Hello Traders and Investors and thank you for joining me for another edition of the Magnelibra Markets Podcast, I’m your host Mike Agne and today’s episode #18 is entitled “Geopolitical Risks Mounting and The US Curve Continues to Steepen”
But first a quick regulatory disclaimer:
DISCLAIMER: The following podcast is for educational purposes only. This is not a solicitation to buy or sell commodity futures or options. The risk of trading securities, futures and options can be substantial and may not be appropriate for all listeners.
The financial markets are closed for the MLK observance holiday. There is a lot going on across the world and so let’s just dive right in. First up, there is word out of Ukraine that Zelensky has requested Switzerland hold a global peace summit, so maybe we are getting closer to the end of this conflict. We know that its Davos week and the global elites are attending the annual World Economic Forum.
The goal of WEF, a not for profit organization is to bring public and private sectors together to discuss ongoing global issues. The WEF does often get a bad rap from many online social media outlets as an over reaching authoritarian organization that uses its power and influence to exert its will amongst the global masses. Look we don’t make an opinion upon something we ourselves have never personally attended, but considering the top 1% own 43% of all the global wealth, yea we get the disdain for such lavish and publicized meeting of this group, we get it. However Magnelibra only likes to deal with facts and figures and will try to refrain from conspiracy or otherwise unknown speculations, although we have our own personal opinions, we find that its better to just stick to what we know and understand to be true rather than speculate as to the nature of the affairs that we ourselves do not have first hand knowledge of.
In other news, this weekend, we also saw that farmers in Germany continue to protest the removal of diesel subsidies as they took matters into their own hands driving their equipment to Berlin and disrupting matters there.
We can only imagine that this situation as the economies move into a recession will only get worse, and with 10k farmers disrupting things, well Chancellor Scholz will need to do something to calm things down. The excuse that the budget can’t afford it is valid, then again we all know the central banks propensity for QE and the printing to pay for things, but we can’t imagine the farmers looking at the TARGET2 imbalances and making an opinion of all that, but they should!
In the Middle East, there is also concern with supply disruptions of gas and other goods given the ongoing Red Sea attacks by the Houthi rebels on vessels. We know that 12% of the seaborne oil and 8% of liquified natural gas or LNG go through the Suez Canal and 40% of Asia/Europe trade normally transits the sea. (CFR.org)
This also has a way of increasing shipping and insurance costs, so at a time where we have just begun rectifying post covid supply disruptions we now have this to contend with. This for us is a dangerous situation, we know UK and US operations are ongoing in the area and strikes have occurred in Yemen directly. This is all leading to a much bigger conflict given the fact that Iran will not just sit idly by with what is going on there, in Gaza and not begin to conduct their own operations.
So we must monitor all of these things and to say that there is a potentiality for a greater geopolitical conflict is not an understatement. We know all this effects global markets and if we are moving into a much more difficult financial period, this will only exacerbating things. So we will do our best to keep you fully aware of these situations but all in all, know that everything matters in today’s so tightly wound and interconnected world.
Ok in news closer to home here the United States is dealing with delayed and grounded flights, power outages and many other disruptions related to the ongoing arctic blast that has gripped a greater portion of continental U.S. This is going to last a few days and is something we believe will continue to plague the northern hemisphere as climate variability is here to stay. It will be interesting to see the NFL deal with the Buffalo Bills/ Pittsburgh Steelers game which was postponed earlier this weekend but slated for tonight! Fans were pouring in trying to clear seats off this whole weekend, but it looked futile. Thankfully the Bills are building a new stadium which is slated for opening in 2026 will come with radiant heating and a canopy that covers 65% of the the seats (wpdh.com)
This will be fun to watch and we can’t imagine how hard that frozen field will be for those players, so hopefully everyone makes it out of there in one piece, hell we will give it to any of the Bills nation that show up to this, takes true dedication…the Bills better win!
Ok onto the real reason we are here, as we touched upon it late last week, it was the bond market that was the real surprise as it continues to reassert the steepening trend almost knowing it will force the FOMCs hands here. Take a look at Friday’s US yield curve:
The 2s dropped a hefty 12bp while the 30Y was higher by 1.9bp. This is the obvious trend now and both long term and fast money seem to be consistent in this bid. We will expect days of profit taking but all in all, we expect the steepening to continue. Our target for the 5s30s is 50bp and right now it stands at 7.5bp, so a long way to go here! To you rookie bond traders out there, please don’t be a hero and fade this move, these things have a way of ripping your face off.
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