Fasanara Capital



xxth April 2018

Markets at a crossroads
few interesting charts

  • Trump tariffs tomorrow and potential trade wars w/China and EU. Dismissal of Tillerson and resignation of Cohn may signal the nationalist agenda has now the upper hand – stark difference from when it was Bannon to leave. Agenda may this time have momentum.
  • Tech sector woes just started
    1.  Trade wars are problematic for companies like AAPL, and indeed yesterday’s the stock was the biggest decliner in INDU (down 2%) / TENCENT down 5% this mornin
    2. Yesterday, the EU laid out framework for the tax reform for US Tech companies operating in Europe – interim tax, revenues taxed where produced ( wsj )
    3.  Idiosyncratic difficulties w/Facebook creating momentum for long overdue regulatory backlash (other momentum is Uber, to a lesser extent)
  • Next month potential for breaking Iran deal, chain-effect on potential flare-up of NK tensions, but more importantly impact on oil, and therefore interest rates
  • Rates can adjust upward anytime to 3.5%/4% on 10yr Treasuries (backed by tight job market, economic strength, tax cuts and fiscal stimulus, in adj to tariffs/trade wars)
  • If rates do not rise, still bad as there is potential for curve inversion – Taylor rule at 4% on Fed funds
  • OIS-libor spread continues to widen– now at 56 bips – doubled-up ytd –Citi research attached . Impact on banks like Deutsche bank visible
  • HYG weaker than in January and on slippery slope, next to critical levels. Spread to nearby asset class from equities VIX/VAR shock in February has just begun
  • DXY can swings both ways from here and cause volatility – (i) downward, continuing the trend but now provoking US equity/bond outflows (interesting such thesis here ) or (ii) upward in reference to OIS-libor and potential for USD shortage / liquidity squeeze
  • On March 26, the Shanghai International Energy Exchange is introducing a crude oil futures contract denominated in Chinese yuan, to allow oil producers sell their oil for yuan. China knows most oil producers don’t want a large reserve of yuan. So producers will be able to efficiently convert it into physical gold through gold exchanges in Shanghai and Hong Kong. Trend and implications to watch.


More readings:

10th Jan 2018 - "Edge of Chaos"
20th Nov 2017 - "Positive Feedback Loops"
11th Oct 2017 - "Market Fragility"
17th Jan 2018 - "Stocks are now in complete bitcoin territory"
22th Nov 2017 - "MacroVoices Interview - PFL"

OIS_libor: too easily dismissed as a potential risk indicator (as happened to February VIX-shock) ( Link )

OIS-Libor vs TED Spreads

OIS-Libor vs US High Yield

OIS-Libor vs CDX HY spread

US High Yield on a slippery slope

Widening of credit spreads, cost of leverage rises, need to deleverage arise ( Link )

US Default rates may soon adjust upward and follow debt/GDP historical correlation

When it comes to the outlook for Deutsche Bank, the bond market isn’t listening to the equity market – BOND VIGILANTES

$HYG Is in danger of forming a large rounded/H&S top. Signals in the credit cycle are beginning to pop up all over the place - Raoul Pal

Curve inversion or spike in US long rates: both bad
Either long rates follow short rates upward, or spike in a curve steepening (feeling for a FED behind the curve, or adjusting to oil prices if Iran deal falls apart), or the curve inverts: hard to see a positive outcome out of US rates in the near term

Curve flatness/inversion has historically coincided/preceded recent large adjustments: 00 and 07

Oil testing highs, in isolation to other commodities (hence: bad inflation/ unfavorable rise in rates), right ahead of next month potential break of the Iran deal

Oil rise often pushed US Dollar weaker, historically. Which may now spur outflows from US equities

VIX vs PMI: what’s next for the real economy if weakness persists