The Bond Market Is Coming For The AI Trade: Midweek Update

本站添加: 2026-05-25

[00:00:05]Hi guys. Welcome to the Macro Pillars Midweek Update.

[00:00:09]In this series, we want to walk you through a little bit of our daily process, how we're seeing each pillar, what's standing out to us right now, and where we believe the best opportunities are in the market.

[00:00:18]The aim is to give you a better understanding of how we apply the Macro Pillars process each morning, and how we move from the top-down work into our execution.

[00:00:26]So, what we'll do is a quick run through of the pillars, and then I'll throw it over to Andrew, who will walk you through the best trades on the board Macro Pillars right now, and why.

[00:00:33]Okay, so starting with Pillar 1, government and geopolitics. The dominant case right now is still that we're in this, you know, kind of bearish limbo.

[00:00:41]AI and earnings remain strong, but the yields are starting to come for that trade. And we're starting to see that show up in things like the Kospi, which is below the low of the 13th of May, which is the day that they reduced the RMPs from 25 billion to 10 billion, and now is having a go at the low of the 6th of May, which was the most recent quarterly refunding announcement from the Treasury. And another spread we've been watching is the silver and copper to gold ratio. So, silver and copper have started to materially underperform gold in the last, say, 5 days or so, and that is one of the things we were looking for as these yields were getting out of control to confirm that this bear flattener that we're getting in the US, the dominant curve, was really starting to bite against that AI trade.

[00:01:23]So, the market is still paying a full multiple for the AI story, even as oil is elevated, inflationary pressures are building, and the bond market is saying it has had enough. So, the bull case that drove markets to their highs needs a lot to go right to sustain. Iran needs to resolve, oil needs to fall, yields need to settle, and AI CapEx needs to keep converting into earnings at this stage of the cycle. So, if we look at the per jurisdiction risk rating, you'll see that Australia is, you know, in the it's over category. And that's particularly because of its exposure to oil, the situation with the budget being a complete disaster, and its general preparedness heading into this conflict in the Middle East. We have the US, Japan, Europe, and the UK just sitting as risk off. Obviously, UK has a few political problems at the moment as well. China's neutral, and Canada is in that kind of neutral to risk on area at the moment.

[00:02:08]Any further escalation in the Middle East will definitely flip a few of these jurisdictions into the it's over category, and we'll definitely be watching for that.

[00:02:16]But as it currently stands, Australia is not looking very good.

[00:02:20]So, the risks that we're watching for at the moment, of course, is the war. It's a policy response, uh particularly from the new Fed chair Walsh.

[00:02:28]Uh any further messaging out of the Trump Xi summit.

[00:02:32]Uh the front end yields in Japan, and any significant policy response to support their recent intervention attempt, and private credit, which is likely not in the forefront of investors' minds. And the chart that we're looking at in the bottom right-hand corner here is a conflict index from BBVA Research. So, of course, all the jurisdictions took off on the 2nd of March, 28th of Feb. Uh they've calmed down since then, but uh Taiwan and China have taken off a little bit because of some of the commentary out of the Trump Xi summit. So, this is the MacroPillars private credit index. So, the index obviously came into trouble around that first Brands bankruptcy filing. Then we had the 40 billion per month in RMI purchases from the Fed on the 10th of December. We failed at those levels. This is also last quarter's high here. This came into the end of the quarter. So, we failed at those levels, got below the low of the 10th of December. Uh and we did not see material upside uh until we came into somewhere around the end of the year. We got below uh last quarter's low, and then we printed an ORL, which is outside reversal lower quarterly bar, and we still are maintaining below that low.

[00:03:32]So, this is the high of the 2nd of March, and we are now below the low of the 6th of May, which is the most recent quarterly refunding.

[00:03:41]And we're also below the low of the 13th of May. So, we would not be surprised with these high yields if we see further downside in private credit in our index uh into these levels of the 2nd of March.

[00:03:53]So, I quickly hop over to the MacroPillars dashboard and run you guys through where we see liquidity at the moment through our models. So, MacroPillars measures liquidity in two different ways, right? We have a net liquidity level, which we measure on a year-on-year rate of change basis, which is this -1.24% number here. And we also have a net liquidity level year-on-year rate of change including the MOVE index, which is currently sitting at about 19%.

[00:04:18]Uh down from 17.9% on the 20th of April.

