Xiaomo's latest macro outlook: continue to bet on steeper US debt curves and high-interest currencies to be wary of divergence between supply and demand in the oil market

The Zhitong Finance App learned that in a recent research report, J.P. Morgan Chase looked at the macroeconomic environment, including global interest rates, foreign exchange, commodities, and emerging markets. Xiaomo believes that Federal Reserve Chairman Walsh's recent statement supports a moderate decline in short-term yields and a steeper yield curve, so he continues to trade steeper 10-year and 30-year US Treasury yield curves. The US midterm election results may have an impact on the US dollar in different directions, but the overall impact of the policy is limited, and the comparative advantage of the US stock market is expected to still support the US dollar. As long as there are no obvious volatility shocks or economic growth shocks, large global interest spreads will still provide medium term support for arbitrage trading. The commodities side is concerned about disruptions in the energy supply chain, the risk of falling copper prices, and weather changes in South America. Emerging markets, on the other hand, face multiple tests of energy prices, financing costs, and fiscal pressures.

Global interest rates

In terms of US interest rates, Komo believes that the Federal Reserve Chairman's performance at the press conference after the interest rate decision last week supports a moderate decline in front-end yields and a steeper yield curve. Considering the market's expectations for the Fed's medium-term policy, the yield curve is still slightly flat. If the US Treasury does not make major adjustments to its debt management strategy, the yield curve should steeper. As a result, the bank maintained steeper trading on the 10-year and 30-year US Treasury yield curves. Given that the trading characteristics of the current yield curve are similar to long-term long positions with low beta values, this strategy should benefit if the initial weakness of risk assets spreads further.

In the November refinancing announcement, Xiaomo expects the forward-looking guidelines, nominal coupon bond auction scale, and repurchase scale to remain unchanged. The risk is that the Ministry of Finance will cut the scale of long-term bond auctions, but the bank believes that there is currently no reasonable reason to take this action.

Last week, developed market (DM) interest rate markets showed mixed performance, with US Treasury yields outperforming other markets. Market attention remains focused on the geopolitical situation and the continued weakening of technology stocks against the backdrop of weak financial performance. In addition, central bank meetings (Federal Reserve, European Central Bank, Bank of Japan, and New Zealand Federal Reserve) and the announcement of the UK budget also received market attention.

foreign exchange

The US midterm elections will be held on November 3, local time. If the Democratic Party fully wins the election, it may be moderately bad for the US dollar; if the Republican Party unexpectedly performs strongly and holds in the Senate, it may benefit the dollar. Overall, Komo expects that regardless of the outcome, the impact at the policy level will be limited, and that the US stock market's comparative advantage will continue, which should eventually support the US dollar.

The pullback in arbitrage trading widened further. Although investors may have reasons to reduce their risk exposure to protect investment returns at the end of the year, as long as there are no volatility shocks or adverse economic growth shocks, the medium-term outlook is still quite good, because the yield gap between currencies is still large.

Xiaoma is still optimistic about high-yield currencies in the Group of Ten (G10) currencies, including the Australian dollar, Norwegian krone, and the US dollar. However, in emerging markets, the bank's strategists have become more cautious and have begun to be more selective in their layout. In high-confidence arbitrage transactions, the bank preferred to use the euro as the financing currency rather than the Swiss franc and yen.

The G10 central bank meeting continues. The results of the meeting between the Reserve Bank of Australia, the Bank of England, and the Bank of Norway will continue to support the bullish logic of the Australian dollar, pound, and Norwegian krone; the Riksbank is unable to reverse the decline in the Swedish krona.

Commodities

Komo pointed out that the economy in most regions of the world continues to grow, and the growth rate of many economies is even higher than the potential growth level. At the same time, however, oil consumption is shrinking, and the rate of contraction in some regions usually occurs only during recessions.

Since the US and Israel took military action against Iran and the Strait of Hormuz was effectively closed, Middle Eastern oil exporters have maintained energy transportation by circumventing oil pipelines, alternative transportation routes, turning off dark-mode sailing (dark-mode sailing), and ship-to-ship transfers (STS transfers).

In terms of the copper market, although the fundamentals are still generally supportive, discussions around the copper market around Komoshang have turned to a cautious and uncertain position, focusing on downside risks. These risks mainly focus on the US's delay in taking tariff action, which may cause some of the misplaced premiums previously included in copper prices to subside.

After the recent sharp drop in prices, the competitiveness of US export sales has increased, so we need to continue to pay attention to the relevant situation. Weather remains a key factor, particularly in South America, where rainfall anomalies associated with the El Niño phenomenon continue to increase. After the US midterm elections, the focus of the market will shift to the “World Agricultural Products Supply and Demand Forecast Report” (WASDE) released by the US Department of Agriculture on November 10.

Emerging markets

Komo said that as pressure on energy prices and yield continues to spread to the financial situation, the market is beginning to show signs of tension. Volatility is rising, and economic growth expectations are also being affected. The bank's basic scenario remains that the re-inflationary environment will continue to dominate, which will bring further returns to foreign exchange arbitrage transactions in emerging markets. However, the bank is reducing the size of its portfolio, focusing its investments on the currencies with the highest arbitrage returns and investment opportunities with the strongest unique drivers.

Komo believes that the market's room for further repricing terminal interest rates is being limited by some new developments. At the same time, the bank remains cautious about the long-term yield curve because of financial concerns and the impact of supply and demand factors, which are not fully reflected in the steep yield curve and asset swap spreads.