Fixed Income and Currency Strategist

Gautam Jain, PhD, CFA

FX & Rates

EM rates continue to lag the rally in US rates, resulting in a drop in the correlation between the two. We also find that the cross-correlations between EM rates have dropped in contrast with EM currencies. A direct implication of this is, unlike EM currencies, there are greater relative-value opportunities within the EM rates universe.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.

EM rates continue to lag the rally in US rates, resulting in a drop in the correlation between the two. We also find that the cross-correlations between EM rates have dropped in contrast with EM currencies. A direct implication of this is, unlike EM currencies, there are greater relative-value opportunities within the EM rates universe.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: Cross-Correlations Between EM Rates Drop

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

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.

Technical Analysis

We continue to see a mixed market, and weak market dynamics lead us to be cautious. One of the primary issues is weak breadth; the large-cap indexes (S&amp;P 500 and Nasdaq) remain bullish despite being held up by a relatively small number of mega-cap growth stocks, a condition that can persist for weeks or months. Ultimately, as long as there continues to be an absence of breakdowns at the index and Sector level we remain constructive overall.

We continue to see a mixed market, and weak market dynamics lead us to be cautious. One of the primary issues is weak breadth; the large-cap indexes (S&amp;P 500 and Nasdaq) remain bullish despite being held up by a relatively small number of mega-cap growth stocks, a condition that can persist for weeks or months. Ultimately, as long as there continues to be an absence of breakdowns at the index and Sector level we remain constructive overall.

U.S. Equity Strategy: Cautious Overall; Favor Large-Caps & Growth; Key Supports Holding In The U.S.

Founder

Olivier Desbarres

Exacting. Excellent. Exceeding. Exemplary.

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.

In the past fortnight US Treasury yields across the maturity spectrum have oscillated in reasonably wide ranges, with the highs coinciding with the release on 13th July of US CPI-inflation data. The shape of the yield curve today is almost the same as it was on 8th July.The US rates market has tentatively found its feet, for now at least – tentatively because volatility remains reasonably high both in terms of yield levels and yield spreads. The pace of Dollar NEER appreciation has also slowed and volatility remains low while the S&amp;P 500 and Brent crude oil price have been choppy in multi-week ranges.The inverse correlation between the Dollar NEER and S&amp;P 500 has somewhat broken down so far this month. We estimate that since 28th June the S&amp;P 500 and Dollar NEER have respectively gained about 1.8% and 1.2%. In that sense the Dollar has not traded like a “safe-haven” asset, at least not in the purest sense of the term in our view.  Instead the appreciation in the Dollar NEER since 10th June has largely coincided with the flattening of the 2s-10s Treasury curve.Finally, the relative performance of major currencies does not clearly point to either “risk-on” or “risk-off” having prevailed, in our view. Since the 36-month low in the Dollar NEER on 10th June, weighted-baskets of EM currencies (excluding Renminbi) and developed market currencies have both depreciated about 3% versus the US Dollar.Our overall take is that US (and global) markets in recent weeks can neither be categorised as “risk-on” or “risk-off”. Instead it has been a case of “what is the risk?”. Specifically we think markets are still weighing whether i) they should be more concerned about a potential slowdown in US and global growth or CPI-inflation remaining sticky at high levels and ii) how central banks will adjust monetary policy, in terms of their QE programs and outlook for policy rate hikes (an arguably granular picture at present). Macro data point to rapid global economic growth having slowed in June (but remained positive) and we will elaborate on our outlook in the next FIRMS report.

