WEEKLY MACRO NOTE - Walking a Tight Rope

Reading Time: 8min

Welcome to Q4 2022!

After 3 consecutive quarters of declines, as we enter the final quarter of 2022, Fear & Panic abound on the street.

But before we dive into this week's numbers, as a lot of new subscribers have joined lately, let me briefly recap some of the things we have discussed since the inception of this Newsletter 4 weeks ago.

On the 11th of Sept, the SPX was trading at 4065, following a +3.41% weekly gain.

At the time, sentiment was quite bullish and bottom pickers were everywhere, meanwhile I started my newsletter with the following Italian poem:

SOLDATI - Soldiers 

Stating that “as Autumn approaches, and Winter waits but round the corner, those leaves seem fragile and awfully susceptible to even the slightest bout of wind." Click here to read the full article >

The SPX has since seen 3 straight weeks of declines, for a total loss of over -12%.

Many leaves have fallen, including broadly owned names such as ADOBE, FORD, NIKE, FEDEX etc.

But sentiment changes quickly, 3 weeks later and extreme bearish sentiment now runs rampant, thus the game from here gets harder for the bears.

For new subscribers I want to reiterate that I do not write this newsletter to give specific trade advice or make big calls, I simply want to help you contextualise risk, understand the macro environment and provide some tools and frameworks to aid you in your own decision making.

But enough of this, let us dig into our usual WEEKLY MACRO NOTE!

TABLE OF CONTENT:

• WEEKLY WRAP UP

• CHART OF THE WEEK

• SENTIMENT

• ECONOMIC CALENDAR

• THE WEEK AHEAD

WEEKLY WRAP UP

After 3 straight quarters of declines, many global Indices are at new lows.

From their all-time highs:SPX -25%NDX -34%DJI -22%FTSE 100 -10%DAX (Germany) -25%CAC (France) -20%KOSPI (South Korea) -35%SA40 (South Africa) -20%VNI (Vietnam) -25%And the list goes on.

Despite the DXY (Dollar Index) giving up some gains -0.75% this week, major indices failed to rally with SPX losing -2.91% and the NDX -3.01%.

The decline in the DXY was led by a rally in the Pound of +2.81%, off very oversold levels, and in the Euro of +1.17%

Most other global currencies continued to decline against King Dollar and in some cases make new all-time lows, like the Korean Won -1.3%, the Swedish Krone -1.75%, Indian Rupee -0.3% etc.

Pressure remains on Global Bond markets with yields rising globally and bonds selling off.

Certain Bonds, even in developed nations such as the UK are now trading at 50cents on the Dollar and below. This is putting extreme pressure on many portfolios where the risk-free assets appear to be not so risk-free after all.

Suffice it to say that a large chunk of UK pension funds was close to getting margin called before the BoE stepped in to calm the waters.

As the Fed continues to raise rates aggressively, it forces everyone else to follow suit, and with inflation in Europe accelerating to +10% in Sept, it does not seem like they will be able to slow down any time soon.

Another month has gone by and another month in which the Fed has failed to shrink the Balance Sheet by its stated goal of 95B.

In Sept the B/S shrunk by a mere 31B.*Note that this is as of the 28th Sept, so it does not include the reduction which would typically occur on the 30th, although I doubt it will be 65B!

Well, I suppose to a degree investors should be grateful, imagine they were going at it in full force?“Oh Mamma Mia” we would say in Italy.

The Bank of England stated that they would begin GILT sales in October, I struggle to see how they will manage that, given that they have been forced to intervene and basically do the opposite.Although I do suspect that at the next meeting the BoE will be more aggressive and deliver a +75 or even +100 bps hike.

The spread between the 10Y GILT and the 10Y BUND is now almost +200bps, not far off from that between the Italian 10Y BTP and 10Y BUND of +238bps. Although it must be said that the ECB is having to intervene regularly to stop the latter from blowing out, as is quite clear from the quite unnatural wicks you can see in the chart below.

Another sign of stress in the system and a great indicator to watch is High Yield OAS Spreads. 

