This Week: Taking on risk, early rate cuts, and a second wave for US treasury yields

Published on 18 December 2023

Charles-Henry Monchau, chief investment officer at Syz Group, discusses how traders could have a busy week for December standards as they wrap up the year. He also unpacks how some desks may have revised their appetite for risk assets for the New Year; when he expects central banks to kick off rate cuts; how he’d look to capitalize on a weakening dollar in 2024, and he talks through his less conventional views on where treasury yields will be in 12 months.

North America

  • Equities volumes were up and liquidity improved week on week. US investment grade volumes continued to soar, but bid-ask spreads were marginally wider week on week.
  • Data: Building Permits December 19, GDP Growth, Initial Jobless Claims December 21, Core PCE Prices December 22.
  • Primary equities: There are 6 IPOs expected to price at $59.6 million. The largest should be COR3 & Co (Holdings) Ltd. at $17.4 million.
  • US axe data, which is within normal ranges, indicates a higher proportion of bids versus asks in credit.

Europe and the UK

  • A major surge in EU equities volumes week on week  and liquidity still better than year to date  averages. Euro investment grade  volumes still elevated but bid-ask spreads at widest levels since August.   
  • Data: EU’s Inflation rate on December 19, UK’s core inflation on December 20, UK Retail Sales and GDP Growth December 21.
  • In primary equities: No IPOs expected to price on EU exchanges this week.
  • EU axe data, which is within normal ranges, suggests a higher proportion of EU dealer asks Versus bids in credit
  • GBP axe data, within normal ranges, suggests a stronger skew towards net buying versus selling of credit

Transcript of interview:

Jo Gallagher: Welcome to Trader TV This Week – your insight into how trading desks can prepare for the week ahead. I’m Jo Gallager.

Today I’m joined by Charles-Henry Monchau from Syz Group to discuss the main topics and events leading this week.

Charles-Henry, welcome to the show.

Charles-Henry Monchau: Hi, Jo. Thank you so much for having me.

Jo Gallagher: Before we begin let’s take a quick look at last week’s activity and what’s going on.

In North America last week’s US equities volumes were up week on week as stocks rallied following the Fed’s interest rate meeting. Liquidity improved compared to the first week of December and bid-ask spreads were much tighter than the year to date average and levels seen for the same week in 2022.

Last week’s U.S. investment grade volumes continued their three week high on Thursday, saw the eighth most heavily traded volumes this year to date. Bid-ask spreads in U.S. IG were marginally wider week on week, but were still tighter than levels seen for the same week in 2022.

This week we’ll have data out of the US on building permits on Tuesday, the GDP growth rate on initial jobless claims on Thursday and core PC prices on Friday. We’ll also have another wave of Q3 earnings, including reports from Accenture, FedEx and Nike.

In primary equities there are six IPOs expected to price for $59.6 million in aggregate proceeds. The largest deal expected to price is COR3 & Core Holdings, which is seeking to raise $17.4 million.

US axe data, which is in historical ranges, indicates dealers bids have increased by a substantial 8.8% over asks in the past week, suggesting a stronger leaning towards buying of credit going into the week ahead.

In Europe and the U.K. last week saw a huge surge in European equities volumes week on week and for the year, as markets believe rates may have peaked following the ECB and Bank of England’s announcements.

Liquidity did worsen week on week, adn bid-ask spreads to some of the widest level since August, but overall spreads were still tighter than the year to date average. Last week’s euro investment grade bottom saw minimal difference week on week, but have continued on their high streak since the beginning of November.

In terms of data, this week, we’ll have the latest reading of the EU’s inflation rate on Tuesday. The UK’s core inflation numbers on Wednesday and the UK’s retail sales and GDP growth on Thursday. We will also have some small and mid-cap companies reporting earnings this week, including Erebus and Carnival.

In primary equities we expect yet another dull week in the region, with no IPO is expected to price on European exchanges. EU axe data, which is in normal ranges, indicates the proportion of EU dealers asks versus bids, has increased by a substantial 8.2%. GBP dealer bids are up by 4.3% against asks over the past week, suggesting a skew towards buying versus selling of credit going into the week ahead.