In the past fortnight US Treasury yields across the maturity spectrum have oscillated in reasonably wide ranges, with the highs coinciding with the release on 13th July of US CPI-inflation data. The shape of the yield curve today is almost the same as it was on 8th July.The US rates market has tentatively found its feet, for now at least – tentatively because volatility remains reasonably high both in terms of yield levels and yield spreads. The pace of Dollar NEER appreciation has also slowed and volatility remains low while the S&amp;P 500 and Brent crude oil price have been choppy in multi-week ranges.The inverse correlation between the Dollar NEER and S&amp;P 500 has somewhat broken down so far this month. We estimate that since 28th June the S&amp;P 500 and Dollar NEER have respectively gained about 1.8% and 1.2%. In that sense the Dollar has not traded like a “safe-haven” asset, at least not in the purest sense of the term in our view.  Instead the appreciation in the Dollar NEER since 10th June has largely coincided with the flattening of the 2s-10s Treasury curve.Finally, the relative performance of major currencies does not clearly point to either “risk-on” or “risk-off” having prevailed, in our view. Since the 36-month low in the Dollar NEER on 10th June, weighted-baskets of EM currencies (excluding Renminbi) and developed market currencies have both depreciated about 3% versus the US Dollar.Our overall take is that US (and global) markets in recent weeks can neither be categorised as “risk-on” or “risk-off”. Instead it has been a case of “what is the risk?”. Specifically we think markets are still weighing whether i) they should be more concerned about a potential slowdown in US and global growth or CPI-inflation remaining sticky at high levels and ii) how central banks will adjust monetary policy, in terms of their QE programs and outlook for policy rate hikes (an arguably granular picture at present). Macro data point to rapid global economic growth having slowed in June (but remained positive) and we will elaborate on our outlook in the next FIRMS report.

Not “risk-On” or “risk-Off”, Rather What’s the Risk?

Following the higher-than-expected CPI data in the US, rates volatility has risen which raises the question of whether the flattening trend that had taken hold in the US and EM should persist. In the long run, we still expect curves to flatten, but in the short term, the shape of the curve is likely to be data-driven. As a result, our current trade recommendations, which include a flattener in Colombia and a steepener in Russia, are idiosyncratic.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.

Following the higher-than-expected CPI data in the US, rates volatility has risen which raises the question of whether the flattening trend that had taken hold in the US and EM should persist. In the long run, we still expect curves to flatten, but in the short term, the shape of the curve is likely to be data-driven. As a result, our current trade recommendations, which include a flattener in Colombia and a steepener in Russia, are idiosyncratic.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: Should Curve Flattening Persist with Rising Rates Volatility?

Our weight of the evidence approach continues to lead us to our view that the market remains mixed-yet-constructive overall. We explain our outlook below. The S&amp;P 500 remains bullish, progressing past our first target of 4350 and now on its way to our next target of 4400-4406. As long as 4257-4275 support holds, we expect to see 4400 followed by 4460. Should 4257 fail to hold, our next support levels to watch would be 4164 followed by 4120; we are constructive as long as 4120 holds.

Our weight of the evidence approach continues to lead us to our view that the market remains mixed-yet-constructive overall. We explain our outlook below. The S&amp;P 500 remains bullish, progressing past our first target of 4350 and now on its way to our next target of 4400-4406. As long as 4257-4275 support holds, we expect to see 4400 followed by 4460. Should 4257 fail to hold, our next support levels to watch would be 4164 followed by 4120; we are constructive as long as 4120 holds.

U.S. Equity Strategy: SPX 4400 Target In Sight

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US Treasury (10 Yr Generic) (GT10 GOVT)

Rates 10y Dashboard: Cross-Correlations Between EM Rates Drop

We find that the cross-correlations between EM rates have dropped. A direct implication of this is, unlike EM currencies, there are greater...

Gautam Jain, PhD, CFA

U.S. Equity Strategy: Cautious Overall; Favor Large-Caps & Growth; Key Supports Holding In The U.S.

The S&P 500 remains bullish, recently hitting our 4400-4406 target as large-caps remain attractive. As long as support at the 50-day MA and 4257...

Vermilion Research

Not “risk-On” or “risk-Off”, Rather What’s the Risk?

Rates and equity markets have settled in broad ranges in past 2 weeks and pace of USD appreciation has slowed. Markets are rightly weighing growth...

Olivier Desbarres

Rates 10y Dashboard: Should Curve Flattening Persist with Rising Rates Volatility?

Higher rates volatility raises questions regarding the flattening trend in the US and EM. In the long run, curves should flatten, but in the short...

Gautam Jain, PhD, CFA

U.S. Equity Strategy: SPX 4400 Target In Sight

The S&P 500 remains bullish, progressing past our first target of 4350 and now on its way to our next target of 4400-4406. As long as 4257-4275...

Vermilion Research

Price Gauge

52-week Range

Market Cap (USDm)

P/E

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