Weekly Note 2022.09.05

The Great Adjustment

9 min readSep 5, 2022

I’ve had a good number of discussions with many that don’t believe in the recovery prospects of China and Europe or if US can ride out a recession without too much pain . While there is likely to be many bumps along that road, I’d beg to differ and think the global economy will churn along just fine whilst it adapts to the new environment of what I have called ‘The Great Adjustment’ that was sorely missed in recent decades:

Seeing a lot more discussions about a reflationary environment which I found particularly interesting as it has been a theme I’ve been thinking about for the past month while many stayed focused on the deflationary narrative:

Came across some excellent discussions on this theme while catching up on some podcasts and David Woo’s one was particularly illuminating:


Weak appetite ahead of the US Labour Day weekend — Equities, Treasuries, Commodities though prior week lows, USDJPY higher following US yields higher, EUR higher vs CHF and GBP as the prospects of ECB delivering a 75bps hike; mixed performance among high-beta fx.



  • Major stock averages slide for third week, Nasdaq posts six-day losing streak (CNBC), Payrolls rose 315,000 in August as companies keep hiring — unemployment rate rose to 3.7%, two-tenths of a percentage point higher than expectations, largely due to a gain in the labor force participation rate to 62.4% (CNBC).
  • Brace for ‘Recession Shock’ as Outflows Rock Equities, Bank of America Says — Strategists led by Michael Hartnett expect a “fast inflation shock, slow recession shock” as nominal growth continues to be boosted by surging consumer prices, fiscal stimulus, large household savings and the impact of the war in Ukraine (Bloomberg). Stock Indexes Face Fresh Low This Year, Morgan Stanley’s Wilson Says — ‘Market is being too optimistic about the earnings outlook, investors are way too preoccupied with the Fed’ (Bloomberg).
  • Fed’s QT to Hit ‘Full Stride’ With Central Bank Shrinking $9 Trillion Portfolio — Unwind to increase this week to $95 billion per month, September, October will be largest declines for bill holdings (Bloomberg). Why Fed Aim Is ‘Growth Recession,’ a Not-Soft Landing — Growth recession is a protracted period of meager growth and rising unemployment, a situation where the economy expands more slowly than its roughly 1.5% to 2% long-term trend but an outright contraction is avoided. The late New York University economist Solomon Fabricant coined the term “growth recession” in research published in 1972 (Bloomberg).
  • Biden warns Trump’s extreme MAGA Republicans are ‘clear and present danger’ to U.S. democracy — the same message he ran and won on in the 2020 presidential election, hope is that it will remain a winning strategy two months out from the midterm elections (CNBC), Democrats winning funding wars — candidates who beat fundraising expectations tend to fare surprisingly well (The Economist).


  • Reuters UK: Next British PM to be revealed at 1130 GMT on Monday; UK PM favourite Truss promises immediate action on energy; ‘No time to waste on Brexit’: EU uneasy about Truss as UK leader; British port workers plan two-week strike from Sept. 19; UK govt staff scrap strike planned on day new PM takes office; British port workers plan two-week strike from Sept. 19
  • Lagarde’s Inflation-Fight at ECB Makes Fed’s Job Look Simple (Bloomberg), Swiss Franc No Longer a Sure Bet as ECB Contemplates Jumbo Hike — Franc has slipped 2% since last week’s record high versus euro, While fundamentals favor franc, traders worry about SNB U-turn (Bloomberg).
Gazprom/NS1 headlines (Reuters, UTC+9)
  • Russia keeps pipeline shut as Gazprom, Siemens Energy wrangle — The discovery of the oil leak on Friday coincided with G7 proceeding with plans to impose a price gap on Russian oil, intending to shrink President Vladimir Putin’s resources to fight the war in Ukraine. Gazprom said Siemens Energy was ready to carry out repairs on the pipeline but that there was nowhere available to carry out the work, a suggestion Siemens Energy denied, saying it had not been asked to do the job. Siemens Energy has also said that sanctions do not prohibit maintenance (Reuters). Russian Gas Link Set to Restart as Traders Weigh Further Halts — Nord Stream operator data show flows back Saturday as planned, Germany fears there’ll be another supply cut in mid-October (Bloomberg).
  • Europe Looks Set for Energy Rationing After Russian Gas Cut — Germany has built up storage, but it may not be enough, Europe’s ability to get through winter depends on the weather (Bloomberg). Germany Takes Aim at Cost of Living Crisis in €65 Billion Plan — Third round of help for people struggling with higher prices; Key measures include a vow to cap — and even redistribute — huge profits made by energy companies on the back of the current crisis; increased payments to pensioners, students, parents and the unemployed; and actions to rein in the astronomical pace at which electricity prices are rising (Bloomberg). Finland to Stabilize Power Market With €10 Billion Program (Bloomberg).


OPEC headlines (Reuters, UTC+9)

OPEC+ to weigh rollover or small cut at Monday meeting, sources say — OPEC+ is likely to keep oil output quotas unchanged for October at a meeting on Monday, five OPEC+ sources said, although some sources would not rule out a small production cut to bolster prices that have slid due to fears of an economic slowdown (Reuters). Russia Signals Opposition to OPEC+ Oil-Production Cut (WSJ).


