Macro and Flows Update: October 2023 - e22
Summary
TLDRThe video script discusses ongoing geopolitical conflicts, particularly the war in Gaza, and their impact on global markets. It highlights the West's tensions with China and Russia, and how these conflicts can influence resource markets, such as oil and gold. The speaker anticipates increased global activity and conflict, drawing parallels with the 1970s. The script also covers the financial response to these tensions, including government spending and the issuance of bonds. It predicts a positive Q4 due to structural liquidity effects and seasonal factors. The speaker advises on investment strategies, suggesting a focus on tech and long-dated call positions, while cautioning about potential market volatility and a coming decline in late January.
Takeaways
- 🌍 Increased global conflicts, such as the war in Gaza and tensions between the West, China, and Russia, are seen as ongoing issues rather than isolated events.
- 📈 The geopolitical situation affects financial markets, with potential impacts on oil and gold prices, and is considered a factor in the current competitive global landscape.
- 💰 Government spending, particularly in response to conflicts and economic needs, contributes to the issuance of bonds, affecting liquidity in the financial system.
- 📉 The liquidity pull from bond issuance and higher interest rates can lead to a decrease in stock market liquidity and affect risk assets.
- 🔄 Despite negative sentiments, structural flows in the market remain strong and can counterbalance negative trends during specific periods.
- 📅 A specific date, October 6, was highlighted as expected to mark a market rally, which aligns with structural support periods in the market.
- 💹 Q4 is expected to be positive due to major liquidity effects at the year's end, with significant reinvestment of collateral and a potential 'Santa Claus rally'.
- 🛒 Seasonal factors like holidays contribute to market dynamics, with expectations of increased market activity and potential short-term challenges for bears.
- 📈 The issuance of structured products has helped stabilize the market, providing support despite global risks and seasonal liquidity weaknesses.
- 🔮 The market is anticipated to be volatile, with a potential blowoff top situation setting up for a larger decline in late January or early February.
- 🎯 Focus on tech and low-quality rallies are advised for the upcoming market movement, with a predicted rotation back to value as yields may initially decrease.
Q & A
What major global conflict is being discussed at the beginning of the script?
-The major global conflict being discussed is the war in Gaza, with Hamas attacking Israel.
How does the speaker view the conflict in Gaza in the context of broader global tensions?
-The speaker views the conflict in Gaza as another front in the ongoing war that already exists between the West, China, and Russia, with Iran and entities like Hamas being involved due to perceived opportunities in a more competitive world.
What impact do global conflicts and tensions have on the oil and resource markets?
-Global conflicts and tensions put a put option under the oil market and other resource markets globally, as well as under assets like gold and safe havens like the dollar, leading to increased market volatility and shifts in investment strategies.
What historical parallels does the speaker draw with the current economic situation?
-The speaker draws parallels with the 1970s, highlighting the OPEC crisis, the Vietnam War, the active Cold War, and the Great Society program, all of which involved significant fiscal spending and had an impact on the economy and markets.
How does the speaker describe the effect of government spending on the economy and markets?
-The speaker describes the need for more issuance to meet spending, both domestically and internationally, as similar to the 1970s. This issuance pulls liquidity out of the system, affecting stock markets and risk assets, and leading to a reverse 'TINA' effect where money is drawn out of risk assets.
What specific date was given for a market rally to begin?
-October 6th was the specific date given for the market rally to begin.
What are the two major liquidity effects expected at the end of the year?
-The two major liquidity effects expected at the end of the year are the reinvestment of gains from the equity market at the beginning of January and the increased volume of trading around the holidays, particularly Thanksgiving, Christmas, and New Year's Day.
What is the significance of the January 17th expiration in the script's analysis?
-January 17th is significant as it marks the Wednesday of January expiration, which the speaker believes could be a turning point for a coming larger decline in the market.
How does the speaker describe the role of structured products in the current market?
-The speaker describes the role of structured products as significant in pinning the market and providing support, despite the drawn liquidity and global risks, by leaving banks and market makers long ball and well hedged.
What advice does the speaker give for playing the anticipated market rally?
-The speaker advises using long-dated call positions and calendar call spreads for playing the anticipated market rally with some protection, as they believe this could be a decently large rally with a significant amount of convexity.
What sector does the speaker believe will perform better during the rally and subsequently lead the decline?
-The speaker believes that the tech sector will perform better during the rally but will also lead the decline as it begins its second leg down after the rally ends, with a dramatic rotation back to value from growth.
