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Shifting Investments Amid Rising Market Uncertainties

By:
Stephen Innes
Published: Mar 27, 2023, 06:06 UTC

Amid recent market extremes, investors cautiously navigate the landscape as the banking sector faces turmoil, while oil markets experience record-low liquidity levels.

WTI Crude Oil

In this article:

Key Points:

  • Monday morning calm despite banking sector turmoil
  • Fed cuts drawing investors to S&P 500
  • The US avoiding negative credit impulses for now
  • Oil market liquidity is at its lowest since 2011

MARKETS

After a weekend to get some facts in order, investors put a band-aid on recent extremes that have left cross-asset traders frustrated, bewildered, and tilted. ( In poker, being on tilt is a state of mind that leads that player to make costly mistakes.)

And so far, nothing seems to be moving too far off kilter this morning as there is an unusual Monday morning calm amid recent transatlantic banking sector turmoil. Although I must admit whenever rates, commodities, and credit are screaming ” get out of dodge” while stocks are listening to Strawberry Fields Forever, I’m constantly waiting for something to snap.

And while it still appears like Fed cuts are attracting investors to the S&P 500, like moths to a flame, the YTD flows into the money market, and bond funds signal an escalating household shift away from equities and toward the alternatives. I worry about how much more there is to come down the pipe.

From a “real economic” perspective, the critical risk hiding in plain sight for the US is that a negative credit impulse takes hold, driving the US into recession. While a bit early to start waving the green flag, the latest weekly Fed data offer reassurance on that count. Net new loans from big banks picked up on a 4-week rolling basis.

On the FIMA repo, which had everyone worried last week, the reasonable inference is that the SNB drew to support the resolution of CS.

Banking isn’t just another run-of-the-mill blue chip entity; Banks play an integral and most important part in keeping the economy well-oiled. Still, a significant tightening of bank lending conditions is probably unavoidable, so how the “real economy” adapts to that has yet to be seen. But, for now, it seems investors agree the patchwork of government lending facilities should help prevent an acute banking crisis.

OIL

Caution reigns over oil markets this morning after traders had a chance to digest the latest COT report that showed Wti, Brent, gasoil, gasoline, heating oil, futures, and options delta were at the lowest levels since that data became available (2011). The drop in liquidity for a 10X vol asset makes it difficult to position comfortably, short or long.

And, of course, the VAR liquidity shock aftereffects and a week ago Friday’s “negative gamma event” make it challenging for even seasoned oil traders to jump back in the saddle again this past week. Hence we are not adding to longs this morning, rather taking some time to let the dust settle and smoke clear.

About the Author

Stephen Innescontributor

With more than 25 years of experience, Stephen Innes has  a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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