In Case You Missed It: Charts of the Week

By Mark Masterson on September 30, 2022

It has been said “a picture is worth a thousand words.”  With that in mind, below below are a few of the most important or interesting charts from the past week…..

Charts from this past week:

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Let’s look at yields first…..

I saw this headline last night…..

• BREAKING:  30-year mortgage rates hit 6.87% in the US, per Mortgage News Daily.

The rise in yields will most certainly impact real estate going forward.  At the beginning of the year, the 30 year mortgage rate was sub 3%.  So – we are more than 100% higher today.  That is an extreme move.

The surge in yields is tightening financial conditions.  This is what the Fed wants – but – a move too far too fast can break things.

How Tight are Financial Conditions? – Here is a ten-year chart.  We are now near the Covid panic extremes.

The gold color is the 10 year treasury yield.  That is a vertical move.

The blow is financial conditions.  As yields rise, conditions tighten.

@Convertbond

Another chart showing the tight financial conditions……

Outside of the worst of the pandemic, Bloomberg’s measure of liquidity is at this worst level in 12+ years.

Nearing those Covid levels….

Bianco Research

As bond yields rise, and bonds fall, stocks are falling too.

In fact the two are moving together more today than almost any time in the past.

The correlation between stocks and bonds over the last 2 years is the highest we’ve seen since 1993-1995.

That is why the 60/40 portfolio (60% stocks/40% bonds) is having one of its worst years ever….

A 60/40 Portfolio of US Stocks/Bonds is down 19.3% in 2022, on pace to become the 2nd worst year in history after 1931.

Below from Bank of America…..

This Great Bond Bear Market is “thus far a doozy,” with the worst losses since 1949, 1931 & 1920:

BofA’s Hartnett. This “threatens credit events & liquidations of the most crowded trades,” long dollar, PE, big tech. “True capitulation is when investors sell what they love & own”

So – yields rising are causing big problems.

But – currencies may be an even bigger problem.

I’ve long called the US dollar the “most important chart in the world”.  The dollar surge is problematic as it too will “break things” if it goes too far – too fast.

Pressure building on governments and central banks to push back against strong dollar:

• A number of FX stories beyond sterling also playing out this morning, including China’s PBoC saying it will impose RRR of 20% on currency forward sales by banks in an effort to make it more expensive to bet on yen sliding further, which has already fallen to weakest levels against the dollar since 2008 (Bloomberg).
• South Korea’s finance minister also said yesterday his government would prepare to stabilize the won, including deploying FX equalization fund to induce ~$8B in dollar supply in local currency markets (Reuters).
• Japan’s finance minister also said the government and BOJ are ready to respond to new speculative currency moves, which comes after last week’s intervention to support yen (Reuters).
• India’s RBI also intervened today after rupee fell to record low against the dollar (Reuters).
• A number of recent press articles (Reuters, CNBC, Bloomberg) have focus on the “something is going to break” dynamic around global FX markets. Several currency strategists also noted dollar pushing into most overvalued territory since 1980s, which ended with a coordinated global intervention to weaken the dollar.

Take a look at the dollar surge over the past year.  You can see it is now moving into what looks like a panic, blow off type of move as it goes vertical…..

These kind of moves are not sustainable,  but they can last 3-5 days.  We are nearing a point where the Fed may have to intervene to bring the dollar down.

The dollar / Euro chart is massively disconnected.

The dollar in blue has gone vertical versus the Euro, and the Euro is collapsing versus the dollar……

Eventually – that gap will close – but not without the Fed pivot.

Now – lets look at some extremes in the equity markets……

This market is deeply, deeply oversold.

In fact, this is the most oversold the market has ever been via the McClellan Oscillator looking at all major exchanges…

This certainly sets the stage for a market bounce……

@mayhem4markets

Sentiment is at extremes as well…….

Panic has crept back into market as @sentimentrader Panic/Euphoria model has fallen slightly below June’s fear level, but not yet consistent with prior bear market lows

Put buying has as extreme as we will ever see.

This shows extreme fear as investors try to buy downside protection.

This can also be a contrarian signal that a bounce is coming…..

More than 33 million puts traded on Friday, the highest single day of put volume since data began to be collected roughly 30 years ago.

The AAII survey is quite bearish today……which is also a potential contrarian indicator…..

Most bearish reading in the AAII survey since 2009

Nasdaq is massively oversold…….

