As we begin a new trading week, there's certainly lots to think about. The question is what's important and market-moving right now?
In the past two weeks, the 10-Year Treasury yield is up 18 basis points, but the S&P 500, Nasdaq 100 (QQQ) and credit spreads are basically unchanged. Even Bitcoin is unchanged, though it did surge and drop 10% during that timeframe.
I could write about the Citi Economic Surprise index, but it has "stabilized" for now, though I expect it to drop further.
I could write about the T-bill market, where the curve is finally attracting some attention. T-bill yields are as low as 3.3% out to May 23. They start rising a bit from there, climbing to 4.1% by June 1, but normalizing somewhere around 4.9% from July and later.
So far this weirdness is limited to the T-bill market, where a subset of large investors can only do T-bills and seem to be skewing their purchases to maturities definitively before the debt ceiling would be breached. The T-bill market is hinting at concerns and issues around the debt ceiling, but it is not having undue influence on other markets (secured overnight financing rate (SOFR), commercial paper, etc.).
We could analyze the creation of a 0DTE VIX, some VIX index that is based on shorter dated options, but it just isn't ringing any alarm bells (or at least nothing new about the "gambling" nature of the 0DTE option market). I "know" that VIX is around 17, but to be perfectly honest, VIX is so far down my current list of potential signals, that I only know it is below 17 because there is so much chatter about this. The new VIX could be interesting, as I do think 0DTE is where a lot more people are placing their hedging bets, but even then, I'm just not that excited.
We could write about the demise of the dollar, but the Chinese yuan is weaker than where it was in January, so there isn't an urgency to this story.
I do want to write about the transition from "Made in China" to "Made by China," but that isn't urgent, and will be long enough to be a separate "thought piece."
Earnings season has started, but I'm finding it inconclusive so far. I want to see "weakish" reports met with rising stock prices, to turn bullish here.
I cannot tell whether mornings where we sell off, followed by afternoon buying is shorts getting squeezed, new longs being set, or something else altogether, though I am leaning towards viewing the market as being "neutral" in terms of positioning.
Maybe 10 days away from the screens and news flow has "dulled" my anger (I had a great vacation in Argentina). Maybe, as a contrarian, who does tend to "rant" rather than "write," I need that anger to write? Or maybe, the markets are just that dull?
As I get back in the "saddle," so to speak, there will be a lot to write about and think about, and I do think the debt ceiling will be an issue that could hurt markets as I have little faith that D.C. can "maximize" their benefit from this round of debt ceiling side deals without triggering at least one round of serious, Planet of the Apes, "You finally, really did it" recognition by the markets.
I do think geopolitical risk is underpriced, but that too is part of stories and themes that go beyond the next week or two of earnings releases.
Bank earnings seem OK, but again, the battle over what banks have to pay on deposits to keep deposits in the banking system has moved to a phase that will take much longer to play out than when people were afraid of default risk (which was heavily overstated).
Bottom Line
Not much has changed in two weeks, other than me being more neutral than bearish on rates. Let's review why current view:
Rates
- Relatively neutral on yields.
- 2s vs 10s to invert more. I could see the market starting to price out cuts later this year.
Equities
- Too many headwinds to be constructive. On a scale of -10 to 10 where -10 is extreme bearishness and 10 is extreme bullishness, I'm about a -3 or -4. That would translate to small-to-medium underweight/short positions on equities. If it got to "medium" from small, it would be for a trade. So I'm bearish, but not going to pound the table, although I need to see more than a week of stocks ramping to convince me that much has changed. Positive responses to mediocre earnings/outlooks would change me to bullish in a flash.
- Reversion to the mean trades. I generally like "reversion to the mean" trades, (Russell 2000 outperformed the S&P 500 which in turn outperformed the Nasdaq 100 and Ark Innovation ETF (ARKK) ). I see no reason that this can't continue, so for longs I like the year-to-date underperformers, while on the short side, press some of the amazing outperformers (the long duration stock trade, even if the Fed is done, is overdone and created a lot of misplaced risk (and pricing) here).
Credit
- From high yield to investment grade, there are lean pickings. No need to sell, but no need to add.
- Munis: I liked munis, but they are too rich at the moment, so take some nice profits on recent purchases.
Let's see how this week plays out as we will get more debt-ceiling headlines and earnings, which hopefully translate into some interesting market moves and opportunities!
