The interesting duality right now in this war is, sitting in Tel Aviv, it feels like things have clearly gotten better. However, on my screen, things seem to be getting worse.
It feels like the question now for markets is more about impairment rather than duration.
This is a meaningful Terms of Trade episode for markets. But, I can't help thinking that part of the px action right now is based on how poorly the market was positioned for a ToTs shock.
- Long Asia equities
- Received EM rates
- Short put side in DM front ends
The market is trading this war as a terms of trade episode much more than a flight to safety. I think a good way to see this is in the fact that AUDCHF is actually rallying this week.
Pretty amazing to me that Korean equities are up almost 50% YTD, SPX is flat, and USDKRW is basically unchanged.
This was a really interesting from Lagarde last night in Washington DC. Actually think the FX takeaways are more interesting than the rates ones.
www.ecb.europa.eu/pr....
Tricky part for the privates crew now is that this re-rate is happening at a benign macro time. NGDP 5ish, Fed easing bias, deal activity picking up, IPOs open and for private credit there is yield + AI showing good ROIC.
Despite that, lot of these big names are down 20% YTD.
Strange given that RMP is running
Not sure what to make of this yet, but it feels pretty telling that despite a monster payrolls beat, 2y yields in the US are unchanged on the week.
We have become used to market px action being all about the AI "input" (spend). So far in '26, the market is paying attention to the "output" (impact) too. The juxtaposition between markets reaction to the GOOG capex number to what is going in saas and the labor market feels new.
Seeing a lot of "overreaction" takes re software. Obviously not a space I follow closely, but this seems like pretty normal market behavior. Markets aren't just outcomes, they are distributions. And if this sort of left tail went from 0% to 5%, that is a big deal in price terms.
The market has seemingly decided that whats good for semis is bad for saas. The problem is, as an inverse, what is bad for semis is likely bad for everything at this point. I.e. anthropic progress hurts saas, but a lack of progress might not help given the market's AI dependence.
Despite a rise in the expected growth outlook in the US to start the year, it's interesting that the US continues to underperform RoW in terms of equity markets. YTD performance:
- US +2%
- Europe +3%
- China +4%
- Japan +8%
- EM +8%
You know you were a pretty good macro trader when your head of research now runs the Fed and your most prominent analyst/number 2 runs the Treasury.
In macro we were trained that interest rates are an FX input. I think more and more in this current era, the relationship has flipped, and FX is now more of a rates input. Strong bond markets need strong FX, and vice versa.
Something that feels pretty telling about these TACO episodes is:
- risk assets snap back
- USTs only stabilize
- and the USD keeps softening.
Feel like that is a takeaway more than the "will he/won't he"
There is a lot of applaud for Carney's speech at Davos yesterday, and I get why. However, this "rupture" didn't happen last year, it happened a while ago.
Canadian GDP per capita has been stagnant since 2011. Tariffs on Canada happened last year.
When someone "imports" domestic demand or defense, they "export" capital or services. It's still in a sense a balance of payments.
In some way, Trump being worried about the economy into the midterms is not allowing the bond market to be.
I am not saying it is right or wrong, but I think a lot of market pricing into 2026 is based on the assumption that these two things (AWP vs. NGDP) will diverge. When historically, that is quite rare in any durable way.
It's interesting that so many of the assumptions for strong GDP in 2026 come from the fiscal impact in Q1. However, according to many models, fiscal is going to be an incremental drag on GDP growth after after the big Q1 jolt.
It's pretty amazing to me that in the context of this chart (US 2y rate minus Japan 2y rate), and a fairly material move lower in the broad dollar index, that USDJPY is unchanged on the year.
Something I've been highlighting in my client notes is that the current richness of USD is the byproduct of three major imbalances. And the residual of these imbalances is the capital account surplus. As we head into 2026, there seems to be a path for some level of normalization.
It's a bit surprising that the hawks on the Fed still have momentum, given how the lead up to todays meeting went. Powell set them up to shape the narrative via his last presser, they tried, and despite that the market pushed the pricing back up on relatively little (Williams).
Market seems to be doing a last cut trade as the Fed is about re-rate UR higher and core PCE lower.
These numbers can't happen without US buying, so the stealth numbers are likely quite large.
Just incredible numbers in the Chinese trade data for November. Despite tariffs from the US, China's trade surplus is now the size of the economy in Poland, Switzerland or the Netherlands. CNH is too low.
An interesting dynamic in FX is that while the US prices cuts through March of '27, a lot of DMs now have 1y1y rates that trade above their respective policy rates. YTD a lot of the yield convergence between US and RoW has come from above, but it is starting to come from below.
has sold off pretty consistently since Powell presser
Yes. I mean a key thing over the past decade has been the flows have dwarfed the economics in terms of fx impact. Think AAPL p/e.
A non-trivial part of these post Trump fiscal announcements around the world is that capital exporters are effectively going to need their money back. Thats meaningful when US NIIP position is 80% of GDP.
