Sorry for delay travels this morning…..
Treasuries Bull Steepen...Russia Bear with Strings Attached..ECB..Equities Fade
The optimism of yesterday seems to be fading... While Russia is willing to start their Nord Stream gas tomorrow it comes with strings attached... When that was announced this morning around 3 am the S+P futures started to give back their overnight. NetFlix ,induced gains... At 6.30 am they slumped into negative territory... Bernstein is on the headlines that capitulation has not yet occurred, disagreeing with the Bank America survey of yesterday... Blackstone economist is talking 5% rates, which seems to be ignored... As the equity markets slump the higher rate projections for the Fed are reversing... Yesterday with equities up and Corporate spreads 6% better, we saw some slight movements higher in Fed rate projections... That has been pushed back...
So in a vacation illiquid hump day of the week, we are looking at the ECB tomorrow, the resumption of Russian gas to Europe, and the expectation of the Fed next week... While we would like to build a trend we still see range bound trading with some volatility until next Wednesday...10 years continue to hover around 3%, getting to 3.03 yesterday in the overnight session and now at 2.97... The curve is bull steepening...
Rates... While Blackstone may think 5% rates, the markets do not... We still see 10 years range bound between 2.875 and 3.03... With 2.74 and 2.71 as reach numbers.. The biggest surprise we could see tomorrow is from the ECB... Reuters was out yesterday with a 50 basis point view of what the ECB will do tomorrow... More in line with a "weak" fragmentation policy.... This had helped the Euro versus the dollar, but the Euro is back below 1.02...European rates are running today with 10 years 6 to 10 better across Europe.. The US yield curve is bull steepening for now with 2's and 3's about 7 better and long bonds 4 better...
Credit had another outstanding day ..spreads better by 6%... Bank America issued 10 billion of a docket that issued a total of 16.5 billion yesterday... The last two days we have seen close to 35 billion of issuance, which is the largest two day total since March... And we expect Lenovo and Imperial Brands today...market is open..
Equities catalyst yesterday were the "Capitulation" comments in the Bank America survey coupled with the headlines that the Nord stream would resume tomorrow...and that fund managers had the most cash in over 21 years... But we think the options markets being played by the Hedge Funds show the real direction and will overwhelm what the Fund managers do in the near term. Outlook remains choppy but we read what a colleague from Nomura put out, which we find interesting . Part of the fuel from the recent rally involves the unwinding of bearish hedges put on by HF and other traders who tie their equity exposure to market volatility readings. Nomura says that at least 50 billion of related bearish positions are now starting to cover...he thinks the buying will continue for a couple more weeks... This takes us through the Fed meeting next week into August. As big market moves in late April drop out of the 3 month realized vol calculation, the lower readings will trigger additional buying... ... We find this interesting and worth watching... We also point out that as the rise in S+P and Nasdaq reach their 50 day moving average could also cause more money to come into the markets...
So for today we see another range bound market... Waiting for the ECB and the BOJ (nothing expected) tomorrow.. And the Fed next week.. 10 years should stay in the range above even with corporate supply... Equities will be choppy, but 4100 S+P 500 is what we are looking for in the short term, and 3500 is what we fear in the longer term...
European gas... The way we read it is that Putin wanted to get the West's attention yesterday by allowing Gazprom to start delivering gas to Europe tomorrow... But as we said earlier in the week the Russians have not yet gotten the part they need from Canada to resume full production... That won't take place until early August... For now expect him to use the pipeline to Europe for his political gain... And as a colleague said yesterday the west is funding his war... But in an interview with Bloomberg yesterday, 99 year old Kissinger said this is the time to cut a deal and end the hostilities... Not exactly what he said, but we are extrapolating on his interview... Have a good day.