2022.12.27 Weekly Note

Santa rally vs Year-end volatility

Watched “The Big Short” this holiday weekend which reminded me of the time I graduated as a mature student of Finance and Accounting in August of 2008 and, at a time I was looking to kickstart my career in Finance but without any luck whatsoever. So I went on to do my CPA and work in a wide range of different jobs, two of which was mentioned in the opening monologue of the movie:

“In the late 70s, banking wasn’t a job you went into to make large somes of money, it was a fucking snooze, filled with losers, like selling insurance or accounting. And if banking was boring, then the bond market at the bank was straight up comatose.”

Makes me proud to have had worked in jobs that can be thought as an unambitious snooze fest of losers!

I followed the movie up with Breaking the Bank (2009) and Inside Job (2010) both good documentaries that complements the movie. I’d also add Crashed by Adam Tooze, which I’ve read years ago but is an excellent book for a detailed account of the GFC.

Short one this week just taking stock of the newsflow and thoughts for NY week as I want to avoid reading too much into the market while we have thin liquidity markets.

NEWSFLOW

MARKETS

• Happy 50th anniversary to the discovery of the Santa Claus rally — Markets are obsessed with a recession in 2023. But here’s an odd thing: Santa Claus rallies do occur during recessions. “The three largest Santa Claus rallies (2008–2009, 1974–1975 and 1973–1974) occurred during recessions, as did the worst end-of-year periods (1990–1991 and 2007–2008),” one study concluded. So maybe just sit back, crack open the egg nog and hope for the best (CNBC).
• Record Weekly Outflows Cap Worst Year for Equities Since 2008 (BBG). Why everyone thinks a recession is coming in 2023 — “Usually recessions sneak up on us. CEOs never talk about recessions,” said economist Mark Zandi of Moody’s Analytics. “Now it seems CEOs are falling over themselves to say we’re falling into a recession. … Every person on TV says recession. Every economist says recession. I’ve never seen anything like it” (CNBC). Millionaire investors haven’t been this bearish since 2008 (CNBC).
• Meat bans, soaring gold prices and ‘un-Brexit’? One bank’s ‘outrageous’ predictions for 2023 — SAXO expects global economies to shift into “war economy” mode, “where sovereign economic gains and self-reliance trump globalisation”(CNBC). Gold at $4,000? Analysts share their 2023 outlook as inflation, recession fears linger — Swiss Asia Capital Kiener explained that many economies could face “a little bit of a recession” in the first quarter, which would lead to many central banks slowing their pace of interest rate hikes and make gold instantly more attractive (CNBC). Investors should look to ‘good quality corporate debt and gold’ in 2023, strategist says (CNBC).
• SEC Heightening Scrutiny of Auditors’ Crypto Work (WSJ). Latest SEC Lawsuit Shows Crypto’s Troubles Might Not Be Contained To FTX — SEC seems to be drawing a line in the sand that it considers all exchange-linked tokens, and probably most crypto tokens generally, as securities. “The SEC clearly has them all in their sights. This was a shot across the bow” (Barrons). FTX was a warning. Washington should act now to fill other holes in the Swiss cheese (MarketWatch). While Lawmakers Debate Rules for Crypto, Bank Regulators Forge Ahead (Barrons).

