From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
The Federal Reserve is doing its best to prepare the market for what is expected to be a year of rate hikes. But investors aren’t exactly enthusiastic about this outlook, as stocks came under further pressure following Wednesday’s Federal Open Market Committee announcement.
The bond market is also offering some valuable information again. And considering the recent volatility, it’s more important than ever to listen closely.
When we think about bonds, credit spreads are always top of mind, as they’re a great barometer of market health. When there's stress on risk assets, it shows up in credit spreads.
When analyzing credit spreads, all we’re doing is measuring the difference in yield between a Treasury (the safest bet) and a corporate bond (riskier asset) of the same maturity. If these spreads begin to widen, it’s usually problematic for equities.
As we progress into Q4 of Fiscal Year 2021-2022, this playbook outlines our thoughts on every asset class and our plan to profit.
This playbook will cover our macro view, touching on Equities, Commodities, Currencies, and Rates, as well as outline our views on the major nifty indices and the sector/thematic indices.
We also cover individual stocks we want to be buying to take advantage of the themes discussed in the playbook.
Tuesday night we held our January Monthly Conference Call, which Premium Members can access and rewatch here.
In this post, we’ll do our best to summarize it by highlighting five of the most important charts and/or themes we covered, along with commentary on each.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
There have been some fireworks to kick off the new year. One of the biggest developments in 2022 has to be the US 10-year yield breaking to its highest level in two years.
The direction in which yields resolve from their 2021 consolidation will impact all the major asset classes, including bonds, stocks, and commodities. We’re already seeing procyclical assets catch an aggressive bid as the 10-year flirts with an upside resolution.
For now, the path of least resistance is higher. But we still need to see follow-through and confirmation before we can be comfortable that these new highs are here to stay.
When we look at the international bond market, it’s not just domestic Treasury yields that are on the rise. We’re actually seeing rates make new highs all across the developed world.
I don't have a lot of faith in people, or media or economists. But bonds are something we certainly take seriously.
There's no bullshit with them.
The biggest players in the world have no choice but to be intimately involved in fixed income markets. So if you're curious which way the pendulum is swinging, you'll be able to see it in bonds.
Here's a quick look at US Interest Rates making new highs - from the 1yr to 10yr yields these are going towards the upper right:
It seemed like the bond market was heading in the right direction – except for Treasury spreads. The 2s/10s spread was the missing piece of the puzzle, continuing to push toward new 52-week lows…
Until now!
Only a couple of trading sessions into the new year, the bond market is providing plenty of fireworks. Rates are jumping higher across the curve, and critical treasury spreads such as 2s/10s, are following higher:
From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
With the exception of US large-caps, the market remains range-bound for most risk assets. At the same time, most defensive assets are failing to catch any meaningful bid.
Gold is still chopping around in the middle of its year-to-date range. Bonds continue to trend sideways or lower. The Japanese yen recently hit its lowest level since 2017.
And while the defensive sectors recently made multi-month highs versus the broader market, they're still trading near 20-year lows on a relative basis.
These are the kinds of assets we expect to catch a bid in an environment where investors are fleeing for safety and positioning defensively. But we’re just not seeing that.
At the same time, we haven’t seen many definitive signals supporting a more risk-on tone… until now!
While our risk-appetite ratios remain a mixed bag and most are simply range-bound, we just got a meaningful upside resolution in the High Yield versus Treasuries ratio.
And we already know that Individual investors (AAII) and Financial Advisors (II) are much more bearish going into 2022 than they were over the prior two years.