Yesterday Nasdaq components above their 50 day moving average closed at 2.  This is  the same reading as during the Covid crash lows.

Again….

The biggest fly in the ointment is investors have yet to give up and sell……

That MUST happen at bear market lows.

Global #fund inflows have started to weaken. But there is a long way to go to get to negative flows.

So – sentiment is looking like a bounce is due.

Market internals being so oversold also signals a bounce is due.

Positioning is not yet at a point where a bear market low is put in.  Investors still have far too much in equities to see a typical bear market low.

But……

As I have said before – we need to see this market bounce.

Some of the more dangerous markets are those that are clearly oversold, yet still cannot mount a defense and bounce.  Lets keep an eye out for a multi-day rally that has potential to turn into something more should we get a catalyst.

Prudence and patience remain the theme.

Markets remain erratic this morning as investors digest the large move in both credit markets/yields, and currencies.

We did see one central bank blink this morning.  The Bank of England pivoted.  I’ve been saying that the Fed cannot truly pivot until something breaks.  During the Covid crash of 2020, the bond market broke – and the Fed pivoted to massive QE to support bonds and bring down yields.

This morning, the Bank of England also caved to rising yields….

Here is the headline:

• BoE to buy long-dated Gilts to restore orderly market conditions (statement)
• The Bank of England said it will start buying government bonds on “whatever scale necessary,” in an attempt to calm the U.K.’s growing economic storm
• BANK OF ENGLAND: BANK WILL CARRY OUT TEMPORARY PURCHASES OF LONG-DATED UK GOVERNMENT BONDS FROM 28TH SEPTEMBER.
• BANK OF ENGLAND: BANK OF ENGLAND’S FINANCIAL POLICY COMMITTEE NOTED THE RISKS TO UK FINANCIAL STABILITY FROM DYSFUNCTION IN THE GILT MARKET.
• BANK OF ENGLAND: BANK OF ENGLAND STANDS READY TO RESTORE MARKET FUNCTIONING AND REDUCE ANY RISKS FROM CONTAGION TO CREDIT CONDITIONS FOR UK HOUSEHOLDS AND BUSINESSES.

What caused the pivot?  Take a look at the chart below.  It is the 30 year Gilt (the Treasury bond of England).  The yield was surging and reached 5.15%.  This is the highest level in 20 years.

*UK 30-YEAR YIELD EXTENDS SURGE TO REACH 5.1%, HIGHEST SINCE 1998

Bloomberg

The Fed is not alone.  Janet Yellen – Treasury Secretary – sees nothing wrong out there.  Here are her comments from last night….

• US TREASURY SECRETARY YELLEN: I DON’T SEE ANY ERRATIC FINANCIAL MARKET CONDITIONS.
• US TREASURY SECRETARY YELLEN: I DON’T SEE ANY LIQUIDITY OR DELEVERAGING ISSUES.

Question for the Fed is – how much pain in credit/bonds is too much?

Well – the 10 year Treasury bond did hit 4% earlier this morning.  That pushed the 30 year mortgage rate up to 7%.  That is a massive move in mortgage rates.  Ann Margret and I were talking about our first home purchases over 25 years ago – at a rate of about 5.5%.   Here we are now at nearly 7%.  That certainly may price a particular buyer out of the real estate market as many buy a payment, not a home…..

The Daily Shot

Another market that has been moving wildly is the longer dated US Treasury bonds.

Below is an ETF for the 20 year treasury bond.

It is now down 40% over the past two years.  That is a spectacular move for bonds in a short period of time as yields rise quickly.

That suggests something is breaking to me…..

Remember, bonds typically rally into a recession.  This time they are falling hard. 

• ‘Volatility vortex’ slams into $24T US government bond market (FT)

I posted several charts showing extreme fear in equity markets, as well as extremely negative sentiment.  These conditions tend to lead to at least a short term bounce in markets.

Here is another sign of extreme fear from last night……

Folks are buying up call options on the VIX (fear index/volatility) at a record pace….

VIX call options volume yest hit the highest level since **March 2020**

@ericwallerstein

@WSJmarkets

Rising rates are impacting markets.

Mortgage rates hit the highest level since 2008 after a record yearly increase (2nd chart).

They are going to impact the Government as well. 

With the current presumed terminal rate of the Fed funds rate we’re looking at over $1 trillion/per year in debt payments.  This is much larger than the US defense budget.