FICC

Comments on recent Fedspeak, bond market moves and this morning’s CPI report.

As global financial institutions like the IMF draw attention to the real-estate crisis in China, the CCP will be forced to step up regulatory and restructuring efforts to contain its spread and limit further contagion domestically and globally. The Party also will be forced to deliver stronger fiscal- and monetary-policy support to beleaguered banks and developers. We expect it to do so, which keeps us bullish energy and metals. Failure raises the odds of a collapse in the property markets, which would be socially destabilizing, and lead to greater risk aversion and volatility globally.

Hamas’s attack on Israel raises the odds of a wider conflict in the Gulf, which would lead to higher oil prices. Given the response of oil prices Monday, markets appear to be relatively restrained in their assessment of a sharp escalation in prices. However, this is early days in a strategy that is just revealing itself.

An update to our US bond strategy following this morning’s employment report.

In this report, we explore some trading opportunities after a volatile few weeks for FX markets.

The EU’s transition to a carbon tax launched this week via its Carbon Border Adjustment Mechanics (CBAM) will lead to higher inflation in the medium term (3 – 5 years out), and will stoke consumer (i.e., voter) antipathy if it becomes effective in 2026. As a result, the tax will be watered down. Food and energy prices are particularly at risk, as imported fertilizers, and electricity-generation and -transmission components made from steel and aluminum are affected by the CBAM. We remain long oil, gas and metals equity exposure via the XOP, XME and COMT ETFs. We also remain long gold to hedge inflation.

We present our Portfolio Allocation Summary for October 2023.

Special Report

After a busy month of global central bank meetings, and rising global bond yields, it is a good time to update our suite of Global Central Bank Monitors to assess the likely next moves from policymakers. The signal from the Monitors in all countries (outside of Japan) is consistent with the “on hold but higher for longer” messaging from major central banks like the Fed and the ECB. Only our Bank of Japan Monitor stands out as clearly signaling the need for tighter monetary policy.

The global energy transition will become more disorderly, if oil-and-gas capex growth continues to outpace that of critical minerals. We remain long exposure to the equities of oil and gas producers via the XOP ETF; the COMT ETF to retain direct commodity exposure, and $100/bbl December 2024 Brent calls. Slower supply growth of metals facing off against steadily increasing demand also favors exposure to metals miners and refiners via the XME ETF.

We continue to expect Brent crude to trade just above $101/bbl in 4Q23, and to average $118/bbl in 2024. Higher volatility looms. We expect Russia will cut oil production next year as part of a concerted effort to undermine Biden’s re-election. Oil-demand volatility is set to rise in response to divergent policy imperatives. We continue to favor equity exposure to oil and gas via the XOP ETF; direct exposure via the COMT ETF, and long Dec23 $100/bbl Brent calls. We are getting long Jan-Feb-Mar 2024 Brent futures vs. short the same months in 2025 expecting steeper backwardation as inventories draw and markets tighten.