US

• Wall St ends higher, Treasury yields rise after data flurry (RTS). Inflation Slowed in November, Holiday Spending Didn’t Keep Up (Barrons). US Inflation Continues to Ease, But Wages Will Keep Fed on Alert — Fed’s preferred PCE price indexes retreated in November, Pay gains are still strong, suggesting higher rates for longer (BBG). US Year-Ahead Inflation Views Drop to Lowest Since June 2021 — Consumers see prices up 4.4% in next year in Michigan survey, Sentiment improved to 59.7 in final December reading (BBG). ‘Bubblicious’ used car prices are rising faster than bitcoin, market researcher Jim Bianco warns (CNBC). US New-Home Sales Unexpectedly Increase for a Second Month — Contract signings rose 5.8% to a 640,000 annualized pace, Separate data out earlier this week pointed to a depressed housing market. US homebuilder sentiment dropped for a 12th-straight month, while new construction declined and single family existing-home sales dropped to their lowest level in over a decade. (BBG). Homebuilder sentiment drops for the 12th straight month to the lowest level since 2012, according to NAHB — sentiment was strongest in the Northeast and weakest in the West, where prices are highest. About 62% of builders are using incentives to bolster sales, including providing mortgage rate buy-downs, paying points for buyers and offering price reductions. (CNBC). U.S. business equipment borrowings rise 9% in November — companies borrowed 9% more to finance their equipment investments in November from a year earlier, “Rising interest rates seem to have little or no effect on origination volume in November” (RTS).
• Death toll rises to at least 55 as freezing temperatures and heavy snow wallop swaths of U.S. (CNBC). Deep freeze breaks pipes, creates water crisis across South (CNBC). Southwest Air Faces Gridlock With Over 80% of Flights Scrapped or Late (BBG). FedEx and UPS warn storm could delay holiday packages, airlines cancel thousands of flights (CNBC). Winter Storm Is Freezing Pipes and Hammering Natural Gas Output (BBG).
• Blue-Chip Firms Ready New Year Bond Blitz Before Rates Rise More — January is expected to see about $40 billion in new debt sales, Full-year issuance seen little changed at $1.2 trillion (BBG). Nike surges after results top expectations and retailer shows inventory progress (CNBC). FedEx plans more cost cuts as soft demand hurts profits (CNBC). US Postal Service to transform delivery fleet with 66,000 electric vehicles by 2028 (CNBC). United Airlines Stock Has Hit a December Slump. One Insider Bought Up Shares (Barrons).

EUROPE

• Moscow’s ultimatum: Ukraine fulfils its proposals or Russian army will decide (RTS). Putin Says He’s Ready to Talk, Blames Other Side (BBG). Russian troops work ‘round-the-clock’ on new air defence positions — Interfax (RTS). Ukraine’s Zelenskiy seeks India PM Modi’s help with ‘peace formula’ — Zelenskiy asked the Group of 20 (G20) major economies last month to adopt Ukraine’s 10-point peace formula and to end the war. India holds the G20 presidency for a year (RTS).
• US to send $1.8 billion in aid, Patriot battery, to Ukraine (AP). Biden Says Giving Kyiv Advanced Weapons Risks US Alliances — Biden defended his reluctance to give Ukraine all of the advanced weaponry it wants to fight off Russia’s invasion, saying the provision of longer-range missiles and other sophisticated gear risks straining US alliances in Europe, including NATO (BBG).
• Pound’s Tentative Recovery Masks Worst Year Since Brexit Vote — UK’s tough economic outlook tempers optimism (BBG). Pay Deals to Match Inflation Are Unaffordable, Minister Warns as Strikes Loom (BBG). UK economy was G7 growth laggard in Q3 as dismal 2023 beckons (RTS).
• German finance ministry sees subdued economic activity over winter (RTS). Dutch inflation to stick around 5% as energy costs bite — central bank (RTS). French inflation will be high in coming months before easing in mid-2023 — Le Maire (RTS). German inflation to stay high for two years, adviser says (RTS).
• ECB’s Nagel pleads with Germans for patience in combating inflation (RTS). Dutch governor Klaas Knot signals European Central Bank will keep raising rates as ‘second half’ of tightening cycle begins (FT). ECB will hike rates further, we do not know when will stop, De Guindos says (RTS). ECB must be ready to take the heat and raise rates more, Schnabel says (RTS). There should not be any ‘crash’ in French and European economy — ECB’s Villeroy (RTS).
• Germany orders Standard Chartered to hold more capital (RTS). Austrian regulator orders system-relevant banks to up capital buffers (RTS).
• Norway’s Low Unemployment Surprise Adds to Pressure on Rates (BBG). Sweden faces recession lasting into 2024, finance minister says (RTS).

