OVOM Research

Historically the ratio of high yield / investment grade bonds have traded alongside the equity market ratio Russell 2000 small-caps / S&P 500 large-caps. During this cycle we've seen an uncharacteristic relative decline in small-caps while high yield bonds outperformed and that has led to the "aligator jaws" divergence that exists today. We believe this is going to mostly correct via a substantial decline in high yield bonds relative to investment grade credit, however this chart also highlights how far S&P 500 large-caps have gotten ahead of relative performance in prior cycles. OVOM Research, TradingView #Research #Economy #Markets #Macro #Equities

It’s pretty interesting to take note of how quickly US equity market participants bought back the market selloff following concerns about leverage in Japan following the BOJ hike and weakening US economic data from the last jobs report. Nonetheless I believe the abrupt decline we observed speaks a lot to the danger of present market valuations. The chart below suggests we might be early in the cycle as far as fear regarding contagion risk from Japan’s macroeconomic challenges, especially if high debt levels combined with low growth persist. Sources: OVOM Research, Bloomberg, International Monetary Fund #Research #Economy #Markets #Finance #Macro

For at least the last few years, South Korea's KOSPI index and Russell 2000 US small-caps appear to be moving in a very similar direction. However thus far through 2024 the Russell 2000 is up +3.5% while KOSPI is down -2.5%. At this point we believe recent price action in both has been driven by concerns of a global economic slowdown and the historic relationship suggests investors should avoid chasing a rally in US small-caps we don't anticipate materializing. OVOM Research, TradingView #Research #Economy #Markets #Macro #Equities

🔍 We’ll see in due time how dangerous Japan’s highly levered economy really is to the US equity market, but it’s a good reminder of what kind of price action we can expect if we have any macroeconomic disappointment. I also feel like SMCI is a good example of what we can expect from a poor earnings miss. Both scenarios are obviously still a very, very big “if”, but in either of them NVIDIA today would have potential to follow Cisco’s path from the tech bust era. OVOM Research, Bloomberg #Research #Economy #Markets #Macro #Equities

The BOJ confirmed last night that they would not continue raising rates so long as there was uncertainty in financial markets, so that could be helpful to the extent the carry trade was pushing equities lower. However SMCI reported pretty terrible #earnings and are down -12.5% pre-market. Considering SMCI is one of the primary names in the AI market, I think it'll be interesting to see how market participants are impacted by earnings versus concerns over leverage. We'll have to see if the latter remains an immediate concern, however in my view the below table highlights why I feel more volatility in the future is inevitable. Japan is very highly levered at the macro level with -117% of assets/liabilities and a staggering 505% gross total balance sheet/GDP, essentially resembling one very big carry trade. Sources: OVOM Research, Deutsche Bank, Federal Reserve Board #Research #Economy #Markets #Finance #Macro

We believe the global growth slowdown is being confirmed by recent deflationary trends in commodity markets. Both the price of copper and crude oil have been weaker and are now clearly in a downward trend. As the chart below illustrates, both are typically quite sensitive to broader price changes and copper especially appears to act like a leading indicator to hint where inflation might be heading. OVOM Research, TradingView #Research #Economy #Markets #Macro #Commodities

While all eyes are on Japan, longer-term China government bond yields continue to make new all-time lows. China's economy continues to be hampered, as their government bond yields fell further off another weak PMI print thereby prompting speculation of further rate cuts and monetary easing. Moves in CNY haven't been quite as fascinating as in JPY recently, but we have to keep in mind how much it suffered after the C19 global pandemic (at least relative to the USD). Lot of interesting developments going on in the AsiaPac region I think are very much worth keeping an eye on. OVOM Research, TradingView #Research #Economy #Markets #Macro #InterestRates

There's a lot of focus correctly on overpriced US equities, as the NADSAQ 100 just opened down -4.5% pre-market. Certainly a lot of headwinds to continue to watch out for with weakening economic data and concerns about Japan likely being the top two at the moment. The chart below highlights what we believe is a tail risk to the US Fed's hiking cycle that hasn't materialized yet: credit quality. We feel that high yield spreads are still not reflecting economic reality and they're now disconnected from expected US equity market volatility (VIX). As we continue to see more deleveraging of the Yen carry trade, perhaps we will start to see some repricing in credit markets. OVOM Research, TradingView #Research #Economy #Markets #Finance #Macro

As I'm sure many who have been actively following financial markets are aware of, the "Sahm Rule" was officially triggered after this past Friday's jobs report, historically indicating a recession is imminent. According to the "Sahm Rule", the early stages of a recession is signaled when the three-month moving average of the US unemployment rate is half a percentage point or more above the lowest three-month moving average unemployment rate over the previous 12 months. Dating back to at least 1950 this rule has not been broken (not all years shown in chart below). This rule reemphasizes that the unemployment rate is a lagging indicator of US labor market health, but once it begins a material move up it does not come back down until after the economy troughs and we've begun a rebound. I think history repeats and lastly I think it's worth mentioning in 1953, this rule successfully flagged a recession at 3.5% UR (talk about historically low). Either way it should be a really interesting week ahead of us. OVOM Research, TradingView #Research #Economy #Markets #Finance #Macro

If you look at cross asset risk-adjusted returns for 2024 YTD via Sharpe ratio's, which a lot of investors like to do, in addition to the "Magnificent Seven" and US equities it appears both Bitcoin and #Gold are doing quite well. There also seems to be a very notable disconnect between investment grade and high yield bonds thus far through 2024. We strongly feel #Commodities ex-Energy have perhaps the most turnaround room of any negative asset class covered in the chart below, but we shall see. Happy Sunday! Sources: OVOM Research, Bloomberg #Research #Economy #Markets #Macro #PreciousMetals