2023.03.20 Weekly Notes

The Aversion-Reversion trade…

8 min readMar 20


A late and brief one as I’m tight on time before flying back to Hong Kong.

As titled, I begin the week looking at mean reversion moves of recent risk aversion moves, as well as of the thoughts and trading themes outlined in my prior weeks notes Mar-6th Expect volatility to bounce back and Mar-13th Cash is not trash since it appears we may have averted a banking crisis-induced recession coming sooner, for now.



  • Goldman Sachs cuts U.S. GDP forecast after banking crisis (RTS). Investors brace for hard landing as banking woes stoke recession fears (RTS). World markets set for relief after Credit Suisse buyout, central banks action (RTS). Central banks announce dollar liquidity measures to ease banking crisis — Turmoil prompts authorities to launch daily operations to access dollar funding via standing swap lines (FT).
  • Cash pours into US money market funds as investors flee bank turmoil (FT). Banking Crisis Powers Historic Bond Rally — Turmoil among banks sparks biggest one-day decline in short-term Treasury yields since 1987 (WSJ). Market Stress Snarls Trading in U.S. Treasurys — Making deals now is as hard as in early days of Covid-19, traders say (WSJ). Global banks shed $459bn in market rout as Goldman Sachs loses on rate swing (FT).
  • Stocks Fall on Bank Jitters Despite First Republic Rescue — Uncertainty prompts investors to buy government bonds and gold (WSJ). Bullish Sign Is Flashing for Some as Stocks Skirt the Precipice — Stocks rose this week despite banking industry turmoil, Next key seen coming from Fed signals on path for rate hikes (BBG). Big Wall Street Funds Cling Onto Emerging Markets in Bank Crisis (BBG).
  • US Oil Sinks Below $65 to Lowest Since 2021 Amid Bank Crisis (BBG). Gold Rises Above $2,000 for First Time in a Year on Haven Demand (BBG). Bitcoin hits nine-month high as traders shift away from banks (FT). Tether Becomes Unlikely Crypto Winner in Banking Crisis — The stablecoin’s market cap has risen 10% this year (WSJ).
  • First Republic, SVB, Credit Suisse Show How Higher Interest Rates Caught Up With Banks — Will the fallout among regional banks be contained relatively quickly, leaving the economy largely on the same path it was on before? Or will it spiral into something bigger, as Lehman Brothers did, potentially leading to a protracted economic downturn? It is still too early to tell. Even as of Friday, the fallout continued. Silicon Valley Bank’s parent company filed for chapter 11 bankruptcy protection, marking the largest bankruptcy filing to stem from a bank failure since the collapse of Washington Mutual in 2008 (WSJ). Smaller Banks’ Critical Role in Economy Means Distress Raises Recession Risks — Regional and local banks account for nearly 40% of all lending; Main Street businesses and American families are likely to find it harder to get a loan because of turmoil in the banking industry, denting economic growth (WSJ). US mortgage market suffers fallout from bank failures — Volatility in bonds and stocks has left lenders on sidelines of $11tn home loans-backed securities market (FT). UBS agrees to buy Credit Suisse for more than $2bn — Swiss authorities expected to change country’s law to bypass UBS shareholder vote (FT). First Republic shares close down 33% despite $30bn lifeline — Rescue package from JPMorgan and 10 other banks fails to arrest falling stock price (FT). First Citizens Weighing Takeover of Silicon Valley Bank (BBG). Signature Bank’s Quirky Mix of Customers Fueled Its Rise and Hastened Its Fall — A foray into crypto set the stage for a deposit run that overwhelmed the New York lender in a matter of hours (WSJ).


  • Fed poised to approve quarter-point rate hike next week, despite market turmoil (CNBC). Fed to stay the course with 25 bps rate hike on March 22: Reuters poll (RTS). Fed to Consider a Pause as Fallout From SVB Roils Markets (BBG). Case for Fed Pause Builds After Crisis-Echoing Move on Swaps (BBG). Economists think Fed will keep raising rates despite bank turmoil (FT). Carl Icahn urges Fed to keep fighting inflation ‘disease’ after SVB collapse (FT).
  • U.S. Inflation Cooled in February as Fed Confronts Bank Failures (WSJ). Wholesale prices post unexpected decline of 0.1% in February; retail sales fall (CNBC). U.S. consumer sentiment ebbs in March; inflation expectations fall (RTS). Jobless Claims Fell Last Week, Showing Still Strong Labor Market — New applications for unemployment benefits declined by 20,000, mostly reversing prior week’s jump (WSJ). Fear of Layoffs Is Changing How People Buy Homes — More home buyers are putting an unusual escape clause into their contracts: If they lose their job before closing, they can back out of the deal (WSJ).