Outlines
🌍 Global Conflicts and Macroeconomic Impact
This paragraph discusses the ongoing global conflicts, particularly the war in Gaza between Hamas and Israel, and how they fit into the broader context of geopolitical tensions involving the West, China, and Russia. It highlights the resurgence of old conflicts and the emergence of new ones in an increasingly competitive world. The speaker suggests that these conflicts, along with the need for more government spending to support economies, are reminiscent of the 1970s, with an OPEC crisis, the Vietnam War, and the Cold War. The issuance of bonds to meet spending is drawing liquidity out of the system, impacting stock markets and risk assets. Despite these challenges, the speaker does not view the current situation as surprising, but rather as a continuation of expected global activity.
📈 Market Analysis and Expected Rally
The speaker provides a market analysis, predicting a specific date, October 6, for a market rally following the September declines. The expectation is based on structural support in the market during November and December. The S&P is said to have rallied significantly since that date, and the speaker anticipates this positive trend to continue despite temporary weakness. A positive Q4 is expected due to major liquidity effects at the year's end, with a significant reinvestment of capital and a Santa Claus rally anticipated. However, the speaker warns that the issuance of bonds continues to pose problems, though it may slow towards the year's end.
💹 Role of Structured Products and Market Support
This paragraph examines the role of structured product issuance in the market, noting that it has left banks and market makers well-hedged and able to prevent excessive market fluctuations despite the risks and liquidity shortages. The speaker suggests that there will be substantial support in the upcoming period, especially considering the cash crunch at the end of the year. The Fed, Treasury, and other entities are expected to be cautious and potentially supportive of liquidity. The speaker advises watching the market closely in the days following the expiration week, as the market's performance during this time could indicate future trends.
📊 Investment Strategy and Market Outlook
The speaker concludes with an investment strategy and market outlook, suggesting that despite the expected rally, the market will remain volatile, especially as it heads into November and December. The speaker anticipates a market uptick in late December and early January, followed by a decline. Tech is expected to perform better than it has in recent weeks, but it is also expected to lead the next market decline, with a shift from growth to value stocks. The speaker advises that the dispersion in the market will continue, making it a great opportunity for certain trades. The speaker also provides a reminder that the information shared does not constitute investment advice and that individuals should consult with their advisors before making investment decisions.
Mindmap
Keywords
💡Macro
💡Expiration
💡Conflict
💡Globalization
💡Liquidity
💡Structured Products
💡Gamma
💡Vega
💡Rally
💡Volatility
💡Tech
Highlights
The ongoing war in Gaza with Hamas attacking Israel is seen as another front in the larger geopolitical conflicts involving the West, China, and Russia.
The global landscape is becoming more competitive, leading to an increase in conflicts and activities worldwide.
The speaker expects more conflict and competition, which is well telegraphed and understood by countries like Russia and China.
Conflicts and competition influence the oil and other resource markets, as well as safe havens like gold and the dollar.
The current global situation is compared to the 1970s, with an OPEC crisis, the Vietnam War, and the Cold War, along with significant fiscal spending.
There is an increased need for bond issuance to meet spending, both internationally and domestically, leading to a pull on liquidity.
The speaker predicts a positive Q4 due to two major liquidity effects at the end of the year, with significant reinvestment of capital.
The expected Santa Claus rally and January effect could lead to a large positive reinvestment of new capital on January 1st.
The market is expected to be tough to be short in Q4, especially with the ongoing war and geopolitical tensions.
The FED meeting on November 1st is highlighted as a potentially important date that could influence the market's direction.
Structured products have played a significant role in pinning the market despite liquidity concerns.
Banks and market makers are well hedged due to structured product issuance, preventing the market from getting out of hand.
The market is expected to rally back towards recent highs by mid-January, setting up a potential blowoff top situation.
Volatility is expected to increase as the market heads into November and December, leading to a potential market uptick.
Gamma and vega may not be the worst thing to play this route, with long-dated calls being a good way to play the rally.
Tech is expected to perform better than it has in recent weeks, but a rotation back to value from growth is anticipated post-rally.
The speaker advises watching the market closely in the coming days, as it could indicate the market's direction in the short term.
The end of October and the beginning of November are expected to be positive for the market, with the FED meeting potentially leading to a bullish market run.
