Kalimera!
We’ve had another round trip on the S&P 500 since our last update. If we take a step back, U.S. equities have traded sideways since we turned bullish on spooz. Then again, falling from the first floor is not as painful as from the fifth. Our average entry was around 5795 on E-mini futures, currently at 5775.
The risk of getting crushed in a stampede exit is likely to have receded. At present, it's the ‘right level of discomfort' for a contrarian short-term trade. The main problem with putting the trade on in a meaningful amount to simulate the experience is that it becomes a distraction from the day job and risks influencing our work—a double whammy loss.
We rely on a handful of customers in the trenches for their market insights. And they would prefer we remain as free of potential conflicts as possible.
From a long-term investor's perspective (with real jobs and mandates), there have been many non-substantive headlines since the turn of the year. The change in the European fiscal picture is certainly something to consider—the main focus of this update.
Comments/Observations
Here's what we can say for certain as things currently stand:
— Bearish sentiment among our customers is very high at the moment, and has been for the past several weeks. They're more inclined to take off hedges and square-off risk than to set new shorts/underweights.
— Most of the reasons cited for the recent bearish sentiment relate to well-established concerns from at least a month ago. And most senior fund managers are on top of U.S. politics.
— Trump's inner circle of advisers are astute observers of financial markets, even if they largely fall into the B and C category of economists. Let's call it for what it is.
Bund Sell-Off
For the benefit of our non-finance audience, here's what's spooking folks over the past couple of days:
Yields on German government debt (Bunds) have risen quickly in anticipation of future supply to finance defense spending. As we wrote earlier this week, Team Trump is likely to view this as a positive commitment from European NATO allies. They're market people, after all, with short attention spans.
Shape changes in government borrowing should, in theory, trigger changes in international capital flows. Most often, it's speculative.
Here's a longer-term concern if the stock of German (debt) marketable securities increases significantly—see Eurozone | BTP/OAT | Not Enough Bank Equity, June 2024, for background and full set of charts:
Yes, Germany has a lot of room for fiscal expansion in terms of standard debt metrics.
However, the total market equity for German banks may be inadequate to facilitate orderly risk transfer during times of market stress, even if well-capitalized under regulatory capital rules. See below:
In short, the Germany benefits from the Eurozone banking system in the form of non-German bank dealers' contributions to the functioning of debt capital markets.
Keep calm and carry on trading!
P.S. We try to highlight important developments early, like the recent advancements in AI, so we have time to think and aren't caught flat-footed chasing headlines. And no, the Coke can image (below) is not Barry gotcha trick!
Some readers may recall old-school 3D glasses, which were usually red and blue in color. It has something to do with the latency-speed in visual processing of different colors, which creates a sense of depth.
Updates
Here's an alternative perspective from Brent Donnelly at Spectra Markets, who—like a true pro—is very good at not letting his personal views or trades affect his objectivity:
Regime Change isn’t a Fade
Overbought means buy the dip
HarksterA friend of mine, Darren Dempsey, has built a company called Harkster. They offer
an app that aggregates, summarizes, and presents inbound research and emails in
a useful and succinct way. You set up a separate email there and get your research
sent to it, then the app summarizes and extracts trade ideas.
We can also vouch for Harkster, the team and their product.
Most current market concerns have been years in the making and the subject of countless discussions in scholarly and policy circles. See our prior posts by Paul Tucker.
