Pro Macro: In Focus – Pivots & Rollercoasters

Published on: July 11th, 2022

In a nanosecond, markets pivoted from a fear of inflation narrative to one of a fear of recession. Most likely there will be a tug of war for a few weeks around the two points of focus. The big themes remain set to keep uncertainty high and economic and market volatility elevated. This will push risk premia higher over time. But nothing travels in a straight line. Frameworks and tactics discussed below.

Comments

  • KB
    Keith B.
    12 July 2022 @ 13:35
    Is there any substantive difference between Globex Eurodollar futures, such as /GEZ3 and the type of Eurodollar future you quote, /EDZ3? Many thanks in advance!
    • HM
      Harry M. | Real Vision
      12 July 2022 @ 15:38
      No, I dont think there is a "substantive" difference.
  • PP
    Percy P.
    13 July 2022 @ 01:40
    A lot of non finance, non economic YT channels that cover situations in China, don't shows good outlook. I have no opinion on XME but the Chinese stimulus may be invalid.
    • HM
      Harry M. | Real Vision
      13 July 2022 @ 10:54
      Its a great point. One might argue that the ongoing real estate in China is going to need huge amounts of stimulus from the authorities, Whether that will mitigate the deflationary effects...
  • JW
    JW2 W.
    15 July 2022 @ 06:38
    The volatility in these ED futures was completely crazy. The recent inflation print spooked markets again and seemed to have sawn doubts about lower yields. I jumped out because i could not understand these massive swings. Perhaps when the mood setttles it makes sense to jump back in but with July Fed decision loming I am not sure. Any views?
    • JW
      JW2 W.
      15 July 2022 @ 12:55
      Thanks Harry. I kept it small, but still....
    • HM
      Harry M. | Real Vision
      15 July 2022 @ 11:29
      Vol has been super high. The important thing is scaling the trade correctly. Assume 15-20bps per day vol, cos thats been happening recently. However, that kind of vol also suggests a potential turning point. But its definitely not an "easy" trade.
  • JW
    JW2 W.
    15 July 2022 @ 13:24
    In various podcasts JB has been saying he was buying the short end of the treasury market (SHY)....wonder why he did not add this to the trade recommendation?
    • JW
      JW2 W.
      15 July 2022 @ 15:33
      Much appreciated Harry.....He mentioned both ED and SHY in various comms, hence my question.
    • HM
      Harry M. | Real Vision
      15 July 2022 @ 14:48
      I think the ED trade is what he is referring to. Its the most direct way to play it (other than SOFR futures). 2y UST is pretty similar.
  • BM
    Brent M.
    16 July 2022 @ 16:53
    This was a good read. Can someone kindly help me locate the JYU2 Trade in interactive brokers? Can't seem to find it.
    • HM
      Harry M. | Real Vision
      18 July 2022 @ 12:21
      I think it might be "JPY Sept19'22" on IB. Try typing JPY and see what comes up on contracts. https://www.wsj.com/market-data/quotes/futures/JYU2/contracts
  • YC
    Yi C.
    22 July 2022 @ 21:29
    Hi Julian, with historic inflation happening in EU and Japan, and EU having to deal with anti-fragmentation, do you see the possibility of, under the authorization of Exchange Stabilisation Fund (ESF), the US Treasury having to come out and have the fed print USD and buy bonds in the EU and Japans to save Euro and Yen while continuing QT in the US? The money printing would offset the QT in the US and would be bullish on growth stocks. This thesis was proposed by Arthur Hayes's recent article and was validated by Danielle DiMartino Booth and Felix Zulauf. linked as follows. I find this idea brilliant and enlightening and would like to see what your thoughts are on the probability of this actually occurring? https://entrepreneurshandbook.co/excalibur-44b2822dc4e6
    • YC
      Yi C.
      31 July 2022 @ 20:43
      The author provides the following political reasons to justify such an approach: "If we look at the political checklist of the US Treasury, this policy checks all the boxes: - Allow America’s allies to continue pursuing YCC and retain a strong currency against the dollar, which lessens fuel import inflation. This reduces their desire to break ranks and purchase cheap Russian energy. - Continue to tighten domestic financial conditions by selling Treasuries and MBS. Since the rate of change of price rises will have peaked, a victory can be claimed using a somewhat dishonest measure of inflation. - This creates a market dynamic which causes the stock market (i.e., S&P 500 / Nasdaq 100) to rise and make rich people happy. This should stall the recession that started earlier in the year." You may ask: wouldn't QT or a Fed pause be a much better political sell than above to achieve similar effect? But in order to do pause QE or pivot, the fed will either convincingly have 1)defeated inflation or 2) financial conditions have tightened drastically so the fed will have to pause. Here's the author's explanation to that: "The backwards-looking economic metrics needed to politically justify a pivot will take time. That is time that Japan and the EU don’t have. When it starts getting cold in October, energy use will rise. If the JPY and EUR are trading markedly weaker vs. the USD and there is no arrangement to change the relative valuations of these currencies, then Japan and the EU will be extremely tempted to re-engage with Russia. Russia always has the most leverage in the winter." " it is an American election year. The Fed’s domestic monetary policy is pretty set in stone from now until mid-November, when the government can end the theatrical performance it has been putting on to curry votes. Therefore, I believe that if the Treasury and the Fed are to do anything to assist the kingdom of the Yen and the Euro in their existential fight against the Great Bear, printing USD and purchasing JGBs and EU bonds is the only politically- and time-efficient option."
    • HM
      Harry M. | Real Vision
      30 July 2022 @ 12:17
      Isnt it politically very difficult to do?
  • JW
    JW2 W.
    5 August 2022 @ 19:01
    Looks like these EDZ23 should be sold now, what with latest job reports and the likely Fed response ...front end will go higher.... or just let them stop out I guess... Harry...if you are still reading this :-) ?