In the US they widened to +5.50% and in Europe to +6.13%, yet despite all that has been going on, neither spreads are at the cycle highs.This is quite interesting, and something that I think may change going forwards, with rates trading around 4% the downside for treasuries IMO may be limited, meanwhile, the downside for High Yield and Junk may be quite large.

Lastly, let us take a brief look at the commodities complex, where the CRB index was virtually flat for the week.

WTI was also flat +0.13% on the week and the avg price of Gasoline rose +1.15% in the US.Interestingly, Energy was the only sector that was up last week with XLE +2.19% and XOP +5.15%

The record-setting Strategic Petroleum Reserve release by the Biden admin has 1 more month to go before the midterms, and then we might presume it will have to come to an end. 

It is the fastest depletion of the SPR since it was created in 1977 and the reserves are now at their lowest level since 1985.

Meanwhile, OPEC+ is meeting in Vienna next week in person for the first time since March 2020 and there is talk of a production cut.

I need not remind you that the Energy supply situation remains TIGHT, and it may not take much for OIL to trade back up to its 2022 highs.

Most metals and industrial comedies were down but agricultural commodities broadly rose, led by WHEAT +5.32%

It is important to remember that the Food part of the inflation complex has continued to rise all year and so far remains the stickiest component.

CHART OF THE WEEK

Are we approaching the point where things are about to break? I dunno!

The UK bond market almost did, until the BOE intervened, to save pension funds from getting margin called.

But let us look at Credit Suisse, a Global Systematically important bank, whose Credit Default Swaps, basically Insurance Premiums on the bank's default, (those things that made Burry et all rich in 2008) are exploding higher than 2008 levels.

Is Credit Suisse this time round's Lehman?

Again, I am not going to pretend to know, but the chart above clearly shows that a bunch of people are quite worried.No surprise the CFO just this week stated "BANK IS AT CRITICAL MOMENT"

Deutsche bank is not in a much better position, and both banks are extremely highly leveraged, the latter with a multi-trillion dollar derivatives book.

At $3.92 and 10B$ in MarketCap Credit Suisse is almost trading like a penny stock

At $7.40 and 15B$ in MarketCap Deutsche Bank is not far behind.

SENTIMENT

As I expand this newsletter and the tools I provide you, I will henceforth be including the NAAIM (National Association of Active Investment Managers) exposure index which represents the average exposure to US Equity markets by its members.

This recently hit a new low for the year at 12.61, the lowest read in 2 years

This is the second week in a row of extreme bearish sentiment from the AAII report.

CNNs Fear and Greed Index has also dropped further into Extreme Fear territory

Put/call ratios have come down somewhat, although premiums for puts remain high.Equity Put/Cal ratio 0.77Index Put/Call ratio 1.35

An interesting chart by Melvin Capital, shows that Retail investors may finally be starting to capitulate.Last week was the 2nd largest retail selling week in the last 5 years. 

On one hand sentiment is extremely bearish and retail traders are starting to capitulate, on the other CFTC net speculative positions show that traders are flat the Nasdaq, increasingly less short the SPX and increasingly long the Euro.

So you have bottom pickers in FX and cautious traders at the Index level.

FYI whoever keeps on getting long the Brazilian Real is getting smoked with the BRL losing over -2.5% against the USD last week.

ECONOMIC CALENDAR

THE WEEK AHEAD

Thus as we look at the week ahead Uncertainty is probably the best word with which to define the current state of affairs.

As a trader, you’ve got to know what you do know, but most importantly you have to know what you DON’T KNOW.

I look at next week and think, either we are going to crash or we are going to bounce.Remember as a trader and investor you always have the option not to play, skip a round, sit back, watch and wait.The right opportunity eventually presents itself.

The question is whether you will have the capital to execute when the time comes or whether you will have it all tied up in losing battles.

Many risks remain for October, so I do think any rally will eventually be sold.

Earning season is ahead, and from what we have been able to glimpse, the earnings recession I warned of at the start of the year is now truly underway. Also, remember that Blackout Period has now begun and companies will not be able to buy back their stock. Buybacks often account for over 20% of volume according to Goldman.

This is just one of the gargantuan number of risks that will keep pressure on stocks in October.

Trade safe, we are in the eye of the storm.Thank you for reading,

Antonio C. Nobile

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

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