[00:04:22]So, as we can see, the comparisons for our net liquidity level, which is in blue, are getting quite tricky into the 13th of June. And then we fall off quite a lot, so that will be positive for liquidity. And then the comparisons for the year-on-year rate of change including the MOVE uh are continuously difficult into about the 30th of October. So, that's what we're looking at there. And I'll quickly overlay our year-on-year including the MOVE with the S&P to give you an idea of the sort of dissonance we're seeing between liquidity and risk assets.

[00:04:52]So, in orange is our net liquidity level including the MOVE and then blue is the S&P. All right, so this tends to be a leading indicator. And as you can see, we came into that -25 area, got around to the lows, and we took off. We had a huge rate of change increase in liquidity, but now liquidity is starting to fade again, and we are seeing show up in some of the risk assets across the board this week.

[00:05:14]So, basically as it stands, liquidity on a year-on-year rate of change basis is flat. And then liquidity including the MOVE is positive at a 20% year-on-year rate of change increase, although it has come in quite a lot tightened from around 80%. And that's definitely something that we're watching.

[00:05:30]Global M2 is currently supporting liquidity up 7.86% on the year. The MOVE is down 17.81% on the year, and the dollar is down 1.45% on the year. Both neutral inputs for liquidity as it stands. In terms of volatility, we're seeing pretty easy volatility across the measures that we track except for the bond market, of course, which is the most important measure for volatility, particularly for macro pillars. So, if we look at the comparisons from 1 year ago on the move index, they are getting quite tricky, especially with a rising current price.

[00:06:02]So, as this move index starts to flip positive on a year-on-year rate of change basis, what that causes is deleveraging in the system as global banks and hedge funds have to take some of that risk off the table due to the way that the VAR models are set up so as VAR or their risk models. And if we quickly look at monetary and fiscal policy, we've obviously seen a lot of hikes being priced in into year end with Australia and the UK with the highest implied rates and the US now pricing in more tightening than the April lows in risk assets and that is the chart we're looking at here. So, this is the S&P 500 inverted overlaid with uh the interest rate futures in the US.

[00:06:37]So, that's June take December. Currently sitting at 17 to 20 basis points. And on fiscal policy, of course, our table showing that Japan has the strongest year-on-year improvement with the deficit improving by 2.5 percentage points. US still has the largest deficit problem, while Australia is the only one deteriorating year-on-year. So, of course, at the moment, through our process, all roads are leading to Australia being in a little bit of strife.

[00:07:01]Couple of key points on monetary and fiscal policy, of course, is Warsh, right? So, the market is very focused on whether Warsh will cut rates, but I think the big question is really liquidity. So, if he tightens reserves, he pulls back Fed support, then maybe he can actually cut rates, right? And you know, this is a guy who resigned from the Fed over QE2 because he thought policy was going too far in that direction and he was right about that.

[00:07:22]So, will he tighten reserves first?

[00:07:24]Well, before he's even in the chair, they reduced from 25 to 10 billion in RMPs, um fairly quietly. Right? So, will he do that first and then use cutting rates as the offset? Guess we'll find out, right?

[00:07:36]We'll definitely be watching anything on Warsh like a hawk. Australia, of course, still has the highest current and implied policy rates, but the RBA minutes suggest that maybe they've got a little bit over their skis there. So, they now look more likely to pause and assess rather than keep chasing the front end. And on Japan and the yen, of course we know Besan stopped in Tokyo, met Takachi, met Katayama, and the market essentially yawned. So, the yen is weakening each day against the dollar after failing to close below the low of the intervention on the 30th of April.

[00:08:05]So, if policy makers do not deliver something credible to support this intervention, then markets will likely test the downside again in the yen.

[00:08:13]So, this is the macro pillar scorecard, right? So, this is how we track strength and weakness in the market. So, we have all of our dates for all the different pillars, and then we give those individual dates their own weighting, and then we just track their output score. So, for example, in the stocks, you know, leading we've got the Nikkei, lagging we've got European equities, and of course the Australian stock market below 10 of our recent important key dates. The yields are obviously all ripping. Copper and oil pretty strong the commodity. Whilst platinum and gold are having a rough time, and silver is sitting pretty flat. Corn, soy, and wheat are sitting at a plus 12 in line with our primary position for some time now being short the European and Australian equities and long what you need to eat, corn, soy, and wheat. For effects, dollar yen's leading, Aussie dollar's following, and for some time now the dollar yuan has been negative 12, and in fact there our trend scorecard is actually extremely negative score for some time as that yuan's been strengthening. Crypto sitting in that neutral to negative range, and we're seeing a similar story play out in the sectors and the countries as we are in risk assets. And of course, if you've been following macro pillars, you know how critical the curves are to our process. That's where we track all the different curve shapes across all the different jurisdictions. And of course, the major the major dominant curve is the US curve, and it has been in a bear flattener for some time. But, you know, the curves are slightly nuanced, and you definitely don't want to be, you know, tracking the the change in the curve.

