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ZH Geopolitical Week Ahead: A Destabilized Pakistan Could Become Far More Dangerous Than Ukraine War

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A weekly round-up of geopolitical flashpoint and energy news we're keeping our eyes on, and trends impacting global markets, accessible for Premium members and above...

While 99-year old Henry Kissinger told US media that he predicts China's entry into Russia-Ukraine diplomacy will result in the two sides finally coming to the table, UN Secretary General António Guterres issued a more ominous prediction in a fresh interview with Spain's El Pais. He said "I believe that peace negotiations are not possible at this time" as "both parties are convinced that they can win." But he did acknowledge one rare bright spot: "The most important initiative has been the export of grain from Ukraine and food products and fertilizers from Russia through the Black Sea." But that too is teetering on the brink of failure.

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Warnings signs, but what if...

Warning signs

Bobby Molavi writes: "...new job openings are the lowest they’ve been since Apr 2021, with Layoffs the highest they’ve been since Dec 2020. We’re starting to see leading indicators of repricing of credit like subprime auto loans falling to around 2% of all auto loans from around 10% in 2018. We saw German industrial production fell more than expectations in March on the back of weakness in the Auto sector. Oil has had its 6th monthly loss in a row. US courts have just seen 57 ‘large’ insolvencies in Q1 for the busiest quarter since 2009".

Add to this Yellen's no option and things could be getting exciting again...

another "disturbing" gap

LQD vs SPX gap widens even more. Recall JPM's LQD hedge logic from yesterday here.

Source: Refinitiv

The sole buyer

BofA on the latest buying:

1. Corporates were the sole buyers through buybacks, as institutional, hedge fund, and retail clients sold equities; retail clients have been selling for six consecutive weeks, while hedge funds sold for the first time in four weeks.

2. Buyback activity is strong and tracking above seasonal trends.

Current data looks worse than prior “good pauses”

"The Fed and ECB have just undertaken the fastest set of rate hikes in over 40 years. Policy works with a 12+ month lag, and a “pause” doesn’t immediately relieve this headwind to growth. A key reason we prefer bonds over equities is that current data looks worse than prior “good pauses” that boosted risky assets. It’s not just inflation. Relative to the bullish pauses of 1985, 1995, 1997, 2006 and 2018:

1. Current Industrial Production (IP) is much weaker

2. Leading indicators are negative (they were positive during ‘good pauses’)

3. The yield curve is inverted (it was positively sloped during ‘good pauses’)

4. The labor market is tighter

5. Banks are tightening credit conditions significantly (versus easing, or neutral conditions during ‘good pauses’)."

(Andrew Sheets, MS cross-asset)

Still in love with soggy Euro(pe)

The spread between European vs US economic surprises has continued to plunge...while most remain in love with the euro. The gap should not be dismissed.

Source: Refinitiv

Dollar just needs a bit of VIX "love"

DXY vs VIX needs little commenting.

Source: Refinitiv

CTA's and oil

Come on guys. Another puke at lows, must buy the squeeze set up for momentum chasers. Last year they got everything right, this year is pretty much the inverse for the CTA community.

Source: GS

Systematics & dealers

Systematic macro strategies are expected to be sellers of $5-10bn of global equities in the next week, compared to a week ago when they were buyers of $5bn and two weeks ago when buying was $15-20bn/week. On top of that, S&P 500 options dealer long gamma positions are about half of the magnitude that they were coming into the week ($3-4bn vs $7-8bn a week ago), leaving the market more free to move in either direction. (MS QDS)

What if...

...markets actually break up from here? Both NASDAQ and SPX have been stuck inside a range since late March. Consolidations on recent highs can become violent to the upside. GS writes: "The desk has seen some demand in the last week or so for right-tails, which has led to a bid in the S&P call wing. For a melt-up trade that very few have, S&P 3-month knock-out calls look decent."

Source: Refinitiv

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2 hours ago at 20:36

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Warnings signs, but what if...

Warning signs

another "disturbing" gap

Source: Refinitiv

The sole buyer

Current data looks worse than prior “good pauses”

Still in love with soggy Euro(pe)

Source: Refinitiv

Dollar just needs a bit of VIX "love"

Source: Refinitiv

CTA's and oil

Source: GS

Systematics & dealers

What if...

Source: Refinitiv

Today's Top Stories

"We're Back": Tucker Carlson Moves Show To Twitter

This article is so good,
it's for premium members only.