What will break next? Look for leverage and artificial limits, this fund manager says


The competition between the UK’s financial and monetary authorities is likely to cause the most turmoil in financial markets as Bank of England Governor Andrew Bailey told a conference in Washington that pension funds have three days to sell the UK government. bonds.

The question is whether central banks around the world will continue to raise interest rates to control runaway inflation. “The place to look for breakouts is where there’s leverage and where we have an artificial market structure driven by authorities,” said John Ricciardi, head of global asset allocation at Deuterium Capital Management and a longtime industry veteran.

One place to watch: Japan, where the yen is USDJPY,
+0.69%
While the Bank of Japan has kept its interest rate at zero, its value against the dollar has fallen by 27% this year. “One thing that could break, and it’s something we’ve been discussing internally, is the ability of the Japanese to maintain zero interest rate policy,” he told MarketWatch in an interview.

Betting that Japanese interest rates will rise is a classic “widow” trade, as it has not succeeded in decades, and its opening would strengthen the beleaguered Japanese currency.

Another place to look is Europe, where the European Central Bank is trying to maintain sovereign spreads in the eurozone, but peripheral CDS are widening in Greece and Italy. “If this continues, it won’t just be the euro – which is beneficial for it to go down – but it will be in interest rates and interest rate differentials,” he said.

Ricciardi is the lead manager of the Deuterium Global Dynamic Allocation Fund, where investments are dictated primarily by inputs to his model of the global economy, central bank policy, market assessment and price trends.

According to Deuterium, valuations don’t pose much of a problem and actually look attractive outside of the US.

The fund expects a rough fourth quarter for both U.S. stocks and commodities, predicting that consumer spending will eventually turn around, industrial production will slow and earnings growth expectations will fall. The firm expects the fastest decline in U.S. consumer and retail sales since the 2008 financial crisis as workers react to falling inflation-adjusted earnings.

“You see it in the savings rate going down, you see it in their maxed-out credit cards,” Ricciardi says. With mortgage rates on the rise, refinancing is not an option that consumers can turn to either. “The big damage is still coming to the stock market for the next month or so,” he said.

Ricciardi notes that this year, bonds have been sold first, followed by non-US currencies, and stocks have started to run out. When the Federal Reserve turns around or the labor market turns around, he said, that order will probably come back — but that won’t be until next year.

He referred to the 1985 Plaza Accord, in which global central banks came together and took measures to devalue the dollar. “I don’t know if something like that will ever be on the table, but I could certainly see a Fed pivot moment where the authorities would come together to find a way to ease the pressure one way or another. global liquidity from the appreciation of the dollar”.

Market

S&P 500 SPX,
+0.37%
fell for five straight sessions and technically the Nasdaq Composite COMP,
+0.32%
entered a bear market on Tuesday. But things are looking up with stock futures ES00 on Wednesday.
+0.29%

NQ00,
+0.54%
higher and dollar DXY,
+0.13%
a little weak. 10-year Treasury yield TMUBMUSD10Y,
3.944%
It was 3.95%.

Buzz

According to the Labor Department, producer prices rose more than forecast by 0.4% in September, bringing the annual rate to 8.5%. Minutes of the last meeting of the Federal Open Market Committee are due at 2:00 PM Eastern.

PepsiCo PEP,
+3.49%
reported better-than-expected profits and raised its forecast. Health technology company Philips PHG,
-11.74%
downgraded its sales outlook and said supply chain competitors were affecting deliveries and installations.

Intel INTC,
+0.50%
It could cut thousands of jobs when it reports results at the end of the month, according to a Bloomberg report.

Modern mRNA,
+11.61%
$250 million to be paid by Merck MRK,
+0.30%
as they plan to develop a personalized cancer vaccine together.

Coal producer Peabody Energy BTU,
-1.02%
Coronado Global Resources in talks to merge with CRN,
+8.01%.

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