Hive Intelligence Report: Fed Taper, Speculation on Energy Prices, and Earnings Estimates

Every week, we bring together our community of macro experts to discuss the latest market developments. In this piece, we distil the insights from our conversations up to 1 November. These are views from our network rather than the views of the Macro Hive research team.

Fed

Read Dominique’s FOMC preview.

Goldman Sachs stance, and market thoughts

• Goldman Sachs’ stance: ‘We are pulling forward our forecast for the Fed’s first rate hike by one full year to July 2022, shortly after tapering is scheduled to conclude. We expect a second hike in November 2022 and two hikes per year after that.’
• This is, sort of, what the market is pricing anyway [Saturday]. Goldman Sachs are priced to the Eurodollar curve. So, is the Eurodollar curve (pressure whites, collapse Z3Z4) what people think (maybe), or is it a by-product of October’s massive stop-out (also maybe)?
• It’s assumed that many banks will now change their view as they prepare their official forecast for 2022. This means we can sell off for another month while that happens.
• Even if central banks deliver what is priced, it is going to be heavy for fixed income and it will then shift to USD and equities. Confirmation of what’s priced must be worth something.

Are we supposed to believe the Fed will hike the month they stop purchases?

• Powell just might push back against that.
• It’s unwise for Powell to not push back against price action.

What happens if Powell pushes back?

• If he does, rates fall. If he doesn’t, rates rise.
• It’s one thing to guess his [Powell’s] next move, but even if you were able to know it [his move] in advance you would need to be in on some of the highly leveraged positioning.
• We could see a clean out of conditional bear steepeners (short front end payers and/or long long end payers).

A presentation to the Fed

• Bill Ackman presented to the Federal Reserve Bank of New York and thinks ‘the Fed should taper immediately and begin raising rates as soon as possible.’
• But he was also at the Investor Advisory Committee on Financial Markets where it tends to be ‘a bunch of rich people venting’.
• Money is lost investing for what the Fed should do, versus money made understanding their reaction function/having a good sense of what they will do.

Inflation

Read Dominique’s latest analysis on how Disinflation is Proceeding Slowly but Surely.

Issues with ‘transitory’ inflation

• If we have four quarters leading to 10% inflation then it moderates, and prices don’t come back down – which is unlikely they will except in resources, perhaps – then it’s transitory. Except we just had 10% in a year, how does that function?
• Cash has still lost 10%, in this example. Then we get back to 2% inflation.
• So, what’s that over 5 years compounded? In this example, that’s 20% over 5 years.
• Of course, it’s not 10%, but unless we go negative this still matters.

And a disconnect with the general public

• There’s no problem with transitory as a way to describe what is going to happen. Inflation will be lower in 2022 than 2021. Even the critics aren’t thinking 3 or 4, everyone is in the 2s. That’s okay, not ideal, but okay.
• But the challenge is if we see core lower in 2022 versus 2021, that’s transitory, but the ‘man on the street’ cannot distinguish between a price shock and a price level shock.
• The risk is a communication disconnect when big relative price changes and the disconnect persists the longer it goes on.

Rates

Last week I put out my Global Rates Weekly looking at Term Premia Shock.

How to get curves steeper

• The way to get curves steeper is to get G3 5y5y higher.
• US 5y5y is 2%. For that to go higher you need some acceleration in growth or actual hikes. Stocks will lead it, or it won’t happen, there is no easy equilibrium where curves steepen while equities crash.

Flattening is still the paint trade in US rates

• The problem with trading the curve in this cycle is it’s never clear if the curve should steepen or flatten. Because the Fed is only tightening half-heartedly it’s not clear if it will be enough. Add to that the end of QE and impact on supply, perhaps.
• If you are still bearish, stay paid money markets, don’t touch the curve.

Will the Treasury curve flatten post-Fed meeting?

• Formal tapering announcement will flatten the curve harder, even if the start of tapering isn’t in November.

FX, Rates, and Losses

• FX volatility is just about [Thursday] to remind governments and policy makers about the real politics of rates divergence logic. EUR 1y1y volatility is highest since the sovereign debt crisis [below].

• Even large global macro hedge funds, and FX and rates specialists not only missed this but were wrongly positioned.
• The balance sheet is very expensive in regulatory capital terms. Which is another reason why long dated FX volatility can really move, nobody can afford to hold on it. And market depth for long dated vega is molecularly thin, especially approaching quarter end.

US Equities

Read John Tierney’s latest on how the Earning Season Finds Companies Bullish in the Face of Supply Bottlenecks.

Is there a systematic bias in analyst estimates or in companies ensuring they beat guidance?

• One shift in equity research has been their shift in funding. Previously they were tied to sales/trading and hence served the investor. Now they are tied to advisory/banking and hence serve the issuer/company. This would suggest they would forecast low to help their client (the company).
• The other shift is that companies must give the same information to everyone – in the past analysts could get more info from companies. So perhaps now companies have more control on the narrative and what data everyone can work with.

Tesla

• Option flow Wednesday (chart below) as shares blew through $100 level. Records included total option volume of 3.55m contracts, and total premium over $16bn (55% of the entire UK market).
• Implied volatility increased nearly 10 points to 45% in the November term with upside skew suggesting bulls are looking for further short-term gains (on top of the 29% two-week climb).

