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Macro

Interactive Brokers - The Market Giveth, The Market Taketh Away


Equity markets have had a very difficult time establishing a direction after Wednesday’s Federal Reserve meeting.  We entered the announcement with lower indices, pushed down by the President’s acknowledgment that China trade talks were proceeding more slowly than expected.  We then rallied upon the market’s perception of a dovish tone from the Fed announcement.  We then turned lower as the market began to worry that Chairman Powell’s conciliatory tone was actually in response to weaker global economic conditions.

As one of those who believe that the conciliatory tone was indeed prompted by economic weakness, I was confounded by the ferocity of yesterday’s rally.  We saw the usual buy the dip crowd appear in response to some pre-market futures selling, but the buying continued throughout the session.  My morning market commentary questioned how the equity markets could remain sanguine in the face of a yield curve that had inverted out to 7 years with 10-year notes nearing an inversion.  Inverted yield curves, while not a perfect harbinger of doom, usually do not bode well for economic growth.

I fretted that while markets climb a wall of worry, I seemed to be one of the few worrywarts left.  Today I seem to have quite a bit of company.

Most of us in the US awoke to lower futures after a slew of tepid, if not chilly, economic releases in Europe.  Yields on 10-year notes fell below their 3-month and 2-year counterparts, signaling a deeper yield curve inversion, and the equity markets plunged below their Wednesday lows.  In hindsight, yesterday’s rally seems like a misguided last gasp of the FOMO (Fear of Missing Out) that institutional investors displayed this quarter.

Despite today’s sell-off, we haven’t yet seen significant fear burst out.  The VIX index has risen 2 points, or 15%, but remains below 16.  I would assert that fear will not have meaningfully surpassed greed until that index begins a flirtation with the 20 level.

Market participants would be well advised to watch the tone early next week with a jaundiced eye.  A snapback rally without significant news flow is likely to be suspicious, as it would be much healthier for equity markets to consolidate before retesting yesterday’s highs.  If the weekend news flow takes a negative turn, however, we could continue to see the markets churn lower. 

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There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC Risk Disclosure. A copy and additional information are available at ibkr.com.

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

Rareview Macro - Key Signal - Floating Rate Paper


Yesterday, risky assets had a good day. Floating-rate paper, did not.

The Senior Loan ETF (symbol: BKLN) declined by more than one standard deviation (SD), while US equity markets, especially interest-rate sensitive and secular growers, appreciated by between 1.5-2.5 SD’s.

 

Effectively, investors extended the duration of their portfolios in one fashion or another, which started with selling floating-rate paper that has a near-zero duration.

This underperformance is representative of the negative duration that is structurally embedded in investors’ portfolios, the banking system, the insurance business, and anything else sensitive to interest rates. Said differently, if a large bank’s negative duration gap is ~8 months, and they have $2.6 trillion in assets, how much duration do you think they need to buy? It’s no wonder the KBW Bank Index (BKX) is -5.56% this week. 

It is further highlighted in the $12.1bn of inflows into US bond funds over the last week, the largest in more than a year, and inflows have averaged ~$8bn per week for every week this year.

Conclusion: If the Fed is on hold, why do you need floating rate paper anymore?

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Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


23274




Macro

Schroders - Fed Turns More Dovish and Signals an End To Rate Hikes - By Keith Wade


The Federal Reserve signals no rate rises for 2019.

  • The Fed suggests no rate rises in 2019 and one in 2020
  • The dollar fell on the news, sliding 0.8% against a basket of currencies
  • Schroders expects the next change will be a cut

The Federal Reserve (Fed) has lowered its outlook for US growth and inflation and reduced its expectations for interest rates. The “dot plot” published after Wednesday’s meeting shows no rate hikes this year and only one in 2020.

 

Tighter financial conditions

At his press conference, Fed chair Jerome Powell said growth was slowing by more than expected amid tighter financial conditions. Although interest rates did not change, the Fed announced that it would stabilize its balance sheet in October, some three months earlier than previously expected.  

This would seem to complete the Fed’s move from hawks in December to doves in March. Certainly, the data has been soft with current estimates for Q1 GDP growth from the Federal Reserve Bank of Atlanta running at just 0.4% annualized. The Federal Open Market Committee (FOMC) statement highlighted the slowdown in household spending and business fixed investment alongside slower payroll growth.

 

A re-appraisal of the neutral rate for interest rates?

However, the latest move suggests there has been a more fundamental shift in the committee’s thinking. There was a significant reduction in the median expectation for the Fed funds rate from 2.9% to 2.4% this year and from 3.1% to 2.6% by the end of next year. The reduction is greater than the fall in growth and core inflation outlook combined and suggests a reappraisal of the neutral rate for the economy.

