Equities Higher as War Looms

Higher Rates = Higher Net Risk Free Interest Uptake

We condemn any violence that exists across the world today, we fear that it is civilian casualties and the unprotected that see the brunt of power battles enacted under the guise of military conquest. We are advocates of peace and diplomacy which should always be the goal before any loss of human life, however we know we live in a world full of violence, chaos and uncertainty, so we can only pray for those unfortunate who have to bear the brunt force of brutality that plagues mankind and has done so for centuries. We will not comment on this weekends events other than we hope for a swift peaceful resolution, yet we also know given the recent retaliatory actions, more bloodshed lies ahead.

As far as the US financial markets, the equities opened weaker and then proceeded to march higher all day long. We suspected this would be the case as the US markets are a bastion of safety for the worlds capital and once again they proved this today. The markets have been in oversold territory, CTA positioning has flipped short and many names are most likely going to be bought in this bear market rebound now. The first tell for today was the consistent equity bid, even bond futures were bid and we may see a continuation of this in the coming days. However we will not change the overall fundamental sentiment as the overall tone is still negative.

As far as the net changes on the day of some of the markets, we follow, the SP500 and the Nasdaq futures as of this letter are +27 and +81 points respectively with the US 10 Year Futures +32 ticks or one full point which yield wise, should correspond with about a 4.65% implied yield or a drop of around 13 basis points from Friday’s settlement. (US Treasury Cash market closed today)

One point we did want to make today is the fact that higher rates, if they are indeed here for the next 8 months or so (first rate cut is not expected till June 2024) it seems that the yield pick up on the risk free rate is a massive stimulus for many cash stashed, investors, corps, pension funds and insurers. We have said it before that higher rates now, in today’s economy lead to increased inflation via the risk free interest take up mechanism. In order to demonstrate this, let us present this chart below:

In a ZIRP environment you can see how little risk free interest is paid out via the US Treasury and FRB. Now compare this to that risk free interest today. What you will see is a massive near trillion dollars worth of interest payments transferred from the US Treasury to the investment and consumer communities.