Seconds Away: Round Two

Published on: November 14th, 2018

“Red October” shifts the investment backdrop. Prepare for tightening of financial conditions which can be tracked via Fed Funds, Bond Yields, Credit Spreads, USD FX and Equities.


  • ag
    anthony g.
    14 November 2018 @ 15:19
    Good article - useful - with thanks.
  • JC
    Justin C.
    15 November 2018 @ 05:05
    Very helpful Julian - thank you!
  • MS
    Mark S.
    16 November 2018 @ 23:13
    Would be interesting to know what would take Julian to change his view on treasuries yields to dropping and for Raoul what would it take for him to switch to yields rising. I have to say as of late, I have change my view to Raoul's.
    • JB
      Julian B. | Contributor
      20 November 2018 @ 16:35
      Hi gents. As Daniel suggests the disagreement is over the long term. My work suggests that if we do get a recession (not my base case) as a result of housing and or equity weakness, the ensuing bond rally should be sold NOT bought. Right here and now with our institutional clients, we have switch from outright shorts in 10yr Treasuries to bets on a steeper yield curve. These allow us to play the potential that the Fed stops hiking but also benefit from relative weakness or poor price action at the long end of the treasury curve. In general given the weakness of stocks, treasuries have traded very poorly.
    • DB
      Daniel B.
      19 November 2018 @ 02:02
      I think their disagreement is on long-term view - short term they're aligned on rates being cut when the Fed pauses and starts cutting at signs of recession leading to bond rally because bonds have been pricing in at least the next 2-3 quarters hikes
  • CL
    Charl L.
    18 November 2018 @ 07:13
    How will the recent drop in oil impact the inflation expectations and the long term bonds? Will we see inflation coming in lower than anticipated because of the drop in oil which will then ease financial conditions more ?
    • JB
      Julian B. | Contributor
      20 November 2018 @ 16:28
      Hi Charl, the dip in oil clearly impacts headline inflation. However, our work still suggests latent core and wage pressure which will last well into Q1.
  • JL
    J L.
    20 November 2018 @ 07:09
    If FANG takes the lead, where does that leave EM and the USD short and mid term? Thanks
    • JB
      Julian B. | Contributor
      20 November 2018 @ 16:25
      Hi EF, sorry for the late response but I've been travelling. As you correctly observe, CB's own a LOT of US stocks. But I'm not sure that the meltdown will impact the balance sheets enough to impact the currencies (at least not yet). In general, FX has been a very tough trade because the PBoC continues to hold USDCNY below 7.00 and as long as that's the case they suppress broad FX volatility.
    • JL
      J L.
      20 November 2018 @ 14:37
      And a related question, how do you see JPY and CHF reacting to a stocks and in particular a possible FANG meltdown, considering their CBs ownership of equities?