The resulting collapse in US Treasury yields is spectacular on any measure. We believe investors have not had time to absorb that this is the death of one of the most popular carry trades globally – that is, borrowing at negative interest rates (i.e., -0.50%) in the euro exchange rate (EUR) to buy U.S. assets, specifically the NASDAQ-100 Index. This is known as the “US Exceptionalism trade.”
The short EUR/USD position is not tourism; it is structural and deeply embedded in the market. It has been used either as a yield enhancement on European asset longs or to fund risk asset purchases internationally. Along the way, the volatility-adjusted carry in EUR/USD has been the best in G10, and the most liquid asset. With the Fed potentially cutting interest rates down to the Effective Lower Bound (ELB), the call has already started for a move in EUR/USD to between 1.17-1.24. As a result of the volatility-adjusted carry collapsing, a key structural buyer of US equities is missing.
Secondly, US corporations are hesitant to increase their buyback strength at lower stock prices like in the past. Why? Because they do not know the current impact of the coronavirus relative to their cash flow needs and balance sheet, and whether or not they will be able to raise debt financing to fund the buybacks. After all, the market of investment-grade corporate credit primary issuance has been shut for the last weeks except for one day.
Collectively, the two strongest-handed buyers of stock market weakness are currently absent, or much less involved than normal.
Disclosure: Interactive Brokers
Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from Rareview Macro and is being posted with its permission. The views expressed in this material are solely those of the author and/or Rareview Macro and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
Disclosure: Forex
There is a substantial risk of loss in foreign exchange trading. The settlement date of foreign exchange trades can vary due to time zone differences and bank holidays. When trading across foreign exchange markets, this may necessitate borrowing funds to settle foreign exchange trades. The interest rate on borrowed funds must be considered when computing the cost of trades across multiple markets.
Disclosure: Margin Trading
Trading on margin is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.
For additional information regarding margin loan rates, see ibkr.com/interest
