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Meme: What are the types of headaches?On September 17th, the cost of insuring euro-denominated credit against default remained low ahead of the Federal Reserves interest rate decision. AJ Bell analyst Russ Mould said in a report, "Today is the key day investors have been anticipating all year—the Fed is likely to cut interest rates for the first time in 2025." Mould noted that a 25 basis point rate cut could further boost market sentiment, but a 50 basis point cut (currently considered less likely) could spark market concerns about the US economic outlook. According to S&P Global Market Intelligence data, the European cross credit default swap index, which measures the risk of default on euro high-yield bonds, fell 1 basis point to 251 basis points, approaching the 3.5-year low of 248 basis points reached on Monday.On September 17, TA Securities warned that if the Federal Reserve holds interest rates steady and incoming data continues to weaken, the market could interpret this as a policy mistake. This scenario could prompt investors to shift toward healthcare and consumer staples stocks, leading to outflows from financial, industrial, and growth-reliant technology sectors. U.S. Treasury prices could rebound, while overall risk appetite could fade.On September 17, TA Securities predicted that if the Federal Reserve cuts interest rates by 25 basis points to a range of 4.00%-4.25% as expected, the market will react by "buying the forecast and selling the reality," as most investors have already priced in a 25 basis point rate cut. A 25 basis point rate cut would be interpreted as a cautious, supportive, "insurance" cut aimed at maintaining growth momentum without signaling distress. This environment typically favors consumer staples, healthcare, and technology stocks, which benefit from lower borrowing costs and have defensive or secular growth characteristics. Financial stocks, on the other hand, tend to underperform the broader market due to the impact of narrowing interest rate spreads on earnings.On September 17, Russias weekly crude oil exports fell sharply, driven by a decline in cargo volumes at Baltic ports due to Ukrainian drone attacks that affected facilities in key Russian regions. Vessel tracking data showed that Russias average daily seaborne crude oil exports were approximately 3.18 million barrels in the week ending September 14, down 934,000 barrels from the previous week, marking the largest weekly drop since July of last year. However, the less volatile four-week average of exports rose slightly: the week ending September 14 was revised to an average of 3.46 million barrels per day, higher than the revised average of 3.42 million barrels per day in the week ending September 7. This rebound was due to the previous weeks exceptionally large exports, when Russias exports of Urals crude oil through Black Sea and Baltic ports drove cargo volume growth. The four-week average data can more clearly reflect the underlying trend.

Rising Rates and Volatility are Features, Not Bugs: Top Trade Opportunities

Cameron Murphy

Apr 19, 2022 10:37


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The S&P 500 outpaced the Nasdaq 100 in the first few months of 2022, EUR/USD rates fell below 1.1000, and the US Treasury yield curve (2s10s) went into inversion territory, as predicted in the 1Q'22 Top Trading Opportunities. While one of the primary causes – Russia's invasion of Ukraine and the accompanying crisis in commodities markets – wasn't on our metaphorical bingo card, the other price drivers were central banks' rapid interest rate hikes and the end of fiscal stimulus.


The primary price drivers from 1Q'22 are likely to continue into 2Q'22. The Federal Reserve is increasing interest rates more aggressively, following a chorus of other major central banks in reversing monetary easing. When it comes to greater fiscal stimulus, governments are "tapped out." Although the COVID-19 outbreak is waning, lockdowns are still occurring on a regular basis (e.g. China). Even if Russia concludes its conflict with Ukraine, the consequences for supply networks would last for months.


Concerns over decreasing economic growth in developed nations, as well as greater volatility in 2Q'22, imply that more volatility is on the way. Risk appetite will fluctuate throughout the year before becoming more positive later in the year.


As 2Q'22 begins, the ratio has been steadily retracing from a high of 1.31 before rising. However, the possible double bottom that formed against the 1Q'21 and 4Q'21 lows remains legitimate, indicating that the transition from growth to value stocks is still in its early stages. The long S&P 500/short Nasdaq 100 strategy remains popular, with an entry around 1.22 and a climb to 1.35 expected in the following months.


The argument behind predicting a US Treasury yield curve inversion is simple: when the Fed decreases stimulus, the short-end of the yield curve tends to see higher rates, while the long-end tends to see lower rates as growth and inflation expectations – intrinsically incorporated in the long-end – fall down.


In the 2s10s spread, a further flattening of the US yield curve is still projected, heightening recession worries for late-2022/early-2023. Inversions of the yield curve, on the other hand, seldom endure long, therefore this viewpoint has a short shelf life (also, after yield curves invert, stocks tend to bottom).


We continue to believe that the gap between the Federal Reserve and the European Central Bank will widen in the coming months, and that the divergence between US and Eurozone inflation rates will weaken the EUR/USD exchange rate even more. The ECB may hike rates later this year, but the Fed may have already lifted rates by 100 to 150 basis points by that time. Early in 2Q22, EUR/USD rates are likely to return to the 1.0806 low from 1Q22, followed by a return to the 1.0636 low from 2020. (coinciding with the DXY Index move above 101.00 before topping).

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