WEEKLY MACRO NOTE - Don't Fight the Fed

The Fed's determination to bring down asset prices seems to be finally paying off.

No less than 15 Central Banks updated their monetary policy this last week, resulting in major moves in FX, Bonds and Stonks.The Fed raised +75bps and is forcing everyone to play catch up, lest their currencies lose value against the dollar and in the process make inflation harder to tame.

TABLE OF CONTENT:

• WEEKLY WRAP UP

• SENTIMENT

• ECONOMIC CALENDAR

• THE ROAD AHEAD

WEEKLY WRAP UP

Let us start our weekly wrap-up in a slightly different order this week, with Bonds first, then FX and lastly stocks and crypto.

The US 10YR rate is trading at a 13-year high at 3.69% following a 6.95% gain.The risk-free asset seems not to be so risk-free after all, with bonds continuing to sell off across the curve and worldwide.

In the UK the 10YR rose 21% to 3.81%, a +65bps one-week move, taking the rate on GILTs higher than those in the US for the first time in a Long Time!

Bets on the ECB continuing to hike aggressively ramp us as 2YR German Bund rates are now trading at 1.92% up 26% on the week.Just think that barely 7 months ago, at the start of March they were trading at -0.80%.

Now despite what some may say about its meaninglessness, the Yield Curve inversion has historically been one of the most accurate predictors of a recession.No less than 19 countries worldwide have an inverted yield curve at the moment.

Now that the SNB of Switzerland has raised rates by +75bps points to 0.50%, Japan is the last country to maintain ultra easy monetary policy and negative rates at -0.10%.

While we could go on at length about why the BOJ is pretty much stuck between a rock and a hard place, let us move to FX and look at the consequences of this rate talk above, because there are repercussions.

BOJ was forced to intervene in the FX market this week.The Yen is down -20% year to date against the Dollar, and with the Fed raising and the BOJ easing, the risk is that things could get much worse.

The BOJ intervention to shore up the Yen resulted in a 4% intraday move in the USD/JPY pair, a massive move for FX, however, any gains achieved were quickly given up the next day and the USD/JPY is right back at where it was pre-intervention.

It is no wonder that Japan is finally opening its borders to tourists again, with their FX reserves dwindling at a very fast rate and them never being more necessary than now.Inflation in Japan just hit 3%, which may sound low compared to what the West is experiencing, but for Japan, it is quite high.

The Yen was not the only major move in FX, in fact, there were quite a few.

You see the Dollar Index DXY gained 3.08%, and the reason all this is important is that there is an almost -1 correlation between the dollar and stocks at moment!

The GBP had a terrible week and was down -4.96%

Back in January, the probability of the Euro hitting parity was quite obvious to me, it had not occurred to me that the Pound may go and do the same.

Well with the GBP/USD now at 1.08 that possibility is very real.The pound selloff is being attributed to the BOE hiking only +50bps compared to the Feds +75.But then Swedish RiskBank hiked +100bps and their currency still lost -5.8% against the Dollar.

There is a reason it is called the Dollar Wrecking Ball, and good old Powell in his religious commitment to taming inflation is set on a course to crush us all.

The anomaly this year has been that Bond and FX volatility on a relative basis has been much higher than that in Equities, but fear not, stocks are en route to catch up.

SPX declined 4.65% (for the second week in a row)NDX -4.64%DJI -4%RUT -6.60%

The VIX managed to get back above 30 for the 5th time this year.

Truth be told it was carnage on a very broad scale, with pretty much every major stock market and sector down on the week.So as opposed to listing you their declines let me tell you which ones are making new lowsNOTE: Lower Lows are not a buy-the-dip signal!

List of new lows in Country ETFs EEM (Emerging Market)EWJ (Japan)EWY (South Korea)EWL (Switzerland)EWN (Netherlands)EWG (Germany)EWC (Canada)EWA (Australia)EWT (Taiwan)EWK (Belgium)EWQ (France)EWD (Denmark)EWP (Spain)EWH (Hong Kong)EWM (Malaysia)NORW (Norway)EPOL (Poland)

Now I probably missed some, but the point is, they are many!

And yes I know there is some currency adjustment that goes on in these, but a good chunk of the respective stock markets are making lowers lows as well.

