Recap :


  • I wrote last Wednesday that the highest obstacle to richer P/E is higher rates. Note that Bill Gates confirmed this somewhat on CNBC today. He said that he doesn’t know how anyone can be an investor in this market without a view on interest rates. The thing is – that’s arguably ALWAYS true, at least for long term investors. If you don’t have a general idea or belief as to what the long term discount rate is or should be, how can you determine whether a 50+ year duration instrument like equities is priced fairly?
  • On the curve, the biggest ‘mystery’ for the market is probably why 30y yields are here. There are many reasons, but the sharp drop in the labor force participation rate on Friday is one of many contributory factors. As I said on Friday, I think current levels are likely to continue to drift lower. That will wind up being very bullish for equities later this year.
  • German bonds are getting rich – even given all the problems and issues in the EU. No catalyst for a reversal yet, but keep your eyes open. A blow off extreme following one more ECB ease could do the trick. Remember that growth has been picking up for a while now. A shift in ECB tone is really only a matter of time.
  • This is likely to mean tighter periphery spreads. Outright yield levels on periphery don’t look horrible, but more importantly, negative carry of being short / underweight is very high in this environment.
  • It seems like a lot of people are worried over the low volatility. But the fact is, like the price of other financial assets, the price of vol is context dependent. And vol is not that low given where we are in the cycle and the leverage in the system. I’m not saying we should be selling 1 day straddles here, but it’s much too early to be buying vol on a mean reversion bet.
  • With interest rates stable in most DMs, carry in FX space remains something of a muted driver of price action. As a result, Basic Balance of Payments flows have an outsized impact. I think this is one reason EURUSD & AUDUSD has frustrated the consensus this year. Until the Fed gets closer to its first hike date, it’s hard to make the case that this environment will change.
  • As a result, high carry EMFX currencies cay continue to do well or stay stable. I mean, sure, you can buy USDZAR here because the fundamentals look bad, but are you going to pay a negative carry of 6% a year while you wait? It’s worse than being short High Yield.
  • Maybe some of this is spilling over into RMB. CNH made the first significant lower closer in a month today.

h/t TBP for this:


  • Australia Building Approvals dropped -3.5% MoM vs +1.5% exp
  • China HSBC Mfg PMI improved to 54.8 vs 54.5 exp. The Official print declined to 48.1 vs 48.4 exp
  • ISM Non-Mfg PMI improved to 55.2 vs 54 exp and 53.1 prev
  • GS: The shift in regulatory focus towards the “two L’s” (leverage and liquidity) is forcing banks to reconsider balance sheet pricing. As low ROA businesses with unfavorable funding profiles under the new rule set, repo and securities lending are likely to come under pressure. Changes are already happening, but the impact is likely to accelerate as rules become final and banks fully adapt. The result is likely to be a smaller short-term financing market with wider spreads, as banks capture higher ROAs on a smaller pool of assets, potentially compressing trading activity
  1. To date, the market impact of these changes is modest, but we are seeing the impact of banks’ repositioning through: 1) a smaller repo market, with a ~$350bn decline (7%) following the introduction of the SLR; 2) increased stress for repo pricing at month-end as banks optimize their balance sheets for the SLR
  2. Leverage ratios are now the binding capital constraint for four of five money center banks, either through the SLR or through stressed ratios under CCAR. This puts an intense focus on rationalizing low ROA businesses to account for less leverage.
  3. The repo and prime brokerage businesses are extremely dilutive under the new liquidity rules given their outflow and drawdown assumptions. To run these business as liquidity ratio neutral, banks will have to increase their liability duration and thus the cost of funds they pass on to clients.
  4. Some investors believe “shadow banks” will disintermediate banks in the ST financing markets. We believe this will be difficult as: 1) ST financing is a business with large economies of scale from both a risk process and netting perspective; 2) given the Fed’s increasing focus on ST financing, we believe it is unlikely that “shadow banks” will risk being classified as “systemically important” by becoming key players in these markets.

Nov mid-terms – polling data gives strong edge to Republicans – a nationwide USA TODAY/Pew Research Center Poll shows the strongest tilt to Republican candidates at this point in a midterm year in at least two decades, including before partisan "waves" in 1994 and 2010 – USA Today.

Upcoming Data:

  • Mon: AU Trade Balance
  • Tue: RBA, EU Services PMI, NZ Unemployment, Australia Retail Sales, China HSBC Services PMI
  • Wed : UK RICS House price balance, Australia Employment
  • Thu : BoE, ECB, Canada Housing Starts, US Jobless Claims, RBA Minutes
  • Fri : Canada Employment, Brazil Inflation, USDA Ag Report