Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Access both platforms from your single Saxo account.
Warning brief: market sell-off risks may be at highest since pandemic outbreak.
John J. Hardy
Chief Macro Strategist
Summary: We are at the end of the post-pandemic policy cycle and this brings with it the potential for a period of significant transitional volatility. This article is an abridged set of points looking at the evidence that the broader market is at risk of rolling over significantly in coming days and weeks and what investors can do to generally risk market exposure.
Note: this is an abridged version of a far longer article – see the original article for more background, charts and additional charts.
What: this market is set up for a potentially very significant correction (baseline of 10-20% given the magnitude of the recent draw-up) in the coming weeks as the post-pandemic policy cycle is coming to an end and already reversed for some countries. We may be early and /or wrong, but a cascade of developments and forward concerns have us on edge here. Please keep in mind that this article is meant to provide some food for thought rather than serve as a recommendation for action.
Evidence
- The Fed is pulling away the punch-bowl in coming months and has signaled as such recently in its clear indication that a tapering of asset purchase is on its was before year ahead, barring a mishap in the economy on the delta variant, etc.
- Markets have started rolling over even before the Fed is set to pull out, with the bubbliest stocks as seen in our Saxo Bubble Stocks equity theme basket rolling over from their remarkable peak already in February, US long yields rolling over starting in Q2, copper and crude oil breaking down after highs in May and early July, respectively, suggesting forward concern for growth.
- In FX, the US dollar is responding to the Fed’s shift and is poised near the highest levels of the year and AUDJPY, a classic proxy of all things pro-cyclical, has likewise broken down
- Risk measures are picking up to the largest degree this year, as noted in our Saxo Global Risk indicator
Ways to reduce risk
- Simply reducing leverage to avoid compounding possible downside risk.
- For longer term and general inspiration, consider an all-weather, 100-year portfolio, as discussed by our Steen Jakobsen (Note that Chapter 8 discusses the portfolio principles).
- Besides simply a partial reduction of exposure to the market, some may consider
- Options hedges (long puts) in the S&P 500 and/or the Nasdaq 100 futures, which are very liquid markets. The tough part here is choosing strike prices and expiry dates
- Hedging the market using a volatility ETF like the VIXM (ProShares VIX Mid-Term volatility ETF). The reason for using the mid-curve as opposed to products more sensitive to spot volatility is that it “costs less“ in terms of negative carry to hold the position, even if it is potentially less reactive tactically to moves in volatility.
In any case, be careful out there.
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ... -
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)