Comment of the Day
Living With Yield Curve Inversion
Thanks to a subscriber for this report from Morgan Stanley (NYSE:MS) which may be of interest. Here is a section:
US Rates | An inverted curve by design, not by conundrum We expect 2y,5y, and 10y yields to end 2022at 2.75%,2.50%, and 2.40%, respectively, and see inverted curves across the entire UST space. We think markets are learning to live with yield curve inversion, and not necessarily extrapolating it as a sign of recession, given (1) the market's willingness to price restrictive policy – a terminal rate above the neutral rate – consistent with an inverted curve, and (2) the significant distortions from pension demand, QE, and flight to quality, making the curve artificially flat. We think investors eventually will accept an inverted curve as a natural consequence of interest rate policy moving toward restrictive territory faster than balance sheet policy moves toward neutral territory. Discussions of an impending recession will continue, but we expect confidence in that view to wane over time.
Eoin Treacy's view
A link to the full report is posted in the Subscriber's Area.
The US yield curve is exceptionally flat from 2-years out to 30-year. Earlier this week the 5-year traded above the 10-year. That was the first inversion of any part of the curve in this cycle. This is not the only measure that is beginning to signal signs of stress.
BOJ's Kuroda Waves the Green Flag for Further Yen Weakness
This article from Bloomberg may be of interest to subscribers. Here is a section:
Now that the Bank of Japan has suggested that it isn’t losing sleep over a weaker currency, the yen may gravitate even lower.
The yen has lost more than 3% against the dollar so far this year despite the war, highlighting how its fundamentals have superseded its haven status. BOJ Governor Haruhiko Kuroda remarked earlier Friday that it is “wrong” to think that a weaker yen is negative for the economy and that the monetary authority doesn’t have a need to run forex policy. With no verbal or actual intervention to stop it, the yen faces little hurdle in weakening further toward 120, consistent with a call MLIV made at the start of the year.
The BOJ has also reiterated for good measure that inflation reaching 2% -- led by a surge in commodity prices -- is different from its goal of kindling demand and that the current cost-push inflation will in fact weaken the economy. In other words, the BOJ isn’t remotely thinking of changing its policy in the face of what it legitimately sees as temporary factors. That essentially means that real-rate differentials will continue to worsen in favor of the dollar, sending USD/JPY to 120. In fact, colleague Vassilis Karamanis cites technical indicators to suggest that the pair is well set-up to reach the January 2016 high of 121.69.
My view - Japan has been trying to stoke inflation in the economy for years. Now that it has what it wants, it is going to err on the side of caution and allow prices pressures to force consumers to spend. There is no country that needs to reignite consumer activity more than Japan. From their perspective this is good news.
'Dash for Trash' Fuels Big Bounce for Money-Losing Growth Stocks
This article from Bloomberg may be of interest to subscribers. Here is a section:
No earnings? No problem.
That was the message from investors this week who stormed back into the shares of faster-growing companies with little in the way of profits after months of chasing value stocks. While major benchmarks rallied, a Goldman Sachs (NYSE:GS) index of unprofitable tech companies was up 18% over the five sessions. That compares with a gain of 6.2% for the S&P 500 and 8.4% for the Nasdaq 100.
“A straightforward dash for trash” is how Bespoke Investment Group described it when explaining why smaller companies with the lowest return on assets and no dividends were among this week’s biggest gainers.
My view - The Ark Innovation ETF bounced this week in an emphatic manner from the region of the of the pre pandemic peak. In doing so it fully unwound the big bull market and the upside weekly key reversal suggests investors are willing to bargain hunt.
The Chart Seminar June 6th & 7th in London
Now in its 53rd year, the first venue for The Chart Seminar in the post pandemic era will be in London on June 6th and 7th at the Army & Navy Club.
To reserve your place please contact Sarah@fullertreacymoney.com.
Delegate Rates:
Full fee: £1799
Each additional delegate: £850
Fuller Treacy Money Subscriber rate: £850
Prices exclude VAT where applicable
Eoin's personal portfolio: equity index long closed at a small loss March 1st
One of the questions subscribers as most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.