[00:09:36]You you that to be a policy shift that supports uh the shape in the curve or the change in the shape of the curve.

[00:09:42]So, I mean, a great tool that we've got at MacroPillars is our advanced measure tool uh in our advanced charting section of our dashboard. So, essentially, what you can do is you can set up your short end and your long end, and you can just you know, we can also put the dates on the chart.

[00:09:57]Let's have a quick look at these dates.

[00:09:59]Let's say we want to measure Uh >> [sighs] >> these are probably the key dates at the moment.

[00:10:04]We want to measure the curve shape from specific dates. We go, "Okay, well, that's the starting measure, and then this can be the end measure wherever we want it to be, and it will tell us the amount of basis points that um each end of the curve has moved, and if we're in a bear flattener, bull flattener, bear steepener, whatever it is.

[00:10:21]Um so, you can really understand the market's response or the bond market's response to these specific dates through the pillars, whether they are geopolitical dates, liquidity dates, policy shifts, technical dates, whatever it is.

[00:10:35]So, of course, since the 2nd of March, we've had a pretty decent bear flattener in the US. We've also had it since the low around 17th of April, and this is something we've been tracking for quite a while, and I'll let Andrew take you guys through the rest of it. There's a couple of things that I've noted overnight that you would be conscious of. Um Um So, basically, we're still going through It seems to be now that now that, you know, with inflation losing its Yeah, not only being transitory, this is obviously going on. I'm seeing it in the oil price and food price, etc., and certainly knowing in sight, but the Iranian war, um uh the the the only comparable period really is the '70s, right?

[00:11:26]Um There's a couple of factors that that that um I think they to be considered. Now, if you look at the inflation in the '70s, we had until they took it seriously.

[00:11:47]So, this is when, you know, obviously, we had this inflation shock through here, yeah?

[00:11:51]Mhm.

[00:11:54]So, it started here, really. And then we had the shock in from '72 to '74.

[00:11:59]Mhm. '74 to '76, came back, then they finally they broke it in 1980.

[00:12:04]Now, I went back and looked at what stocks did in each period.

[00:12:08]'72 to '74, stocks went down 30%.

[00:12:14]Inflation went '74 to '76, they went up 25%. '76 to '78, 1980, went down.

[00:12:21]So, evidence suggests that the inflation shock in the '70s, stocks weren't an inflation edge. In fact, they were a shocking.

[00:12:35]Now, gold to stocks took off.

[00:12:45]Um in the '70s.

[00:13:04]At '76, so so '70 '74 to '76, they got inflation under control.

[00:13:13]Gold underperformed, then it blew then then then then gold um blew again. The market is looking at I think market is looking through the lens of equities as being, you know, an inflation edge. Now, you get you got this massive inflation shock in '72 to '74. I'm going to look at Dow Jones in '72 to '74.

[00:13:50]In '72, in '74, went down.

[00:13:54]Clearly.

[00:13:55]Not an inflation hedge.

[00:14:00]Then we had a wrist spot in '74 to '72.

[00:14:07]Stocks went up.

[00:14:11]And then '76 to '80 when when we had the really bad spike, stocks went down.

[00:14:18]And then once they got inflation under control, stocks took off.

[00:14:25]Gold to Dow Jones.

[00:14:34]Gold to stocks up.

[00:14:43]I don't know if you got to go back prior to '74, but it's the same as you can imagine. It it it it They went off the gold standard in here. So, gold outperformed in the first inflation spike, got outperformed when they got inflation under control, then went parabolic when it went out of control.

[00:14:58]That's when Volcker stepped in and stopped the rot.

[00:15:03]Now, coming back to to So, So, evidence suggests that very clearly that infla- gold stocks were not an inflation hedge even nominally.

[00:15:12]And on an inflation-adjusted basis, they were terrible.

[00:15:17]Um against gold, gold was the place to play. Now, why gold? I mean, we we think we think we know why gold is underperforming. Even last night with the with with the sell-off in bonds globally, gold is um it's still making lower lowers on the week.

[00:15:41]And obviously that's probably to do with the emerging currencies weakening.

[00:15:47]Gold against the fives which seems to be where people are getting worried.

[00:15:50]They're getting hammered.

