Macro Update for the Week 17/10/2022 – 21/10/2022Oct 17, 2022

“Cash is now a safe – haven”

For most of modern investment history, cash carried an air of indecisiveness: any allocation to money market funds or U.S. Treasuries—considered the equivalent of cash—was merely a stopgap in the way for more “definitive” investment decisions. But with the US Federal Reserve raising interest rates ever higher, cash has become a highly reliable asset class for the first time in decades. Three-month U.S. note yields are hovering near 3.3%, a 14-year high, while six-month yields are yielding 3.9%. The latter is higher than the yield on the US 10-year bond, with negligible duration risk—an indicator of sensitivity to interest rate changes that can prove particularly damaging in extreme market environments. Guaranteed 3%+ in interest? You have no duration you have no credit risk therefore you face no risk.

High-risk assets and “safe havens” are taking a hit as a “tightening” Fed attacks inflation. The central bank raised interest rates for the third time in a row by 75 basis points on September 21, while it also revised upward its forecasts for future increases. While that cut yields on longer-maturity fixed-income securities, it also suggested that simply holding interest-bearing notes to maturity and collecting interest — what the industry calls “coupon clipping” — is a sensible strategy.

That logic has fueled a flood of inflows of $32 billion this year into ETFs that hold debt maturing in a year or earlier, a breather from the record $34 billion in 2018, the last time the Fed tightened monetary policy. About $4.6 trillion are in US money market funds, near a 2020 record high of $4.8 trillion.

After a dramatic mixed picture week in which S&P 500 gained within a trading day +5,098% (pr. Close – next low -2,40% and low – high current day from 3491 to 3669), finally it lost -1,55%, Dow Jones gained +1,22%, Nasdaq Composite lost -3,15%, and Dax40 gained +1,34% on a weekly basis.

The Economic Calendar of the week (10/10 – 14/10) has very interesting readings, such as FED Budget Balance, China GDP for Q3, China Industrial production for September,  Germany ZEW Economic Sentiment, and Eurozone ZEW Economic Sentiment for October, US Industrial production for September, US API Weekly Crude Oil Stock, UK CPI YoY and Eurozone CPI for September, US Building permits for September, US Crude Oil Inventories weekly based, German PPI for September, U.S Initial Jobless Claims (weekly released), US Existing Home Sales for September, UK Retail Sales for September, including the speaking of Mrs. Lagarde and Mr. Powel.  

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