Market Notes, 3rd July 2020

Steepeners and flatteners

Andreas Steno Larsen has written his macro piece for Nordea. The message seems to be that in the complex dance with the Fed and the US Treasury (Powell & Mnuchin) there will be a tightening which will cause the steepener trade to falter, by which Larsen seems to mean the 10year - 2 year yield on USTs. To execute the trade you need to know the duration ratio, which is handily available in English and Chines via the CME Group website. As this helpful page points out, the multiplier for the 2-year is twice the 10 year (2000 vs 1000), so the notional ratio is approx 1:1, but don’t do this at home, folks! To profit from the flattener, you don’t sell the long end and buy the short end, because the shape of the curve refers to yields, not prices. Confused? You bet I was!

The drivers yield curves are complex. If you don’t believe me, read this post from the wonderful Kevin Muir. Taking a view on the steepness of the curve sounds a safer bet than going long or short rates, but it’s not that safe!

More about unemployment

Unemployment (next to inflation) is almost impossible to measure accurately in normal times. In the current pandemic, it’s a hopeless task. Nevertheless, the market rallied on one measure, which was miles away from the other measure. I don’t pretend to know what the real figure is, but I’d be gobsmacked if we ended this calendar year with anything like full employment, either here or in the US.

Biden

I try not to spend too much time looking at US politics. It’s far too depressing. This article though was interesting. It’s from a reporter who appears vaguely sympathetic to Biden, but who reports that around 40% of voters think is suffering from dementia. How on earth can the Democrats choose a candidate with such a crippling disqualification from being president? The UK Labour Party seems to have a death wish, but at least they chose a leader who is under sixty. The Dems chose a candidate who is four years older than Bill Clinton (and five years older than Hillary). This just shows how dysfunctional the leadership of political parties has become. Presumably, Biden ended up as the candidate because he was biddable. It’s a crap deal for the voters, though, and will probably gift Trump another term. You’d almost think that the Wall Street donors who pay Hillary $250K for a twenty minute speech and pay so much into the Dems would prefer a business-friendly, anti-redistribution kinda guy after all.

Wrap

US markets (equities, anyhow) are closed today, so there is not much to report.

The pubs open tomorrow in the UK. A symbolic moment, I suppose, but I don’t think it will in any sense represent a cliff edge in terms of our return to normality, as there will be new outbreaks of the disease, and this will cause more ordinary citizens to be fearful. Maybe I’m being too pessimistic. The last couple of books I’ve read have been about the Great Depression, and my mind is constantly brought back to that time, especially in the USA, where all the state’s resources were not enough to put the economy back together again. I hope I’m wrong.

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