Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

The rate curve in the US has been flattening lately as the short-end moved higher with rate hikes getting priced and the long end coming off the peak. Other countries have followed the flattening trend, including in emerging markets (EM). In contrast with the US though, EM rate curves have flattened more dramatically and have experienced bear-flattening. The recent trend allowed me to suggest taking profits on some of my flattening recommendations, but has worked against my steepening recommendations. Given the extreme levels, however, I recommend continuing to hold on to the steepeners for now.Separately, the attached file is a snapshot of the EM 10y rates market in which I seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

The rate curve in the US has been flattening lately as the short-end moved higher with rate hikes getting priced and the long end coming off the peak. Other countries have followed the flattening trend, including in emerging markets (EM). In contrast with the US though, EM rate curves have flattened more dramatically and have experienced bear-flattening. The recent trend allowed me to suggest taking profits on some of my flattening recommendations, but has worked against my steepening recommendations. Given the extreme levels, however, I recommend continuing to hold on to the steepeners for now.Separately, the attached file is a snapshot of the EM 10y rates market in which I seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Flattening of Rate Curves in EM Far Exceeds the US

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Joe Jasper

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Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

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iShares Russell 2000 ETF / Technical Analysis

We continue to believe we are nearing the end of the "mixed market environment," and the beginning of a new, broad-based bull market advance. With that said, we are still waiting for confirmation in the form of breakouts for small-caps (IWM) and Industrials (XLI) in order to turn bullish. Additionally, we would like to see MSCI China (MCHI) break above $74 resistance; this would be a major boon for risk sentiment.Charts highlighted: Russell 2000 (IWM), SOXX, XTN, GLD vs. SPY, TNX, S&amp;P 500, AMD, MRVL, XLNX, STM, MPWR, ON, ENPH, SEDG, FSLR, RUN, SPWR, CSIQ, SOL, ODFL, JBHT, KNX, LSTR, SAIA, SNDR, ARCB, MRTN, PTSI, YELL, and USAK

We continue to believe we are nearing the end of the "mixed market environment," and the beginning of a new, broad-based bull market advance. With that said, we are still waiting for confirmation in the form of breakouts for small-caps (IWM) and Industrials (XLI) in order to turn bullish. Additionally, we would like to see MSCI China (MCHI) break above $74 resistance; this would be a major boon for risk sentiment.Charts highlighted: Russell 2000 (IWM), SOXX, XTN, GLD vs. SPY, TNX, S&amp;P 500, AMD, MRVL, XLNX, STM, MPWR, ON, ENPH, SEDG, FSLR, RUN, SPWR, CSIQ, SOL, ODFL, JBHT, KNX, LSTR, SAIA, SNDR, ARCB, MRTN, PTSI, YELL, and USAK

U.S. Equity Strategy: All Eyes On The Small Cap Russell 2000. Buying Semiconductors, Solar, Truckers

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4X Global Research

4X Global Research was founded in 2017 to provide institutional and corporate clients with the substantive research, high-quality analysis and thoughtful insight on Emerging and G20 economies and financial markets they need to make informed and timely decisions and gain an edge in their investments.

Our measure of  headline CPI-inflation in developed economies rose further in September by 0.27pp to a 13-year high of about 3.9% yoy. Headline CPI-inflation in EM economies was unchanged in September at about 3.3% yoy.The argument put forward by most developed central banks that high CPI-inflation will prove “transitory” is losing credibility and the Norges Bank, Reserve Bank of New Zealand, Bank of Canada and Reserve Bank of Australia have already taken action. Two-year government bond yields have risen rapidly in the past month in most developed economies. This suggests that markets increasingly think that CPI-inflation will remain sticky at high levels for the foreseeable future and that (most) developed central banks will have little choice but to start to or further tighten monetary policy in the near future.However, analysts are less hawkish overall than markets. Our view is of a (partly) self-defeating prophecy, with the surge in short-end bond yields having de-facto resulted in a tightening of monetary conditions, which in turn reduces the odds of central banks hiking rates as aggressively as currently priced in by markets.We expect the Fed at its meeting tomorrow to once again put some distance between the start of the QE taper and the start of the rate hiking cycle. US household consumption is now running slightly above its long-term trend but there is still a $1.1 trn “pandemic shortfall”. Moreover, slower household consumption growth in recent months (albeit from a high level) has led to weaker demand-pull inflation and contributed to the fall in month-on-month PCE-inflation, in our view.

