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Mar 13 • 6 tweets • 4 min read
#China: Back In Focus
▪️ Poor credit data: Agg Financing CNY 1190bn vs 2200bn exp=>MLF rate cut possible 15 Mar
▪️ Biggest Covid crisis since Wuhan as cases surge
▪️ China Tech & HK stocks beaten down
▪️ Geopol: U.S. warns China
▪️ #USDCNH jumps to break 1m consolidation

1/6 ImageImage
▪️ China reported 3,300 cases on Saturday - worst outbreak since early days
▪️ 17.5 million residents in Shenzhen placed in lockdown till 20 March

2/6
bloomberg.com/news/articles/…

scmp.com/coronavirus/gr…
China Tech & HK stocks beaten down
- SEC: delisting concerns
- Cyberspace Authority of China (CAC): regulatory clampdown

3/6
wsj.com/articles/chine…

scmp.com/tech/policy/ar…
Relative (normalized) YTD performance of S&P, Shanghai Comp, HK HSCEI & China Tech (ETF)

4/6 Image
Geopolitics heats up
▪️ China warned by US to not help Russia evade sanctions: Sullivan, US NSA
▪️ Sullivan to meet Chinese diplomat Yang Jiechi in Rome on Monday - Ist high level contact b/w US/China since Russian invasion

5/6
reuters.com/markets/europe…
▪️ #USDCNH safe-haven till now amidst Russian invasion (+Trade surplus+FDI+FII inflows)
▪️ Still in downtrend but Fri saw first spike since Jan FOMC; recent consolidation broken
▪️ USDCNY Fixing Errors skewed upwards but not game changer; +188 pip +ve error since 24 Feb invasion ImageImageImage

• • •

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Varad Markets Profile picture
Mar 13
#USDJPY: Next big trade or just a puzzle?
▪️ In 21st century, USDJPY spiked up >2% when S&P dropped >2% in a wk only on 9 occasions - last wk was one of them - prob of such occurrence <1%
▪️ Last wk $JPY 114.82=>117.29, S&P -2.9%
▪️ Dethrone Long JPY as macro risk-off hedge?
1/9 ImageImage
▪️ Recent S&P drawdown -12.5% since 3 Jan'22 on hawkish Fed & Russian invasion but $JPY +1.0% with drawdown of only 1.4%
▪️ Regime change post Covid?
- Since Mar'20, $JPY vs S&P regression reveals significant -ve beta
- Previous Fed hikes (2004-06, 16-18) also showed low beta
2/9 Image
- Post Covid, reduced (3m) correlation b/w USDJPY & S&P (+ve correl => USDJPY ⬆️, S&P ⬆️)

3/9 Image
Read 9 tweets
Varad Markets Profile picture
Jan 23
#FX/#Rates thru 2016/18 episodes of 'Equity Tantrum' on hawkish Fed: Takeaways
▪️ Short USDJPY best FX trade in both periods
▪️ Short AUDJPY even better
▪️ Short EUR/Long DXY bad idea for risk-off
▪️ Gold/Silver good value here
▪️ Long USDEM not rewarding enuf
▪️ Bonds rally 40bp
Dec 2018 Recap:
S&P -11.3% (30 Nov'18 to 3 Jan'19)
2y UST -41bp, 2.78=>2.37
10y UST -43bp, 2.98=>2.55
DXY -1.0%
Oil/WTI +0.30%
BCOM -6.2%
VIX 18=>25 (36 high)
HY OAS +119bp

But Dec'18 episode was late in hiking cycle=>had enough room for a 40bp bond rally. Lets look at 2016

2/7
Jan 2016 Recap:
S&P -10.5% (31 Dec'15 to 11 Feb'16)
2y UST -40bp, 1.05=>0.65
10y UST -61bp, 2.26=>1.65
DXY -3.1%
Oil/WTI -13.5%
BCOM -5.85%
VIX 18=>28 (32 high)
HY OAS +179bp

DXY ⬇️ on higher EUR JPY & CHF
Strong bond rally at start of hiking cycle
2/10 flatter but 5/30 steeper
Read 7 tweets
Varad Markets Profile picture
Jan 22
Where is Fed Put?

In late 2018:
- S&P touched bear mkt in mid-Dec'18 (20% correction)
- Dropped 9% in Dec'18
- Dropped 2.5% on 3rd Jan'19
Then Powell did dovish pivot on 4th Jan'19: Fed "will be patient"

In 2022:
- S&P has dropped 7.73% in Jan'22
- Corrected 8.73% off peak

1/8
Fed's dovish pivot in early Jan'19

2/8
 cnbc.com/2019/01/04/pow…
But in 2018, Powell was extremely hawkish even as Inflation did not even touch 3%

Now CPI is 7% => implies Fed's hawkishness is justified on inflation + mkt understands it => Fed's Put is further away (v/s 2018)?

What!!! So let S&P correct another ~12% before Fed wakes up?
3/8
Read 8 tweets
Varad Markets Profile picture
Jan 6
#Nasdaq v/s #FedFundRate:

Few comparisons of Fed's recent hawkishness with Powell's extreme hawkishness in late 2018

Nasdaq dropped 22% in Q4'18; currently 5.0% off its peak

1. Fed not really as hawkish as 2018
2. Fed has learnt when to back off. Or has it?
@saxena_puru
Few news reports from that time:

"Federal Reserve raises rates despite signs of economic softening"
edition.cnn.com/2018/12/19/bus…

politico.com/story/2018/11/…
Read 4 tweets
Varad Markets Profile picture
Jan 6
#FOMC Hawkish Minutes: #Fed Balance Sheet BS

Five topics discussed:
1⃣ Preferred tool for policy normalization: Rate hike v/s BS reduction
2⃣ Comparison with 2014 normalization
3⃣ Timing & sequencing of tools
4⃣ Size & composition of Long Run BS
5⃣ Yield Curve shape

1/12
Note: Quantitative Tightening = BS reduction whereas 'Tapering' is reducing pace of BS expansion (currently underway)

1⃣ Rate Hike v/s QT:
“Participants..emphasized..federal funds [FF] rate should be Committee's primary means for adjusting stance of monetary policy”

Why?

2/12
[A] FF rate more familiar tool to general public => [better] for communication

[B] FF gives policy buffer - easier to adjust FF rate in emergency - “few participants..noted..Committee could more nimbly change interest rate than BS in response to economic conditions”

3/12
Read 12 tweets
Varad Markets Profile picture
Nov 17, 2021
#JPY & Correlations:
▪️ USDJPY 114.80 ~5yr highs; last seen post Nov'16 Trump election; ~103.5=>118.66 in 5wk
▪️ JPY v/s G10 increased s/t correls=>towards 'Dollar world' (USDJPY ⬆️, AUDUSD ⬇️) v/s Reflation/Risk Off Cross-JPY moves
▪️ Recently JPY-XXX sidelined; may change

1/4
▪️ YTD Long CAD/Short JPY still best G10-JPY Dollar-neutral trade but rise in correls recently
▪️ Since Nov FOMC, JPY-XXX lacklustre; most FX actually weaker vs JPY
▪️ Since Jun FOMC (hawkish pivot), USDJPY best then NZDJPY

SGDJPY a possible short JPY, Dollar-neutral candidate
USDJPY v/s Rates:
▪️ Best & more stable correl with Nominal yld (10yr UST yield ~55% correl then 5y UST then 2y)
▪️ Some correl with Inflation Breakevens (5y BE ~30%)
▪️ Interestingly little correl with Real ylds (5y Real TIPS ~15%)

Caveat: Correl, esp s/t, reasonably volatile
Read 4 tweets

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