  • China’s Currency Struggles Spell Trouble Across Emerging Markets — That’s pushing Goldman Sachs Group Inc. to SEB AB to predict shock waves not just in China’s neighborhood but as far away as Africa and Latin America — with a cheaper yuan hitting other nations’ export appeal and sparking competitive devaluations (Bloomberg).
  • Global miners are confident China’s stimulus will help prop up steel and iron ore demand — so far, there are no signs steel and iron ore demand has crumbled given low levels of iron ore inventory at Chinese ports (CNBC).
  • China Targets Online ‘Rumors’ Ahead of Xi’s Leadership Bid — Cyberspace Administration of China launched a three-month campaign targeting “online rumors and fake information about major meetings, important events and policies,” starting Friday, it said in a statement. Offenders should be handled “strictly, quickly and severely,” the agency added, without specifying punishments (Bloomberg).
  • China Pushes Back Line US Drew to Keep Peace in Taiwan Strait — China has sent warplanes across the Taiwan Strait’s so-called median line almost daily since House Speaker Nancy Pelosi’s visit last month, shrinking a buffer zone that has helped keep the peace for decades. An average of 10 Chinese aircraft have crossed the US-drawn boundary every day since Aug. 3, when Pelosi became the first House speaker to visit Taipei in a quarter century (Bloomberg).
  • Shanghai’s Yangshan Port Halts Operations as Typhoon Strengthens (Bloomberg). Worst-Ever Storm to Hit South Korea Threatens Catastrophic Damage — expected to be more destructive than 1959 typhoon; Ships in region taking detours to avoid Hinnamnor’s path (Bloomberg). Main districts of Chinese tech hub Shenzhen shuts most public transport and extended curbs on public activities on Friday (Reuters).


A horrible month for global markets with weakness led by the Nasdaq while India and Brazil saw positive months.

Global equities (ex-US) continued lower from the mid-August pivot off the yearly trendline and 20wma and back to a key support area.

NDX the weakest on the week sunk to key support around the 12k handle — I suspect early week action will provide clues on how we continue from here.

A good number of traders I’ve spoken to are leaning bearish as a result of the Friday/weekly action, but putting some context to the Daily price action:

  • 3 weeks straight line down and very oversold for the current leg;
  • clean bullish signal at key support printed on Thursday — a better stage for a relief bounce couldn’t have been set technically;
  • then came a very positive NFP — decent number of jobs added, waged growth increased 0.3% but slowing from 0.4% in July and 0.5% in June, higher unemployment via higher participation rate i.e. expanding labour force and loosening of the jobs market — all of which increases the chances of a softer landing;
  • market gapped up after NFP and looked set to break and grind higher;
  • that was until “GAZPROM: TRANSPORT OF GAS TO THE NORD STREAM PIPELINE HAS BEEN COMPLETELY HALTED UNTIL FAULTS ARE RECTIFIED” headline hit the wires ahead of the planned resumption on Saturday — market flopped over back to support levels.

It was all so promising up to that point and considering latest headlines suggest that gas flows are back online which all came after European hours.

If the headlines can be ignored, European equities finished the week on a constructive note with the DAX printing a 3-day morning star-like formation. Should sentiment firm up, I think NDX will be eyeing Friday highs again on Tuesday where it should become clear whether we can sustain a bounce which I think we will do.

SPX is -4.82% below Zero Gamma, SPY and QQQ much further away at -7.68% and -9.16% below neutral

Furthermore, as I see the market more likely to range until much later in the month where FOMC and earnings will be of focus, the longer it consolidates and selling loses velocity, the higher the risk of vol selling off with the market deep in negative gamma, thus I see greater risks of the market breaking range to the upside.


Commodities broadly lower driven by Energy (Red), while Agricultural (Green) and Precious Metals (Yellow) held up better and diverged higher at the end of week.

J.P.Morgan Global Manufacturing PMI

Commodities sentiment continues to sour on the weak PMI readings last week that points to weakening demand against high prices.


Fed Funds (RHS) and Eurodollar (LHS) Dec’22 futures

STIR markets reacted positively to the NFP report pricing out ~10bps from hikes by year end; Fed fund futures priced in ~75% probability of 75bps prior to NFP, and settled closer to 50% after.

Big move in yields last week particularly in TIP yields (bottom panel showing wk/wk change) up until the NFP report stalled the weakness in bonds (Thursday close in Green) as it pointed to slowing wage inflation and loosening of the jobs market and alleviated some pressure on the Fed.


USD gained against most currencies with JPY and NOK the weakest on higher yields and lower Oil prices. Asia FX continues to slide lower, EM’s mixed with the CEEMFX showing some resilience and appears to be reacting positively to stimulus news.

Asian currencies continue to bleed out against the USD and there is really no end in sight with QT ramping up squeezing USD liquidity on top of the widening rate differentials.


I’m tactically positive on risk this week. I’ve covered my short risk exposure mid-last-week on the view that we see some respite of the moves seen over the last few weeks and have started trading the pro-risk side. Hopefully the reversal of the ‘indefinte NS1 halt’ news can get the market on a positive footing for the week (or two) ahead, otherwise, September could really shape up to be another horrible month for risk assets.

  • Equities: Long Nasdaq as I think yields reaching the 3.5% area could be as far as it goes for now, and yield curve flattening could support a brief come back in ‘duration’ equities.
  • Commodities: Short Gold on rallies as real yields maintains upward pressure on inflation expectations moderating, and potentially Long Oil on dips with OPEC trying to keep price propped up.
  • FX: As I continue to like the USD smile theme broadly speaking while US QT ramps up, I prefer funding tactical pro-risk trades (e.g. AUD CAD MXN) with the EUR rather than the USD. And for risk-off, no where to hide but the dollar.

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