Our measure of  headline CPI-inflation in developed economies rose further in September by 0.27pp to a 13-year high of about 3.9% yoy. Headline CPI-inflation in EM economies was unchanged in September at about 3.3% yoy.The argument put forward by most developed central banks that high CPI-inflation will prove “transitory” is losing credibility and the Norges Bank, Reserve Bank of New Zealand, Bank of Canada and Reserve Bank of Australia have already taken action. Two-year government bond yields have risen rapidly in the past month in most developed economies. This suggests that markets increasingly think that CPI-inflation will remain sticky at high levels for the foreseeable future and that (most) developed central banks will have little choice but to start to or further tighten monetary policy in the near future.However, analysts are less hawkish overall than markets. Our view is of a (partly) self-defeating prophecy, with the surge in short-end bond yields having de-facto resulted in a tightening of monetary conditions, which in turn reduces the odds of central banks hiking rates as aggressively as currently priced in by markets.We expect the Fed at its meeting tomorrow to once again put some distance between the start of the QE taper and the start of the rate hiking cycle. US household consumption is now running slightly above its long-term trend but there is still a $1.1 trn “pandemic shortfall”. Moreover, slower household consumption growth in recent months (albeit from a high level) has led to weaker demand-pull inflation and contributed to the fall in month-on-month PCE-inflation, in our view. 

Hawkish Rates Markets Ahead of Themselves

With the US 10y yield and 5y5y forward inflation expectations rising, the correlation of EM rates with the US has risen sharply. We discuss the reasons behind this along with what it means for EM rates going forward and the strategy to pursue.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

With the US 10y yield and 5y5y forward inflation expectations rising, the correlation of EM rates with the US has risen sharply. We discuss the reasons behind this along with what it means for EM rates going forward and the strategy to pursue.Separately, the attached file is a snapshot of the EM 10y rates market in which we seek to identify the leaders and laggards among countries by comparing the performance of each to its history as well as to other countries based on their respective betas to an EM rates index.

Rates 10y Dashboard: Correlation of EM Rates with the US Rises Sharply

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Thomas Schroeder

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Markets are dynamic and trading systems must reflect this. It is crucial to determine underlying correlations and lead-lag relationships within global markets and the impact on linked instruments. Our weekly Chartonics product gives you short-term trading strategies that can be applied within the medium and longer term macro trends that are mapped out in our strategy updates. 

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USD domino decline gaining traction with the Euro above our 1.1610 pivot barrier. USD weakness (DXY 94.50 top call) leading a peak in the 5yr and 10yr yield. USD/JPY next line at the key 114.50 major top barrier.The Euro is the latest currency to make a move. The dollar started its descent in August/September vs commodity currencies and rolled into stronger EM FX and more recently marked tops in the USD/KRW and USD/THB.Yield peak targets outlined that will provide fuel for a weaker USD, stronger metals and a short financials pair versus sectors that benefit from a yield backfill.

USD domino decline gaining traction with the Euro above our 1.1610 pivot barrier. USD weakness (DXY 94.50 top call) leading a peak in the 5yr and 10yr yield. USD/JPY next line at the key 114.50 major top barrier.The Euro is the latest currency to make a move. The dollar started its descent in August/September vs commodity currencies and rolled into stronger EM FX and more recently marked tops in the USD/KRW and USD/THB.Yield peak targets outlined that will provide fuel for a weaker USD, stronger metals and a short financials pair versus sectors that benefit from a yield backfill. 

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US Treasury (10 Yr Generic) (GT10 GOVT)

Flattening of Rate Curves in EM Far Exceeds the US

The recent rate curve flattening trend has allowed me to suggest taking profits on some of my trade recommendations but has hurt the steepening...

Gautam Jain, PhD, CFA

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The PHLX Semiconductor index (SOXX) and the equal-weighted Transportation Sector (XTN) are the latest cyclical areas to break out to new YTD...

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Hawkish Rates Markets Ahead of Themselves

CPI-inflation is proving sticky and markets pricing further developed-economy rate hikes in coming months. We think they've got ahead of...

Olivier Desbarres

Rates 10y Dashboard: Correlation of EM Rates with the US Rises Sharply

We discuss the reasons behind the sharp rise in the correlation of EM rates with the US along with what it means for EM rates going forward and the...

Gautam Jain, PhD, CFA

Weak Dollar Leading Yield Top

USD domino decline gaining traction with the Euro above our 1.1610 pivot barrier. USD weakness (DXY 94.50 top call) leading a peak in the 5yr and...

Thomas Schroeder

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