Emerging Markets

China Property

Should you buy China property dollar bonds?

• No, not with US tightening sanctions of China telecom – an hour after Treasury Secretary Janet Yellen and the Chinese Vice Premier Liu He spoke.
• The Fed now, almost, needs a systematic shock to validate its transitory hold out position. China’s Achilles heel is access to USD rollover. But, if you go by official numbers, China does not have a USD problem.
• That’s the Achilles heel of Evergrande and a few other corporates, not China.
• Outside of looking to buy Evergrande, there are other names that were sold off. Not all property companies can ‘go to zero’.
• Most of these dollar bonds are owned by PBoC or other mainland vehicles. So, a default would not hurt ‘foreigners’ at this stage.
• We have seen in the past few days’ efforts being made to re-start paying coupons on offshore debt.
• The risk comes as one word from Xi could crater these bonds. If one goes, you could jump 300bps.
• If some semblance of normalcy returns, then we rally 20-40% in price terms.

Brazil Election

• Lula will win and calm the markets in Brazil. Bolsonaro has no option but to accept the result with institutions strong enough.

Energy

Speculation on a drop in energy prices?

• China coal crisis has ended, Putin is sending gas to Europe again, OPEC meeting 4 November with massive pressure behind the scenes from consuming nations to raise production.
• But, the JKN/TTF spread is almost at record which means all LNG is going to Asia leaving Europe to rely on Russian LNG, not a great set up.
• The consensus for many is long.
• If oil is your focus, you may see bigger swings in those extreme positions. While oil traders are closely monitoring weather, especially in China, Siberia, and North America, with cold winter the main risk to a negative energy view.
• A graphical illustration of why you don’t ever really have a ‘balanced’ oil market.

Carbon Credits

• An interesting comment from the Spanish Government agency regarding EU Carbon Credits: ‘A bubble on EU ETS is the last thing we need; EU ETS should be a market for energy and industrial companies,’ Spain said in its document. ‘We are also of the position that the EU ETS trading should not be available to all agents, especially not to speculators with market power.’
• It will be tough to control, many companies have treasury functions that actively speculate too.
• Or it may just require a license to clear the product and a classification by user that they are approved.
• And hopefully a law that makes it illegal to transfer economic benefits of the contract to a non-approved user.

COVID

• Latest research from a team at the University of Oxford and Imperial College London concludes ‘Vaccination reduces the risk of delta variant infection and accelerates viral clearance. Nonetheless, fully vaccinated individuals with breakthrough infections have peak viral load similar to unvaccinated cases and can efficiently transmit infection in household settings, including to fully vaccinated contacts.’

Charts To Watch

• UST 5s30s versus US 10y BE. One must be wrong. Or both are right and real yields stay very negative.
• KRW 5s10s is currently inverting.
  • Shouldn’t read too much in these curve inversions. People say it suggests a policy mistake by central banks. But curves are often inverted in rate hike period for technical reasons.
  • Shouldn’t position against it in this environment.
  • It is even more pronounced in the swap curve forwards, as it should be. KRW 3y2y versus 5y5y is -20 [Wednesday].

Metaverse

Will Facebook (Meta) win the race?

• It’s not easy to buy. There are various metaverses around, the concept is not that new, and despite Zuckerberg bluffing about his expense there is no guarantee he will succeed.
• The metaverse is a big gamble. Technology has been a little less driven by leaders and more revolutionised by newcomers. Perhaps in the world of those monopolies this will change but it’s hard not to feel that technology revolutions have been more organic and spontaneous.
• But it has a decent chance of becoming the biggest company by market value. The VR/metaverse is real. The Oculus purchase in 2014 was brilliant.
• Zuckerberg is constantly pushing on and up to the next big thing

MANA token is the play in the Metaverse

• MANA is Decentraland, like SAND for the Sandbox. Both are metaverse type environments so you can but land, build, and host events. It is the 67^th largest crypto, by market capitalisation, and number one in Metaverse. The market recognises that they are the ‘true vision’ of what a Metaverse should be – decentralised and community oriented.
• But Animoca seems to be backing Sandbox more, at least from his last interview.

NFT Landscape

• There are 22 million NFTs on OpenSea.
• Is this space leveraged up or is it done with cash?
  • People are still using 20x leverage on some of the big exchanges, some may offer more which is why we get the flush outs.

Trade Ideas

Read my latest Trade Ideas, as well as our latest insight on Asian Currencies and Iron Ore. Our latest Trade Survey saw a flurry of changes.

• Broad exposure to the digital asset space in public markets (Thursday). SATO looks to be a broad ETF.
• Tactically shorted QQQ (Friday). Keep buying the dips, however it doesn’t feel right for real commitment, but the location is decent.

Interesting Reads, Watches, and Listens

Reads

• The Last Days of The Romanovs at the Port of Los Angeles (and Where Is Everybody?)
• Britain’s macro-policy mix is a mess
• The Future Of Money: A Complete Revolution
• What caused all the supply chain bottlenecks? (thread)

Listens

• Uncommon Core: From Skin Trader to NFT Expert – with Anish Agnihotri and Hasu (1 hour 39 minutes)
• The Market Huddle: An Interview with a Stock Market Wizard (2 hours 46 minutes)

Humour

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)