China’s banking regulator has highlighted potential problems ahead, warning that “We are very worried about the financial markets, especially that the bubble in foreign financial assets could one day burst”.
Oil
Brent finished strongly at the end of the week to close at $69.36/bbl, after OPEC+’s decision to leave quotas virtually unchanged.
✦ HIGHLIGHTS
- Financial players are assuming a rapid and turbo-charged recovery in demand; the 6-month spread is at a near-record level of optimism
- But the physical market is telling a completely different story as Reuters reports:
- “There are plenty of cargoes available, especially for delivery to the top-importing region of Asia“
- Buying is likely to slow as refineries move into the maintenance season after the winter
- It also seems likely that Iranian sanctions will start to be removed in Q2, as the US prepares to rejoin the nuclear deal
- And US shale volumes are likely to rise, given the profits now available
WATCH FOR
WATCH FORMarket volatility to increase as slowing physical demand challenges the hedge funds’ focus on their $72/bbl Fibonacci target.
S&P 500
The S&P was virtually unchanged at 3842, with the VIX volatility index lower at 24. ‘Bubble stocks’ such as Tesla are now down 33% since late January. And the US$ Index continued its recovery.
✦ HIGHLIGHTS
- Investors began to worry that the Fed was now following the Biden administration’s lead in focusing on employment rather than the stock market
- Rising interest rates are removing support for highly-rated stocks with low or negative earnings
- Emerging Markets are also in the firing line as investors begin to worry higher rates will slow their recovery from the pandemic
- As we have warned, the US$ Index is moving higher, reaching 92 on Friday, with more gains likely
- A higher dollar reduces liquidity in global markets, and makes commodities more expensive as they are priced in dollars
WATCH FOR
Investors to start to realise that the so-called ‘Fed put’ may have passed into history.
Interest rates
The rate jumped to 1.55%, after reaching 1.63%, whilst the MOVE volatility index consolidated at 69.
✦ HIGHLIGHTS
- Traders were shocked by the Fed’s new line on interest rates and inflation
- But the head of the Richmond Fed couldn’t have been clearer in his message:
- “In fact, I would be disappointed if we didn’t see yields, you know, rise as the outlook improves”
- Worryingly, some traders took this as the signal to chase yield in ultra-risky products
- New Collateralised Loan Obligations reached an 8-year high of $58bn in Jan/Feb
- Companies also increased issuance of Convertible bond by 68% in the same period versus 2020
- Even arch-bull Goldman Sachs warned: “We’ve never seen pricing like this in the convertible market”
WATCH FOR
Rates to continue pushing higher as concerns mount over short-term inflation levels.
China
China’s top policy-making bodies are meeting to agree the new 5-year Plan and the economic blueprint to 2030.
✦ HIGHLIGHTS
- China expects its economic recovery to continue, with GDP “above 6%” this year
- The crackdown on shadow banking is set to continue, with the use of fake business loans for house purchase being targeted by the government
- Policymakers are focusing on self-sufficiency in the tech area, and increases in R&D spend, along with a priority for Climate Change policies ahead of COP26
- China’s rapidly ageing population is becoming a key concern, with fertility rates failing to recover even after the end of the ‘one child policy’
- China’s banking watchdog has also issued a strong warning about the risks for China’s economy from “loose monetary and fiscal policy overseas“
WATCH FOR
Dramatic changes to take place in China’s energy mix to meet Net Zero rargets – less coal, more nuclear.
Summary
Hedge funds have relied on support from the Federal Reserve since the end of the subprime bubble. Now they are starting to realise the Biden administration has other priorities.
Oil
S&P 500
Interest rates
Market view today
Some concerns
Some concerns
Expecting inflation
Our current view
Negative
Reversion to mean inevitable
Expect long-term deflation
Positioning began
December 2020
December 2020
December 2020
Confidence level
Initial
Today
.
.
.
Relevant positioning
Waiting for reality to dawn
Waiting for reality to dawn
Expecting higher rates for the 10-year and longer-dated Treasuries
Confidence level: 
= 100%, = 75%, = 50%, 
= 25%
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