[00:15:52]Gold against stocks are even not winning.

[00:15:58]Right?

[00:16:00]Yeah. Yeah.

[00:16:02]Now, you know, if you want to you want to say okay, gold's useless to anyone but copper's the one that everyone wants because of, you know, it's it's AI.

[00:16:10]Copper to 5 years.

[00:16:13]Not winning. No, it's it has been winning but starting to not win.

[00:16:20]Now, I'm I'm not saying 70s and and now is exactly the same, but we're not we're not in our models seeing any any um any reason to believe that the commodity is particularly bright, right?

[00:16:36]Yep. So, to me, this is the trade that I think we've got to start to focus more on.

[00:16:46]And I just um and that's um obviously the tightening going on here in the US is now is now out to 20 basis points.

[00:16:58]The tightening.

[00:17:00]Now, that would normally at this point cause the problems for stocks all around.

[00:17:09]But they're hanging in there.

[00:17:11]But the trade that I think that I'm starting to get that I'm starting to put on now is two trades.

[00:17:26]Cuz the Russell's under the QRA with the this one. Five years of writing the problem is this is the Russell to the fives.

[00:17:41]Bonding at 21's high and that was the bear flattening that killed the market.

[00:17:46]Mhm.

[00:17:47]That's what we're getting now.

[00:17:49]Yeah. But a bear flattening in the in the 30s fives last night.

[00:17:57]Yep.

[00:17:59]Yeah, for sure.

[00:18:01]Okay, so what happened in 21?

[00:18:03]Sorry.

[00:18:09]That.

[00:18:12]That we're starting to do that.

[00:18:14]Mhm.

[00:18:15]Then you'll be right to be sure of that.

[00:18:17]I'll value under the 21 high.

[00:18:20]The other one that really scares me is Australia against the five years in the US.

[00:18:31]That's a range like order.

[00:18:33]Is it's elected at last night.

[00:18:41]Yeah.

[00:18:42]It's sell both.

[00:18:44]Sell both.

[00:18:47]I mean I think what's going to I think what's clearly happened now is that the market's just going to go "Okay, that's enough." They're going to force them in They're going to have to force their hand at some point. I don't know how they what what they do. If it's some sort of yield curve control, you're going to you're going to have to uh You're going to have to you know, turn around and go long everything you can find, but at the moment until that happens, you've I think you're just going to have to be, you know, I think the the clean trades obviously not gas doing well last night.

[00:19:20]Yeah, it's it's the same stuff. It's long it's but it's including um short bonds.

[00:19:28]And those technicals to me without flat last night whether stocks can handle it or not, but everyone's saying that you know buy buy buy stocks is an you know flashing edge bonds. Don't see it in the evidence.

[00:19:43]Although, you know they're hanging in there. And I think the critical thing at the moment is just looking at that evidence is that you know, the the the price of gas, price of food, the price of oil and and it's it's just completely sticky now and the bond market's just had enough.

[00:20:01]Now um if I look at that, you know, again all I can do is say okay, Aussie spot Aussie 5 years um you're gone. Russell 5 years you're gone.

[00:20:15]Um you know, I I have to protect myself back through here.

[00:20:22]Cuz you know essentially above you know today's you know, you you probably don't want to want to back above this week's high, right? This week's close, right?

[00:20:34]And and it's right.

[00:20:36]I mean I've already seen an extension there that needs to give me but it's already closed under it, right?

[00:20:43]The end of that run.

[00:20:48]Um it it feels to me we're about to get a meltdown in the bond market.

[00:20:55]Um bigger than which is going to drag should drag stocks with it and and and the thing we have to be looking for isn't it is a policy response.

[00:21:08]And how you respond to that um because if we had a policy response what would this chart be doing?

[00:21:20]Gold would start out perform.

[00:21:22]And it should be doing against everything. Right? So basically the chart that you know, USA short USA short stocks long gold twice, right?

[00:21:37]That's That's the policy response chart.

[00:21:53]Let's try the other way around.

[00:22:11]So I As far as I'm concerned, that chart's already telling us Well, obviously it's got the influence of the EM currencies, right? And they all got ripped last night, yeah?

[00:22:21]Yep.

[00:22:24]Um this is now you know, a much lower high. So gold's under performing stocks and bonds in a in a in a high inflation environment.

[00:22:35]Now, that doesn't make any sense, does it?

[00:22:40]Unless someone's selling a share of it, which they are.

[00:22:45]Cuz ultimately try That's where you're going to have to hide.

