Brief for SPX: - Weakness in price due to Quad Witching ahead of FOMC. Controversy in taper announcement as ECB has done. - Technical weakness in price, as it has fallen out of a rising wedge and as of yet, failed to make a quick recovery to ATHs as usual. Price closed in a DCF, indicating weakness in the dominant cycle. - Fears of real estate market collapse in China, with global implications (there are US counterparties involved). However, it has yet proven to be anything more than an isolated event.
Cyclicality: - SPX facing headwinds of seasonal decline. - Expecting DCL in early October, a bit of a rally to a DCH and choppy markets in mid-late October, then a greater selloff into the end of October in the seasonal trough, where an ICL may be made into an end of year rally.
Macro Layer: - Inflation expectations continue to decline globally: fred.stlouisfed.org/series/T5YIFR/ - Yield curve continues to flatten, despite real rates getting a slight reprieve. - Dollar and gold showing risk-off.
Debt Ceiling: (Opinion) - Interestingly, October Treasury Note Futures trading at a slight discount to September, or December. This indicates that there is some risk-off on the notes regarding the debt ceiling, but nobody expects the debt ceiling to not be raised. The US government had shut down for 35 days at the end of 2018 due to debt ceiling disagreements, so I think this is a legitimate concern and could be (a largely perception-based) catalyst for a sizable pullback. - If we take a look at 2018's correction, it began with the Sept Quad witching as well. A very similar setup to now, which is of concern: - 3700 is an area of Demand which would correspond to such a pullback, while 4290-4400 is the mid-year Pivot Range which should be watched closely.
Treasury Note Futures:
Key Points: - Seasonality. - Debt ceiling decision approaching, media is still buzzing about Evergrande but the narrative to form around our trade should be Evergrande > FOMC > Debt ceiling > Then perhaps the US-China Trade Deal for the EOM October ICL.
Strategies: - Unilateral: Bearish/short until proven otherwise. - Intraday: Volatility expected, look for bullish reversal signs.
GLHF - DPT
Comment
Opening lower, and a wave of fear overtaking the media.
"The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated, and vice versa." -JL
Comment
In regards to the debt ceiling, I think indeed it will be purely psychological. There is 1.2T USD sitting around in the o/n RRP waiting for such an event, and there is even a possibility of manufactured "good news" in early resolution for a bit of a rally.
Comment
It would appear that FOMC was not what bond market participants had expected:
Taper which is expected to begin in November for 10Bn/month, ending in the middle of 2022 was not delayed. This is not bullish.
Fed doubled RRP counterparty limit from 80b to 160b.
This indicates that they are preparing more reserves in case of a government shutdown and the debt limit failing to be lifted in time.
I would speculate (a): that the "plan" is for the government to indeed shut down for a time (while reverses in RRP and SRF lie in wait to prevent any real damage), while pumping out the FUD and letting the market correct and cool down, to rein in price inflation.
(b): There is a real fear of a liquidity crunch event (They don't have control) and there is a significant risk of default.
Comment
The yield curve has already broken down, even though nominal yields and real rates have yet to show it on the surface:
Comment
On the debt ceiling:
The Treasury General Account (TGA) which QE has been coming from has been ran down to pre-pandemic levels. With the debt ceiling, TGA is the only source of QE with a rate of 120Bn/month.
Due to SLR expiry, there has been no new collateral (treasuries) added to the system, yet liquidity is.
Instead of purchasing treasuries, Fed incentivized the RRP facilities, in order to 'hide' the liquidity without causing downward pressure on yields, which would reveal the deflationary conditions.
Fed doubled RRP counterparty limit from 80b to 160b, giving more room for yields to keep the inflationary narrative alive.
Why stuff so much liquidity in a system that is already drowning in liquidity? Preparing for a liquidity crunch event?
To my understanding, US would officially go into default on Oct 15. Mark that 'X Date'
Comment
A significant move in yields today:
RRP limits doubled, so liquidity being moved from UST to that facility, hence the yields spike. Why the rush to sell the UST?
Comment
It seems that this map was the correct one. More evidence pointing to this. Update:
I suspect that we will have some news regarding the debt ceiling and US government shutdown on Oct 1, and some news regarding Evergrande on Oct 4.
The rising dollar cannot be ignored and it has given me more conviction in this map. The market is teaching me of patience and conviction.
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