Transcripts
hello and welcome back to another macro
and flows update for here at October
expiration um let's start with macro
this time around there's been a lot of
that going on um for one we have a war
in Gaza Hamas attacking um
Israel uh we've talked about macro quite
a bit this year particularly in terms of
the coming conflicts that are likely to
happen during a time of
globalization um unlike many we actually
see this as just another front on an
ongoing war that already exists the West
versus China and
Russia add to it Iran and entities like
Hamas uh this despite being an old
conflict is invigorated there is a new
war U because countries see an opening
right and what is now a much more
competitive world
we've talked about this for several
years now we expect there to be more and
more activity globally like this more
conflict things like this put a put
underneath the oil market and under
other resource markets globally puts a
put under Ed things like gold and safe
havens like the
dollar um this is something that you can
continue to expect these things are not
a straight line but the probabilities of
them um continue to be quite high so
this is not a
surprise um and I would argue actually
it's something that's well
telegraphed um and something that Russia
in particular Iran as a vassel of that
um and China by extension um are very
very aware
of
um add to that conflict and that growing
drum beat of war and competition that
we're seeing um the continued need for
more issuance uh to meet spending
spending that's happening uh in Ukraine
uh by the US government uh spending
that's happening uh at home to meet
individuals and growing uh distrust in
government um spending that's happening
uh across the board to support the
economy this is very similar to the
1970s we have we had an OPEC crisis then
we had a Vietnam War we had an active
cold war and we had a great society
program the last big fiscal spending
program since what we have now um these
are all threads that I would continue to
expect to be pulled on as we move
forward in the years to
come this issuance to meet that spending
is pulling liquidity out of the system
at the end of the day somebody has to
buy these bonds uh somebody has to fund
this spending and there is less and less
Supply um of of money to come meet that
that money as interest rates go higher
pulls liquidity out of the stock market
ultimately and other risk assets which
can now go to the alternative there was
no alternative there was a Tina effect
for all these years now there is a
reverse Tina that is slowly sucking
money out of risk assets as
well we're seeing that in particular
since the TGA was drain after the debt
ceiling we talked about this for several
months um it doesn't happen right away
there's a lag as we've discussed but
here is that lag but again that issuance
despite being negative is met by other
structural flows and that those
structural flows are very very strong
during certain windows as we've talked
about if we go back to last month in
September uh a big quarterly expiration
as we mentioned we we mentioned there be
there should be significant support into
the window of strength um which we saw a
massive dampening of all support against
an otherwise weak uh liquidity picture
led to a market going essentially
sideways after that initial decline in
early September that we called for um we
mentioned that if that decline was well
uh well uh supported in that window as
we expected and that Vault continued to
be compressed that come October 6 we
give a very specific date we would
expect the market to Rally back and
begin the process of healing that those
September declines eventually because
November December have structural
support we'll get to that structural
support in a second but October 6 indeed
was the bottom that we expected and we
have since seen a significant rally in
the S&P of 170 to 180 points uh that's
about
4% um not bad four four and a half
percent
um we expect this now to continue from
here despite some some maybe uh declines
briefly in this window of weakness here
after October expiration but except for
that we would expect this rally to kind
of continue um and we expect a very
positive
Q4 um why do we expect a positive Q4
we've talked about this before but let's
review two major major liquidity effects
at the end of the year uh on January 1st
uh there's about 10 to 20% of the total
collateral that's been gained this year
there's A1 trillion Equity Market let's
say the Market's up about 20% that's $2
trillion if about 15% of that goes back
into reinvestment at the beginning of
the year if you have that
recal and increase of of investment that
comes in first of the year is about $3
trillion in the context of a market that
has incremental flows of about 50
billion very small amount to move the
market on a day-to-day basis um 3
trillion is a massive massive amount um
that is months of volume and incremental
flow so that will get front run as it
always does in positive years with not
always but in most situations for that
Santa Claus rally that January effect
afterwards so that month but importantly
because of the holidays during that
period both Thanksgiving and Christmas
uh New Year's President's Day um you
know we're likely to get some uh some
significant V and charm buyback into a d
toally expiration that has a ton of open
interest and a ton of skew as it's been
out there for many years and one is one
of the biggest expirations out there so
expect a lot of supportive Decay uh to
to to the market in terms of v and charm
expect a big positive reinvestment of
new capital on January 1st and that
really means all of November and all of
December into mid January is a very very
tough time to be short particularly in
new wall of worry with the war that
we've been talking about um and whatnot
yes that issuance U is still a problem
but that should uh slow a little bit
into the end of the year and we think
that November 1st in particular is a
very important date that fed meeting is
given the war given the the creep up uh
and yields and concern by by fed
presidents like Lori um Lori Logan of
the Dallas fed who's a significant Hawk
um you know will likely cause the FED to
not only pause but take an extended
pause here into the end of the year um
and it will also lead the treasury We
