Recap 2014-09-12: A Cross Asset Observation


Concerns over a shift in Fed policy are affecting more than just yields and currencies. Precious metals and risk assets are also reacting. Silver, for example, has broken below key, multi-year support:

Gold (in white & inverted below), which lead 10y real yields (orange) higher ahead of Bernanke’s tapering comments last year, has also sold off, down about $100 since early July:

While US 10y swap yields have broken cleanly above its downtrend line:

The synchronized movements across yield sensitive assets increase the likelihood that this is the ‘real deal.’ And note that this is not just about the Fed – the perceived end to ECB easing earlier this week is also likely playing a key role. 10y bunds yields are now well above the 1.0% level, up 20bps on the month, the most since last December, and is now testing the 50dma as well as a downtrend line that started in January.

Having said that, note that both 10y Treasuries and Bund yields are close to resistance levels. The 2.75 area has been a pivot for the US 10y swap rate for over a year, as well as the current upper weekly Bollinger Band level. And 10y bund yields are, in addition to sitting at the downtrend line, are also close to the 1.11-1.13 area. The EURUSD weekly candle chart (below) shows a doji below the lower Bollinger Band. With the FOMC just a few days away, these moves may well take a breather around here until then… but the size of the moves on speculation suggests the possibility of a reversal.

The potential for higher yields, along with high leverage and weak liquidity, has been a problem for the high yield debt market. Sober Look noted that the fundamentals of middle market leveraged finance are getting frothy, though banks are not directly involved.

With spreads already tight, especially in weaker credits, there has been a sizable exodus out of the asset class. HYG has sold off quite sharply this month: (although there are early signs of stabilization)

These moves have started to impact equities as well. There is a fairly strong, intuitive relationship between credit spreads (CDX HY spread in white & inverted below) and equity valuations. (orange) The optical gap between the two series is as large as it was during the taper episode last year:

Having said that, there are some offsetting factors. @RareviewMacro noted that US equity short interest (white below) is at very high levels. Since 2012, such readings have coincided with subsequent equity bounces, but the correlation isn’t stable. In 2008, the correlation was positive.

And this isn’t the only indicator suggesting low net exposure. BAML’s August survey showed the highest net cash position since mid 2012, when people thought the Eurozone would break up. We are due to get the September survey results soon, but the net cash figure is unlikely to fall to levels coinciding with intermediate market tops.

And finally, many participants believe that QE was responsible for the stock market’s gains, and so there may be selling as the Fed nears the end of its asset purchase program. This is clearly a short term negative. But I also think that it is a longer term positive. When the stock market doesn’t fall off a cliff, those participants, along with participants who have sat out the rally due to this belief, are likely to reassess…

Separately, here is an interesting chart from the BLS, showing the change in consumer expenditures for 2013. If it wasn’t for housing, expenditure growth would’ve been much weaker. This raises the question of what inflation would’ve been had the housing recovery been much weaker.

The NSA is a bully.


  • US Retail Sales were broadly inline, but revisions were strong. Core retail sales rose 0.4% vs 0.5% exp, but the prior print was revised from 0.1% to 0.4%.
  • U Michigan Confidence improved to 84.6 vs 83.3 exp and 82.5 prev.
  • NZ PMI improved to 56.5 vs 53 prev
  • NZ House Sales declined -16.3% YoY vs -13% prev.
  • Scotland poll data shows rising support for staying within the UK. YouGov polling numbers out overnight showed a 4-point advantage 52% to 48%.
  • Russia threatens retaliatory actions in response to Western sanctions; Moscow warned it could limit western car and clothing imports – FT. It appears Russia is willing to cut itself to spite the West.


  • Mon: China Retail Sales, IP, US Empire Manufacturing,
  • Tue: UK CPI, PPI, German ZEW, US PPI
  • Wed: BoE Minutes, UK Employment, US CPI, NAHB Housing Index, FOMC, NZ GDP
  • Thu: UK Retail Sales, ECT 1stTLRTO, US Jobless Claims, Housing Starts, Philly Fed
  • Fri: Quadruple Witching, Canada CPI