External factors are probably playing a role here and chair Powell mentioned the slowdown in international trade and Brexit, but the most likely factor has been the behavior of inflation. Headline inflation has declined as a result of lower oil prices and core inflation has stabilized near the 2% target. Despite the late stage of the cycle, inflation is not a threat to the FOMC’s objectives and market expectations remain low.

 

Schroders now expects no further rate rises this year

We still expect the US economy to rebound in the second quarter as much of the current slowdown reflects a temporary move in inventory, and we expect GDP growth to be stronger than the Fed anticipates this year.

Nonetheless, inflation is undershooting, and with growth likely to slow toward the end of the year, the window of opportunity for another rate hike is narrowing. Consequently, we are taking out our June rate increase and now see no further rate rises from the Fed this year. The next move is now likely to be a cut in 2020 as activity cools.

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Originally Posted on March 21, 2019

Please remember past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Schroders and is being posted with Schroders’ permission. The views expressed in this material are solely those of the author and/or Schroders and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

FTSE Russell - Dynamic Evolution in Low Carbon Investing - By Jaakko Kooroshy


As efforts to reduce greenhouse gas emissions gather pace, the industrial foundations of society are facing a transformation. From the light bulb to the car, from everyday materials like plastics to cement, even our diets will have to adapt in profound ways to make the low carbon economy a reality and to avoid the worst impacts of global climate change.

Institutional investors have taken note. Today, few sizable asset owners or managers don’t proclaim to take climate risks into account in some manner through their investment strategies—whether it means trying to avoid exposure to those that have the most to lose in a low carbon future, aiming to back tomorrow’s winners, or even using their influence with companies to accelerate the low carbon transition, it's a subject that once was considered out of the scope of fiduciary duties but is now often a routine part of the investment process.

This includes active investing, but passive investing has been no exception to this trend. Investors can now choose from a growing variety of "low carbon" or "climate" indexes, which typically replicate conventional indexes but try to adjust these "parent indexes" in various ways to align them with climate goals.

There is, however, no clear consensus on what appropriately constitutes such alignment, and methods have evolved rapidly as data and our understanding of climate risks has improved – and are likely to continue to do so into the future.

Early versions of "low carbon" indexes typically excluded fossil fuel companies, or adjusted index weights based on “carbon footprints.” Later versions added carbon reserves as an additional factor into index designs to avoid risks from "stranded assets" or "unburnable carbon."

This early generation of low carbon indexes had some important drawbacks. While easy to communicate, fossil fuels will continue to play a significant role in the medium-term even under the most ambitious low-carbon trajectories. Excluding all fossil fuel companies can also introduce sector biases in the resulting index – something that may be undesirable for many institutional investors.

More fundamentally, a focus on narrowly defined "carbon risk" doesn’t necessarily help to effectively position investors’ portfolios for the unfolding low carbon transition. Investors have often been motivated to use carbon footprints based on the expectation of an eventual escalation in carbon pricing – i.e., the idea that as the threat of climate change becomes ever more apparent, governments will eventually put a meaningful price on carbon as the most efficient means to incentivize economy-wide reductions in emissions.

However, the dynamics of the low-carbon transition have turned out very differently so far. Meaningful global carbon pricing remains an elusive a goal as ever for activists and international climate change negotiations. Meanwhile, a suite of disruptive low carbon technologies like solar and electric vehicles and a thicket of sector-by-sector, country-by-country regulations on emissions have created the real prospect of decarbonizing some of the most carbon intensive sectors faster than anyone would have thought. It now looks entirely possible that the last coal-fired power station will be built, and the last combustion engine will roll off the assembly line long before meaningful carbon pricing is a global reality.

In such a scenario, adjusting index weights based on carbon intensity may only partially adjust exposure to investment risks related to the low carbon transition. The latest climate indexes, such as the FTSE Global Climate Index Series, therefore integrate additional metrics such as green revenues into the index design, capturing green industries from advanced batteries to efficient lighting. Rather than narrowly focusing on risks tied to carbon emissions, this data helps investors to increase their exposure to those companies that enable, drive and benefit from the low carbon transition.

The evolution of climate indexes is unlikely to stop here. Future versions may, for example, put a greater emphasis on adaptation risks or capture obsolescence risks and growth opportunities across value chains in much more sophisticated ways. As data become ever richer and more granular, and the low carbon transition continues to unfold in unexpected ways, a one-size-fits all, standardized climate index is less likely to emerge.

