Junk rally on recession fears, Amazon partnering with Grubhub

A weird session

As we have said recently on our podcast and in equity notes the market has turned into a binary state of inflation and recession trades with latter dominated flows recently as commodities have come down together with inflation expectations. Yesterday’s session was wild with a significant breakout in USD which coupled with galloping energy prices in Europe suddenly got all commodities to flip on fears of recession with the Bloomberg Commodity Index falling 5% reaching levels from early February removing the entire extension higher following the war in Ukraine and sanctions on Russia.

Bond yields followed commodities lower and in equities flows intensified throughout the session in the direction of reversing the value and momentum trades. Value and momentum stocks have a significant overlap these days and Bloomberg’s long-short versions of these two style factors declined 4.5% and 5% respectively yesterday which is a lot for long-short style factor. In our own theme baskets the momentum reversal was revealed by the best performing baskets this year declining while the worst performing baskets such as bubble stocks shot higher. In other words, increased recession fear takes inflation and interest rates down and thus the junk pockets have to be bought.

Before anyone thinks that this is the winning strategy the next six months we would like to emphasise that the nominal economy in the US is still growing +10% y/y and the underlying structural issues on the supply side of the economy have not been fixed. July is a low liquidity month and as such we recommend investors to not put too much weight on yesterday’s move.