Charles-Henry, lots to discuss there. Last week, volumes were quite high and liquidity was fair. How do you expect this week to play out and how will you be trading?

Charles-Henry Monchau: Well, first, a set of macro and central bank views. On the macro side, where the very important USP that are with inflation, that’s from the U.K. and also Japan. Talking about Japan, we have the DOJ. So a critical decision here with some implications on the yen and also on JGB. JGB do have some implication for global bond markets, so that will be very closely watched by traders.

Its probably, let’s say, the last week of the year where we see high volumes and talking about volumes and flow, let’s keep in mind that currently there is $9 trillion, say, into money market funds. We just got the news last week from the feds that indeed there will probably be some aggressive rate cuts next year. So investors, traders wants to be positioned into risk assets, so we do expect more flows going into equity markets, into credits. So it might be that it is quite an active week, just, you know, before the very last week of the year, which is expected to be quiet.

Jo Gallagher: Last week we heard from central banks. How’s your outlook for 2024 been revised and what is your appetite now for risk?

Charles-Henry Monchau: So it doesn’t change because just ahead of the Fed meeting the view was that 2024 is going to be a year of rate cuts, not just in U.S. but also abroad. It’s going to be a year with some fiscal stimulus coming. It’s going to be also a year with positive earnings momentum. And as mentioned before, there is a lot sitting in the sideline and waiting to be reinvested into risk assets. So it’s going to be a positive but volatile year for risk assets. That being said, we were surprised like the rest of the markets, by the dovish stance of Mr. Powell, that might show that the year will be more front loaded. But again, it doesn’t change the outlook.

2023 was a year to be in cash and with a very small number of tech stocks, next year is going to be a year where you need to take some risk in credit, maybe into duration. And then when it comes to the equity market, you can expect a broader participation to the upside. So not just the Max seven, but also grow their participation in the U.S. market and also abroad.

Jo Gallagher: Many expect the dollar to continue weakening. How would you be looking to capitalize on that?

Charles-Henry Monchau: A weaker dollar is good for global equity and this is also good for emerging markets. So within emerging markets, we like EM debt in particular in some countries like Brazil. We also like two beneficiaries of the French shorting trends. So we think about India, for instance, but also of Mexico. So there will be elections in these two countries next year. But these put aside, we still believe that their emerging market debt market is quite interesting.

Jo Gallagher: What are the top risks that traders could be thinking about as they go into 2024?

Charles-Henry Monchau: So it’s mainly about geopolitical risk, and it would be an election year in the U.S. This put aside, there is also the risk of too much debt. We saw this in the U.K. when there was these pension crisis happening. And given the level of debts in the U.S., given the stress and volatility that we notice each time there is a U.S. Treasury auction coming, it just shows that the market is becoming very nervous with no political instability in Washington, but also with the level of debts. And that means that once this disinflation trend is behind us, it’s very likely that we could see more stress from the market coming because of, let’s say, 25% more U.S. Treasury issuance coming next year. And that means that the investors might require from the U.S. Treasury a premium when it comes to investing into U.S. Treasuries.

Jo Gallagher: And finally, I’ve had a lot of requests to ask this question. So I will. Where do you think Treasury yields would be in a year’s time?

Charles-Henry Monchau: I may surprise you, but I think when it comes to the U.S., ten year, it might test a lower level and current one. So we might test 3.5%, for instance, but then we might see the U.S. ten year moving up potentially higher than current level. Reason being that, as I mentioned before, there is an issue with the supply side. It just too much supply coming. We are in the middle of buying and that’s very costly in terms of U.S. Treasury issuance. So that’s going to test the market.

And also its always interesting when it comes to inflation. If you remember the playbook of the seventies, there was this first wave of inflation and then disinflation. But then came a second wave of inflation with inflation coming back with a vengeance. And we believe that with the Fed probably turning dovish too soon, this creates a risk of this second wave taking place. And that will create risk on the yield curve and potentially the U.S. ten years moving up.

Jo Gallagher: Thank you, Charles-Henry, for your insight and thank you for watching.

This has been Trader TV This Week.