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Originally Posted on March 19, 2019

© 2019 London Stock Exchange Group plc (LSEG Group). All information is provided for information purposes only. All information and data contained in this publication is obtained by the LSE Group, from sources believed by it to be accurate and reliable. Any representation of historical data accessible through FTSE Russell Indexes is provided for information purposes only and is not a reliable indicator of future performance. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing contained in this document or accessible through FTSE Russell Indexes, including statistical data and industry reports, should be taken as constituting financial or investment advice or a financial promotion.

Interactive Brokers Asset Management, a division of Interactive Brokers Group, offers FTSE Russell Index Tracker portfolios on its online investing marketplace. Learn more about the Diversified Portfolios.

This material is not intended as investment advice. IBKR Asset Management or portfolio managers on its marketplace may hold long or short positions in the companies mentioned through stocks, options or other securities.

 

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from FTSE Russell and is being posted with FTSE Russell’s permission. The views expressed in this material are solely those of the author and/or FTSE Russell and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


23273




Macro

Franklin Templeton - Can the EU's Extension Offer Really Break the Brexit Deadlock? - By David Zahn


After a nail-biting few hours, European Union leaders have agreed to the UK government’s request to delay Brexit, albeit the extension is less than Theresa May had requested. But our Head of European Fixed Income David Zahn believes the decision does little more than reset the clock, and he warns there is still a strong chance that the United Kingdom could still crash out without a deal.

After a good deal of brinkmanship, the European Union (EU) has agreed to offer the United Kingdom a short extension to Brexit preparations. But we’re skeptical that a short delay can fix the underlying problems that both sides face.

The EU has said if Prime Minister Theresa May cannot garner parliamentary support for her negotiated withdrawal agreement before March 29, it will offer to delay Brexit for two weeks. But in our view that represents little more than a postponement of the current situation.

The preferred outcome for both the United Kingdom and the EU remains a deal. But we think that would require some flexibility from the EU side, which it has so far been reluctant to offer.

So, a no-deal Brexit remains very much on the table—we’d estimate it has around a 30% possibility— and without any rapid progress, that likelihood will keep increasing.

Markets Likely to Remain Skittish

Despite the rhetoric, we’re not sure either side is ready for a no-deal Brexit. Neither the United Kingdom nor the EU seem to understand the full implications of the UK crashing out without a deal.

In recent days, a report from the Bank of Spain anticipated a Hard Brexit could reduce Spanish gross domestic product by 0.82 percentage points over the next five years,1 and we expect other EU economies could be similarly affected.

With uncertainty at elevated levels over the coming days, we think financial markets will remain skittish.

We’d expect sterling to remain range-bound, with the latest headlines dictating its movement. It should be a similar story for UK government bonds. We’d expect gilts to remain quite well bid until we get more certainty.


“Managed No-Deal”

The short delay could offer the opportunity for what has been termed a “managed no-deal Brexit.” In that scenario, the UK would leave the EU without a deal, but having had time for both sides to prepare contingencies.

We’d hope the negative impact on the wider economy would be less than a no-deal Brexit on March 29, as there should have been time for the likely shock to be managed.

A number of standstill agreements have been agreed to keep relationships on the same footing, at least temporarily. For example, Ireland and Northern Ireland have agreed not to erect a border on day one, and a number of regulators have agreed that certain financial market transactions will continue unaffected.

But these agreements will probably only remain in place for a short period of time. In due course, changes will have to be made and new arrangements put in place.

After all, even after Brexit, the UK should still be the sixth or seventh largest economy in the world. Its relationship with the rest of the world is likely to be problematic for a period of time, but it’s not going to disappear.

 

 

1. Source: Banco De España Brexit: Balance De Situación Y Perspectivas, March 19, 2019.

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Originally Posted on March 21, 2019

The comments, opinions and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

This information is intended for US residents only.

What Are the Risks?

All investments involve risks, including possible loss of principal. Bond prices generally move in the opposite direction of interest rates. Thus, as prices of bonds in an investment portfolio adjust to a rise in interest rates, the value of the portfolio may decline. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments.

To get insights from Franklin Templeton delivered to your inbox, subscribe to the Beyond Bulls & Bears blog.

There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from Franklin Templeton and is being posted with Franklin Templeton’s permission. The views expressed in this material are solely those of the author and/or Franklin Templeton and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Disclosures

We appreciate your feedback. If you have any questions or comments about IB Traders' Insight please contact ibti@ibkr.com.

The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

Any information provided by third parties has been obtained from sources believed to be reliable and accurate; however, IB does not warrant its accuracy and assumes no responsibility for any errors or omissions.

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