ASIA

• Global Markets Jolted as BOJ Surprises With Yield Policy Change — BOJ move may lead to asset repatriation: Asymmetric Advisors, Treasuries, European bonds follow selloff in Japanese debt (BBG). Japan’s Inflation Speeds Up, Supporting BOJ Shift Expectations (BBG). Bank of Japan Governor Haruhiko Kuroda dismisses near-term chance of exiting easy policy — “This is definitely not a step toward an exit”, widen the allowance band around its yield target was aimed at enhancing the effect of its ultra-easy policy, rather than a first step toward withdrawing its massive stimulus program (CNBC). Yen Gains Look Capped as Treasury Yields Seen Marching Higher — Survey sees US 10-year yield rising to 3.82% in 2Q 2023, Rabobank forecasts yen to rise to 130 per dollar at end June (BBG). U.S. dollar likely has further upside vs yen despite BOJ move — Goldman (RTS).
• South Korean inflation expectations hit 7-month low (RTS). South Korean Equities Eye Worst Year Since 2008 on Chip, Entertainment Stocks (BBG). South Korea’s government will probably propose ‘additional budget’ in mid-2023, StanChart says (CNBC). South Korea Deploys Jets After North Sends Drones Across Border (BBG). Credit-Market Rebound Leaves Korea’s Weaker Firms Lagging Behind — KB’s Joo said investors remain cautious about low-rated firms, Spread between AAA and A- Korean company bonds has surged (BBG).
• Indian shares snap four-day losing streak; Nifty 50 back above 18,000 (RTS). Adani Effect Propels India Stocks Past Most World Markets in ’22 — At least two Adani Group stocks more than doubled in value (BBG). Top Indian Banks Vie for №1 Bond Spot as Credit Demand Surges — Axis Bank leads in managing rupee corporate bond sales, Local issuance rose 3.7% so far in 2022, bucking a global drop (BBG).
• Beijing, Shanghai residents back to work as China limps towards living with COVID (RTS). China to drop COVID-19 quarantine for incoming passengers — arriving passengers must quarantine for five days at a hotel, followed by three days at home. That is down from as much as three weeks in the past (MarketWatch). China is racing to vaccinate the elderly as infections explode with lifting of zero-COVID restrictions (MarketWatch). China’s Xi Urges Better Hygiene as Nation Continues Covid Shift (BBG). Shanghai Port Strives to Keep Global Trade Moving Despite Covid — International vessels are separated into closed-loop zones, Fewer disruptions to supply chains seen than during lockdowns (BBG).
• China Holds Biggest Military Drill Near Taiwan Since Pelosi Trip (BBG). Taiwan reports China’s largest incursion yet to air defense zone — 71 Chinese air force aircraft including fighter jets and drones entered Taiwan’s air defense identification zone in the past 24 hours, 43 also crossed the Taiwan Strait’s median line, an unofficial buffer between the two sides that lies within the defense zone (CNBC). U.S. says it is concerned by China’s ‘provocative military activity’ near Taiwan (RTS). Taiwan to extend compulsory military service on China threat (RTS).
• Australia Retail Sales Fall for First Time in 2022 as Rates Bite (BBG). Fall in New Zealand confidence raises spectre of deeper recession (RTS). Japan’s jobless rate falls to 2.5% in Nov (RTS). Taiwan Nov export orders plunge (RTS). Taiwan Industrial Output Falls Most Since 2019 as Demand Wanes — Semiconductor output remains rare bright spot, rising 13.3% (BBG). Thai New Year spending seen at 3-year high as economy rebounds -survey (RTS).

VIEWS

Keeping things light this week with a mild bias for a Santa Rally into NY weekend where US equity markets may need to contend with a lot of volatility from the JPM collar roll. Assuming the markets hold up to the volatility, I think we could see a decent start to the NY with this schematic in-mind.

SPX printed a weekly long-legged Doji at a key support area, presenting some decent odds for a rally this week and the above scenario might just still be in play.

In FX, I have a liking for AUD for the risk-on side with China’s new found tolerance for living with Covid and the Central government’s focus on recovery; add to that CAD due to heavy short positioning, economic surprises and the recovery in Crude. For the risk-off side I like the GBP due to their gloomy recession outlook along with ongoing Labour market struggles.

I also like short Gold, which I’ve sold into just earlier in the 1820s and after getting stopped out lower down. Yields inching back higher is still a clear and present risk to markets and given the big divergence vs spot Gold, I think we could see a flush in the shiny metal with economic data not showing any signs of Recession other than from various leading indicators and y/y models.

Happy holidays.