And how about a list of the US sector ETFs making new lows?XLI (Industrials)XLK (Tech)XLB (Basic Materials)SMH & SOX (Semis)XLRE (Real estate)XRT (Retail)JETSXLC (Communications)

And again, I probably missed some.

Now you know what is not making new lows yet?

BITCOIN

It is somewhat baffling that in such a volatile week, crypto should be, on a relative basis, one of the less volatile assets, seemingly stuck in a very tight range between 18k and 20k.

Crypto stocks are not fairing as well.

Now frankly I would not read too much into this as the Crypto space can be heavily manipulated, in fact, more than any other asset class, and if anything it seems more like people are being baited in at 18k to think the worse is over, just before taking them to the slaughterhouse.

On the other hand, those who have just been taken to slaughter were the Energy bulls.XLE declined -10%With WTI being down -7% and NATGAS -10%

The CRB commodities index just made a lower low, clearly signalling that despite whatever shortage/supply story you may be hearing, and however true it may be, as the global economic slowdown deepens and the dollar explodes higher, commodities are currently not a safe place to hide.

Also, it is worth bearing in mind that heading into the Midterms the Biden administration is releasing a record amount of oil from the SPR (Strategic Petrol Reserve) something which is undoubtedly having some near-term impact.

Now while that could change in a jiffy, and on a secular longer-term perspective over the coming years the Energy share of the SPX is likely to move higher, caution may be warranted in the near term.

SENTIMENT

Sentiment has gotten quite bearish, with the AAII survey showing one of the five highest bearish sentiment readings in the survey's history (going back to 1987).

Fear and Greed index has also declined back into the Extreme Fear territory.

While positioning has gotten much less bullish Nasdaq a move which is quite baffling is the now net long position in the Euro.

Do traders really think the worse is over? Are they betting on the Euro rising as the ECB now tightens on a lag to the Fed?Personally, while the Euro is quite oversold in the immediate term, I do not think the worse is over yet.

Meanwhile, Put/Call ratios have moved higher as people panicked into the close on FridayEquity Put/Call ratio at 1.02 is the second highest read of the yearIndex Put/Call back at 1.43 also rose significantly

ECONOMIC CALENDAR

THE ROAD AHEAD

Volatility cuts both ways. In such moments of high volatility, caution and cash may be your best asset allocations.

While 3 weeks ago in my newsletter I was quite clear that as autumn approaches the leaves were quite frail and could be quickly blown off, a few weeks later, many leaves have fallen and following a -10% decline, I would urge you not to chase.

Shorting a crashing marking can be quite risky and quick snapbacks can occur at any time.

So while I do not think the downside has fully resolved itself yet, at SPX 3650, the opportunity to short is far from as enticing as it was above 4000.Equally, I would not be a buyer yet, as markets crash from oversold conditions!

I have learned that getting excited while everyone is being stupid and staying calm and patient while everyone is panicking is a highly fruitful and disciplined approach to trading.

So while we patiently wait for the next opportunity let me share some slightly longer-term thoughts on how things might play out towards year-end.

Wherever this next leg down finds a bottom I am starting to think that a rally into November is likely.

There are many reasons but let me list but a few.

• US Midterms and the usual hedging dynamics into such events

• Q3 earnings risk behind us

• Topping long-term rates.

• Lastly, and most importantly, Peak Inflation.

In early Nov the Oct inflation numbers will be reported, and I expect that by then we will start to see a meaningful decline in CPI as base effects get steeper.

This will also occur following the next FOMC in late Oct, which may also coincide with peak Hawkishness, as I believe the most aggressive rate hikes are now behind us, and I suspect the Fed will now take a steadier approach with a +50 basis point hike, then a +25 or two before stopping in early 2023 at around 4.5% FFR.

Equally, we may be seeing yields on the 10YR in the process of topping out.

The above rally is likely to be fuelled by the narrative of peak inflation, peak hawkishness and peak rates, folks are desperate to double down and buy, and they will grab on to anything as a life raft.

Of course eventually I expect this rally to be sold and the SPX to head to new lows after that.The bottom line is that this bear market will likely be a long one and it will be a stair-step process, with various countertrend moves.

But don’t get too excited, with TSLA only 10% off its most recent high and BTC still at 19K I’m not quite ready to call it a day on this current leg down, and November is still 5 weeks away!

Thank you for reading,

Antonio C. Nobile

I am not a Financial Advisor & this is not financial advice

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