last 6 weeks, with 10y yields topping out at the highest levels since July, and over $183 billion (!) in new supply over coming the next few days alone. With key labour data such as JOLTS and NFP due in the week ahead, fixed income will likely remain on the backfoot, while former Fed Governor Kevin Warsh jumped into the fray with some critical comments over the Fed’s recent dovish pivot and inflation framework.
Speaking of being wrong, while the recently released UMich confidence showed a headline softening in 1-year inflation expectations to 2.7%, there was a perplexing jump in the average 5–10yr inflation expectation to a high of 6.6% — the highest number since 1985! This discrepancy vs the median expectation is pretty much unprecedented, and is something the market is content to overlook — for now. But watch for inflation concerns to rear its ugly head again in the next couple of quarters should the economy continue to show resilience.
In the meantime, the SPX just hit its 47th ATH record on October 18, with the previous records in 1995 (+77) and most recently in 2021 (+70). Naturally, investors are pretty much ‘all-in’ with JPM research showing implied cash allocations near 25 year lows while equity future positionings are at multi-year highs. Will stocks be an ‘inflation hedge’ in the future under a potential Trump-win? Certainly something to keep in mind…
Following a string of strong PR showings podcast interviews, equities are trading with a distinctive ‘Trump-win’ flavour despite official betting odds still calling for a 50–50 race. Similar positive skews can be observed in gold and crypto prices with call skews being bid up post election as a hedge.
While we enter the final week of pre-election results, equities will see a busy week of corporate earnings big names such as Ford, Alphabet, AMD, McDonalds, Visa, MSFT, Caterpillar, Meta, Coinbase, Starbucks, Amazon, Apple, Intel, and Mastercard all reporting results this week. Data wise, we’ll see JOLTS, ADP, consumer confidence, GDP, Challenger job cuts, core PCE, ISM, and NFP to end the week. Get ready for lots of macro fireworks over the next couple of weeks!
Crypto saw a volatile week with a retest of ~69K early on, before retracing to support at 65k to remain at the current holding pattern. BTC net inflows came to nearly $1B in the week, marking the 3rd consecutive week of inflows and institutional demand remains robust. Furthermore, BTC dominance continues to rise (59.8%) at the expense of ETH, with the former outperforming by nearly 10% on a week-on-week basis, with Vitalik being pressured to publicly defend against the Ethereum Foundation’s alleged sales of ETH over the past few months.
In addition, alleged reports of US govt investigation into Tether caused a drop in USDT to see a temporary low of 0.9965 before recovering close to the peg, with CEO Paolo Ardoino officially denying these claims and the markets more reserved in dealing with these rumors this time around.
In terms of price action, at the risk of sounding like a broken record, BTC will remain as an SPX-proxy until further notice, with its 3m correlations running at 1-yr highs vs SPX, and next to zero versus the USD and inflation.
Good luck to our readers this week, and get plenty of rest for a busy month ahead!
