CA Trading Signal
It looks like the Curve Advisor Vacation Signal is about to go into effect. More often than not, we seem to get “crazy” curve moves when I am away. I was away a handful of times when the markets went nuts, including March 2023. I WILL BE AWAY NEXT WEEK! So while I think the markets could find some stiff resistance at the nearby fixed income highs, another 2-4% drop in equities (which is nothing) could cause a break. The reason I call equities the Devil’s Instrument is that I find it impossible to guess which direction the next 10% is going to be (after adjusting for the +10% historical trend). Next week could be an interesting trading week. You were warned!
There are so many things that happened last week that I will have to write about Trump’s US Belt & Road ambitions (my original thought for this week’s essay) in a future post. Hopefully I’ll have a quiet week in the near future to elaborate.
1. The equity selloff seemed aided in part by the stories about a potential stronger COVID virus. It doesn’t help when Bloomberg says things like “COVID vaccine producer X’s stock rose as much as 7%,” when it ended the day only up 2%. 2% is a decent amount, but not if this situation becomes serious (the stock could rise hundreds of percent). As you all know, I took full advantage of COVID-19 five years ago and wrote about “zero cost” ways to play it to subscribers. Coincidentally, (1) I discussed vol being low and that I liked buying fixed income calls last week, (2) I also wrote about a “zero cost” way to play for crisis last week, and (3) I have been bullish fixed income for a month now. One of my core trades is always to have “zero cost” crisis protection. You just never know when a “crisis” could happen.
That having been said, markets seem oblivious to the fact that a new “deadly” virus is discovered every few months. I don’t think news of the discovery of a virus that may not be transmissible to humans matters much. But the discovery was made in Wuhan (again), so who knows what kind of incompetent handling and subsequent spread can go on over there? However, I am not going to concern myself with a pandemic until we know the virus can be spread to humans AND China is doing something about it. Since “free” crisis protection is always a part of the portfolio, I can trade being less concerned about extreme tail risks.
2. It was options expiry on Friday, so the equity move may have been exacerbated. Or not. There seemed to be a lot of negative industry-specific news last week. The cruise lines got hammered from increased tax talks, some defense companies got hit from budget reduction chatter, there was talk of reduced drug prices, Walmart lowered earnings expectations, repatriation is not going to be good for earnings, etc. While many companies may eventually benefit from Trump tax and regulation policies as well as AI, there will be many other companies that get hurt. Tariffs are coming, and that can’t be good for margins. Given how robust the equity rally has been the past few years, it wouldn’t be crazy to get some kind of correction. I am not calling for one, but I am just saying that we have a lot of uncertainty now and anything can happen.
3. I didn’t put the Fed minutes on the list of events last week, because the Fed did nothing last month and I wasn’t expecting much to have happened at the meeting. But there were a number of interesting nuggets there:
a. They showed more willingness to be patient on eases with the high degree of uncertainty on the horizon. I think the higher U Michigan inflation expectations may give them further pause. Recall that the Fed thinks tariffs could be transitory IF inflation expectations are anchored. Inflation expectations seem to be drifting higher, and tariffs haven’t even started yet!
b. A few suggested that there could be an issue with Q1 inflation seasonals.
c. The Fed intends to have their portfolio move in closer alignment to Treasury issuance (more bills).
d. They implied (temporarily?) pausing or slowing QT until the debt limit is resolved.
e. I thought someone said there was an implied change in the SLR that may have been bond-friendly, but I didn’t see a direct mention of this.
f. I’m wondering if the last few points were things that arose from Powell’s regular meeting with Bessent. Because Bessent also mentioned QT. Coordination between the Fed and Treasury poses a headwind for fixed income selloffs.
4. Bessent’s Bloomberg interview midweek contained some interesting tidbits:
a. Bessent seemed to take pride in the fact that tens have rallied every week since the inauguration. He is clearly watching what is happening to the long end of the yield curve.
b. Bessent said terming out the debt is a long way off. We inferred this from the QRA, but as you know I think he is targeting the longer end of the yield curve.
c. Bessent is not issuing in the longer end until QT is over. He does not want to compete with the Fed. It’s possible Bessent may not want to issue in the longer end until they get a QE (!) friendly Fed Chair.
d. His comments on Ukraine were interesting, but I will discuss this further in my US Belt and Road post.