Syz the moment

Here we go ! The Banco Central de Chile (BCCh) is the first central bank to kick off easing cycle! The Chilean Central Bank made a surprising move by cutting its key interest rate by 100bp to 10.25%, surpassing market expectations of a 50bp reduction. The decision was unanimous, and the BCCh hints at further rate cuts in the near future. This move comes as inflationary pressures ease rapidly, and economic activity weakens. Despite recent challenges, the CLP (Chilean Peso Spot) has shown resilience this year, benefiting from reduced political uncertainty. Policymakers aim to support the #economy amidst deteriorating #sentiment and economic activity. The minutes scheduled for August 14 will provide further insights into the central bank's outlook. Source : Bloomberg

The chart below courtesy of Crescat Capital / Tavi Costa is a reminder of the divergence between rising yields and the highly valued Nasdaq index. Is this divergence sustainable? Source: Bloomberg, Tavi Costa

The Bloomberg US High Yield corporate CCC-rated bond index has delivered a staggering return of over 11% in 2023 so far. To put things into perspective, this level of performance has only been surpassed once in the last decade, back in 2016! The impressive rally in this segment can be attributed to the significant tightening of CCC credit spreads, which have contracted by a remarkable 200bps! Additionally, the high carry of the CCC-rated bonds, with an average yield-to-maturity of 13% in 2023, has contributed to the sector's stellar performance. However, as we approach a critical juncture in the economy, with looming concerns over a potential recession, the question arises: can this impressive performance sustain itself? While a soft landing scenario seems currently fully priced in, the possibility of a materialized recession in the coming months adds an element of uncertainty to the equation. Source : Bloomberg

Source: Tavi Costa, Crescat Capital, Bloomberg

The Turkish Central Bank (CBT) has taken another important step, raising its key rate by 2.5% to 17.5%. Though it slightly missed market expectations (18.5%), the chosen monetary policy path has instilled confidence among investors. This is evident as the 5-year Turkish Credit Default Swaps have hit a new low, not seen since November 2021. Furthermore, Turkish government and corporate bonds denominated in USD have demonstrated an impressive performance, gaining +6% in 2023. In addition to these developments, it is noteworthy that Turkey has recently received substantial economic support from the UAE, totaling more than $50 billion. Could this influx of support help mitigate the sharp weakness experienced by the Turkish Lira? Source : Bloomberg.

While the deeply inverted yield curve has stoked anxiety among investors about the prospect of a recession, Goldman Sachs has a different message: stop worrying about it. Indeed, the bank's Chief Economist Jan Hatzius just cut his assessment of the probability of a recession to 20% from 25%, following a lower-than-expected inflation report last week.

Call Open Interest in the iShares 20+ Year Treasury Bond ETF $TLT is more than triple the OI for Puts signaling that options traders are betting that interest rates are primed to drop. Source: Barchart

Emerging Market local currency debts have proven to be top performers (+18%) since reaching the peak in the 10-year US Treasury yield (4.25%) in October 2022, during this rate hike cycle. This specific segment of the fixed income market has offered attractive real rates, leading to the strengthening of EM currencies against the US Dollar. Notably, volatility in EM currencies has reached its lowest level since March 2020 and the global pandemic. As emerging market central banks prepare for potential monetary policy "pivot" (starting with Chile, Hungary and Brazil?), the question arises: will this trend continue? Or could we see a break in the rally, despite the favorable gap in nominal policy rates between EM and DM, while the gap in headline inflation reaches its tightest level? Source : Bloomberg