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    Positioning into Q3    

  See what's top of mind in Global Markets as we enter the new quarter.    

    Here is what you may have missed:    

       

  Markets/macro: not the time for nuance

The tectonic plates that underlie macro trading are undergoing a deeply
fundamental shift. In that context, market participants are struggling to price
the tails of the distribution—across multiple asset classes—in a constant and
cohesive manner.

So, the big dynamics in the game remain in flux, realized volatility is huge and
I can't decide whether this is a time to be going for the brake or to be going
for the gas.

The upcoming Q2 reporting period should be immensely informative on the state of
US corporates. For the macro investor, it will be a treasure trove of bottom-up
data on labor, inflation, bank capital, post-COVID demand, the goods-to-services
rotation, on and on. I'm inclined to think the risk is not around Q2
earnings—again, there's been a lot of nominal GDP spilling around the globe—but,
rather, it's that forward guidance has to come down. Note the YTD selloff in S&P
has been most entirely driven by the multiple—which, incidentally, has mapped
very closely with the move in real rates—while forward earnings expectations
really haven't budged.

   

 

Full Note →

   

  Click here to receive Tony Pasquariello's weekly macro/markets note.
   

       

  Two-Minute Views on hedge fund trends with Freddie

Coming into quarter-end, the most asked question is around redemptions. There
have been some well-publicized performance challenges in pockets of the hedge
fund industry, so there is lots of focus on how allocators are responding with
their capital allocation decisions.

In the first quarter, we actually observed net inflows to hedge funds, and now
that we are past the deadline for most redemptions to be made for the end of Q2,
we have not heard any anecdotal evidence which suggests any significant
redemptions for the industry as a whole. We're a few weeks away from having data
for the quarter, but it seems that investors are holding steady with regard to
their hedge fund allocations, for the time being at least.    

 

Full Note →

   

  Subscribe here to receive future editions of Two-Minute Views.
   

       

     

       

  Q3 outlook: EM macro views and trades amidst US recession risks

US 1y ahead recession probability is rising – the main driver: unprecedented
pace of tightening is affecting financial conditions. 1y ahead projected
probability of recession is jumping from currently 59% to 95+ into August with
estimated horizon H2-2023. The model is based on 70+ variables in univariate
logit models predicting 12m ahead US recession. Fast moving Fed can be
compressing this timeline. The market liquidity risk during the summer period is
a key Q3 concern.

Scenario A - the “soft landing” into a mid-cycle slowdown, 5y BEIs down to 2.20
by Q4 and once achieved, the Fed ends the tightening cycle at 3.25-3.5% It could
be labelled soft landing as this path doesn't necessarily lead to recession if
BEIs drop fast enough the ease the pressure on the Fed to go much above neutral.
Scenario B – the sticky inflation expectations problem – 5y BEIs sticky around
3% - stagflation and a very inverted curve with stronger USD. Scenario C – a
fast recession triggered by a sharp rise in risk aversion, collapse in
liquidity, FCI shock and higher saving rates.    

 

Full Note →

   

  Subscribe here to receive Borislav Vladimirov's EM coverage.
   

       

  GS Tactical Flow-of-Funds: July Preview

New inflows = New quarter. Over my 20 year run tacking this stuff, Investors
deploy capital in size at the start of the quarter. I do not expect the first
half of July to be any different. This is not consensus.

My major focus for this week will be quarterly pension rebalancing. We have +38B
worth of equity demand in the US and +$22B worth of equity demand in Europe.
Vacation schedule picks up materially next week, and liquidity adjusted, this is
one of the larger rebalances that we have seen (98th percentile rank in USA).

So while the move last week is exclusively short covering laggards and selling
long winners, higher prices have been uneasy for long only managers who become
“higher buyers”. Do we see “FOMU” – fear of materially underperforming, kick in,
if we actually do continue to rally into early July.    

 

Full Note →

   

  Subscribe to Scott Rubner's weekly Fund Flows note here.
   

       

  G10 FX Options: Q3 Outlook

Financial conditions have tightened significantly this year and the chances of a
growth slowdown have increased.

H1 saw drawdowns in risk primarily driven by higher yields. High beta currency's
underperformed as these economies benefited from higher commodity prices.
However, the latest risk off episode through June has looked like a more
traditional “growth scare” seeing commodities trade lower with equities (see
chart below)

Under this environment, short commodity currencies can return to being an
effective risk hedge. Long $CAD is our top pick given its correlation to oil and
attractive entry point in spot given CAD's relative outperformance this year.  
 

 

Full Note →

   

  Subscribe to more FX Options content here.
   

       

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