[00:22:49]Come um well, depending if it's a if it's yield curve controlling, you you just you you won't want to be short the bond market, but you'll probably just be long gold.

[00:23:00]Um But and again, if you look at that chart on on a on a potential overall on a log it's got a little bit more further to go, right?

[00:23:18]There you go. Made it made it hit the 236. Maybe this is where it needs to come back to, 2274.

[00:23:27]Mhm.

[00:23:29]And then we get a policy response.

[00:23:33]I think we're close to it is to shocking night on the bond market that's going to eventually um you know, it wouldn't shock me if it eventually does okay, the market tries to rally and then basically the tightening ultimately overwhelms it. All right, you know.

[00:23:45]Let's go copper silver, the two.

[00:23:48]Um I mean, the problem they've got inflation of you know, four or five where it's where where where it's heading in this in world, they do something that's remotely um like yield curve control, he's going he's going to put he's going to risk putting the the world into hyper inflation.

[00:24:22]And this is always the circumstances that the world was facing.

[00:24:26]I'm printing too much money too long and then he's he's made a he made a strategic error by going into Iran and he can't get the out. Yeah?

[00:24:36]Mhm. Now it's now now they've got they've got them by the balls.

[00:24:44]I mean, I don't know. I mean, does he just say I need to your point, I need a 20 30% sell off to to hurt oil.

[00:25:02]But that's that's not the that's not the stage we're at now. The stage we're at now is that we've got non-investment are tightening the Fed.

[00:25:10]And if I just basically look at that as you know, as a curve, but that's that that is a trade or maybe it's even I'm not sure if you want to be short the 30-year bonds, but I guess I guess you do. It just means you want to be longer the gold, but that that that that I think's probably the trade that's going to be an absolute winner eventually when they give you a policy response.

[00:25:32]It appears to me we're heading into a in in into a um that's you know, an event that's going to give us a the potentially another date like um March of 202020.

[00:25:48]So there's that. So it's a it's a clear it's a clear bear flattener coming from the fives, right? So we go two-year US 30-year MY two-year US 02 MY.

[00:25:59]Okay. Bear flattener from the twos, yep.

[00:26:03]30-year MY two-year US 05 MY bear flattener from the fives two-year US 10-year MY two-year US 05 MY bear flattener from the 10s. So it's a bear flattener.

[00:26:18]And it's this is 2022 on steroids with an inflation problem.

[00:26:25]That's the Russell's the fives.

[00:26:31]And that's a problem, isn't it?

[00:26:34]Completely perfectly married, crashed it, went up, started losing it, started not paying attention here, and started paying attention, yeah?

[00:26:44]Well it's Aussie's five. It's Aussie the fives.

[00:26:54]It's So, on the basis of those trades, uh that's the the bond market as we wrote about last Monday is clearly coming after asset markets. And as the evidence suggests in the '70s, equities didn't perform, but there are some dislocations going on due to the selling of gold by central banks irrespective uh that is um likely gold is underperforming bonds and equities.

[00:27:25]When you look at the two trades that we've um we're looking at is the Australian stock market and the five-year bonds in the US, which is the part of the curve that is steepening in the most, that is rates going higher.

[00:27:44]This quarterly bar that is being taken out in context of where how strong these yields are selling off, you could be short protect yourself against last week's close looking for this extension.

[00:28:06]But, with our liquidity models being tight and tightening, this is fantastic location. The other trade is the Russell versus the fives.

[00:28:18]Again, it's uh not confirming the '21 high.

[00:28:26]And this sell-off was a bear flattener in the US and tightening conditions which is occurring at the moment.

[00:28:35]Again, protecting yourself against the 2021 high.

[00:28:44]And possibly that aligns with last week's close, which is there about. So, if you do not want anything above this week's high.

[00:28:53]And the potential for this to be a route is significant.

[00:28:58]So, this is some great positioning data from Tier 1 Alpha.

[00:29:01]So, as you can see coming into the end of last year, start of this year, uh CTA positioning was very long, uh and then they went max short, right? And then came right back up. So, they're fairly long at the moment.

[00:29:14]Which is definitely something we are aware of with the fading liquidity, general state of the bond market, and the elevation in the move index. And these are our current active positions and how we plan to manage them and the risks we see to those positions uh in the future.

[00:29:30]So, if you guys like this video and you want to see more of this sort of content, just like and subscribe. Uh we plan to upload this sort of video each Wednesday and we'll probably share different bits and pieces each week of our process.

[00:29:41]All right, thanks, guys.