  • ECB Defies Mounting Banking Strains With Half-Point Rate Rise — Decision shows central bank still sees tackling inflation as its priority (WSJ). Markets price in even chance of further Bank of England rate increase (FT). Sight deposits rise, indicating Credit Suisse took central bank liquidity (RTS).
  • German producer prices rise more than expected in February (RTS). British manufacturing output rebounds, outlook remains bleak, survey shows (RTS). UK housing market stabilises after “mini-budget” rates spike, Rightmove survey shows (RTS). UK govt, teaching unions to start ‘intensive’ talks to end strikes (RTS).
  • Sunak Thinks Timing UK Tax Cuts Just Right Can Save the Tories (BBG). Protests mount as Macron faces no-confidence vote on pensions reform (FT). Putin pays surprise visit to Mariupol in occupied Ukraine (FT). Explosives shortage threatens EU drive to arm Ukraine (FT). Xi Jinping to visit Vladimir Putin in Russia next week — Chinese leader to affirm strong ties with Moscow despite Ukraine invasion (FT).


  • China cuts banks’ reserve ratio for first time in 2023 to aid recovery (RTS). China Frees Up Liquidity in Sign of Wariness About Recovery — Move by PBOC wasn’t widely expected and followed the release of generally upbeat economic data (WSJ). Many Investors Are Skeptical of Jumping in on China’s Highly Touted Recovery (WSJ). Chinese Developer Evergrande Nears Landmark Restructuring Deal (WSJ). China suspends Deloitte’s Beijing office over Huarong audit ‘deficiencies’ (FT). Surging Chinese Oil Demand Pushes Shipping Costs Sharply Higher — A burst of U.S. exports to China is driving up charter rates for world’s biggest crude tankers (WSJ).
  • South Korea’s Battery Giants Are in Hot Demand From US to Europe — Seoul’s biggest annual battery event is a beauty parade of US and European officials lobbying for investment (BBG).


MSCI World finished slightly positive +0.24% last week while the ex-US index was down 1.60% …

The divergence between the World and ex-US being driven by the big rally in Nasdaq +5.83% while the Dow and Russell small-caps finished flat.

On the LHS — Developed Markets EAFE is showing some technical weakness below the 50fib and 20wma but the STOXX50 index is showing potential for a bullish reversal today which, currently at the time of writing, is printing a reversal bar after extending below the 20wma in the opening hours of trade. On the RHS — EEM has retraced almost 15% off the January high and showing potential for support with China equities resting at the low end of the last 2months range.

Volatility measures have shot up over the last 2 weeks and will be watching to see whether it decompresses this week with CB meetings and news of Credit-Suisse buyout and announcement of Fed liquidity swap lines. Overall, equity charts are some signs of both weakness and resilience.


Bloomberg Commodities index continued to slide last week driven by the collapse in Energy prices, while the Precious metals sub-index took out the January highs driven by the exodus of funds to money market funds and safe haven assets.

While commodity markets are essentially screaming recession/ demand-destruction! if latest newsflow is believed to allay market fears of a sudden banking crisis induced recession, then I think there is a big mean reversion trade here, an idea I’ve commented on twitter about:

Long Crude vs Short Gold. Technically, the pair has produced a powerful combination of DeMark signals with Daily 9 and 13 and Weekly 13 buy counts. Rate markets have moved a long way over recent weeks, which I will touch on below, but I think we see some mean reversion in real rates as well — to the effect of something like ‘crisis-averted, for now’ and focus still firmly on bringing inflation down.


There’s been a bloodbath in the rates market with the banking crisis sparking massive short-covering in bonds.

Orange 17/3, Purple 10/3, Green 3/3

The 2yr lost -100bps and -60bps in the 10 yr where where the market went from higher-for-longer-er to full blown recession all in the space of 2–weeks! On theme with my current thinking, if a global banking crisis has been averted (for now) and markets re-shift their focus back to inflation and policy, we could get a respite from these moves and have room for some mean-reversion.

Forward inflation expectations should continue to soften alongside the softening in data as well as banks tightening lending and risk controls. If central banks still believe they have a job to do (whether or not it is now too much too late), I think those factors will lead to a mean reversion in short to mid-duration real rates.


USD goes into the week on the back foot. US Treasury reintroducing dollar swap lines likely to weigh on the USD while the recovery in risk sentiment with government backstops in banking should also factor in for a weaker USD. As the market debates a 25bps hike vs no-hike, I think there is a risk of USD higher vs CHF and JPY as I think the Fed will go ahead with 25bps this week.

Commodity currencies have been slowly recovering from early-March lows and looks set to build on that given the softening of recession-sooner fears.

Energy looks to be very oversold and I think petro-currencies like NOK MXN and CAD will benefit from a bounce back in commodities while Gold gives back some gains from the risk aversion flows of prior weeks — all of which particularly interest me this week.

That’s all for now, have a safe week trading! //