Believe to shorten duration on its
issuance and slow uh some of the
issuance as well that combination of
slowing some of the liquidity drain
despite it still coming out paired with
um uh a a increased uh Von and charm
flow structurally into to the end of the
year could likely uh squeeze the shorts
We Believe into what could be a very
very interesting rally back towards the
recent highs and we believe all-time
highs uh by mid January that would be
the perfect setup for January 17th
Circle that date on your calendar the
Wednesday of January expiration the vi
expiration in January to Mark a
beginning turning point for then a
coming larger decline we do believe that
this
uh could very well move uh quite
convexly given um you know of almost 10%
given the amount of uh flows that we
will likely see into the end of the year
that would be the perfect blowoff top
situation we'll see if we get it or not
um I want to review Structured Products
the amount dramatic amount of issuance
that we've seen there has uh has played
a significant role in helping to pin
what has otherwise been significant
amount of drawn liquidity GL Global
risks in the market um and that
structured product issuance uh has left
Banks and market makers significantly
long ball and well hedged um allowing
the market to not get out of hand
despite all these risks and despite the
seasonally weak period with period with
all of the issuance the fact that it was
able to pin the market and hold it at
Bay despite the 5 to 7% decline we saw
is a significant win for the Bulls in
that week period and is very telling we
believe that there will be a significant
um you know amount of support likely um
in this coming
window
um there's usually a cash Crunch at the
end of the year as Banks need to have
more capital on their books um we also
believe that the fed and Treasury and
with the understanding that that is
likely coming more so than most years
given the IL liquidity will be very very
cautious and potentially as a result
quite supportive for liquidity into the
end of the year as
well so this is the macro picture um
we've you know that having been said we
are are having this conversation on uh
on on Monday of expiration a little bit
earlier than we usually do very strong
Monday as they tend to be of expiration
um with all the Vana and support going
into expiration week um the next several
days are very
important why because this is a very
supportive period uh tomorrow Tuesday
and Wednesday of expiration morning U
have structurally positive flows if this
Market despite the strength on Monday
cannot continue to build on the strength
for the next two days that would be a
sign that in the very short term meaning
for the next two weeks that we could see
a little bit more Digest question so
watch the next two days very carefully
um there is a chance that if that is not
building the momentum that we need we
believe it will but if it does not and
we see some continued weakness um uh you
know into what is otherwise a strong
period that would be a clue that after
expiration we could see some some again
some weights of that issuance and
liquidity pull continuing to to make the
the market digest a bit longer that said
We Believe by October 31st end of the
month beginning the month flow should be
quite positive this month because it is
an up month if it continues to be um we
also believe then with the FED meeting
on November 1st itself that uh given
what we think is a positive macro um
outcome for the FED there we could
really begin to see into November 3rd
and Von a charm week of November really
the markets start to to to run
so um a bullish message here after uh
the the pullback that we expected in
September and that October 6th turn that
we've we've called for um again this
does not mean don't take profits along
the way we we do expect this will be um
a a volatile um uh market and
increasingly so as the market um heads
into November and December we also
believe that that volatility will
actually lead ironically into market up
vol up as we get into um late December
early January um and V gets to a nater
so we do believe that V will eventually
bottom here and that actually gamma and
v may not be the worst thing um to way
to play this route a long dat call
position we believe set out in uh
February or March um Opex for next year
could be a very interesting way to play
this rally with a bit of protection um a
nice amount of convexity for what could
be a decently large rally and a ball
that will likely have to uh bottom at
what is a a realized ball that will
slide too low so calendar call spreads
in particular um long-dated calls um are
probably the best way to play this rally
we believe in the months to
come um ultimately a blowoff top we'll
see market up B up potentially for weeks
um before some type of Decline and we do
believe that will come in late January
and February if we do get this rally
that we um likely see in terms of areas
to focus on We Believe Tech um will will
actually do a little bit better than it
has been um in in the last several weeks
and regain a bit of end ofe push uh as
we get a trash Dash um uh you know some
of the Russell might actually do okay as
well uh we believe it'll be a lowquality
rally um uh in particular but we also
believe that those items those those
those entities that rally during this
period are also the ones that are most
likely to kind of lose um in the coming
decline we do believe Tech in particular
will begin its second leg down after
this uh this rally comes and it will be
a dramatic rotation back to Value from
growth into this coming decline um
ironically it'll happen as as we believe
yields will actually come down during
that period for um for some initial
period uh and and again counterintuitive
much like the tech rally this year has
come in the context of rising yields
which again has been a very count
counterintuitive duration move expect
more dispersion to continue index ball
should be more pinned dispers that
should lead to more more risk and more
rotation as we've seen all year that
should continue to be a great trade as
we have had in our VA neutral as
well it will be an interesting Market
continue to be water thanks again for
joining me um until next time this is
jeem Caron with your macro and flows
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