Jive Turkey

 

The Turkish Lira is basically in a free fall versus virtually all major currencies. The Lira is down over 50% this year, but 30% in the last month and 15% in just the last week against the US Dollar. Even with inflation near 20%, President Erdogan keeps lowering rates. In fact, 500bps since September. I think this one is a little under-covered in the news. Erdogan is claiming he’ll get inflation down to 4% sooner or later. What does that even mean?

I'm no expert in international finance, this seems like it might be a problem, and not just for Turkey, for its trade partners as well. China, Germany, and Russia are the top three sending goods to Turkey. The beneficiaries of the falling Lira are Germany, the UK, and US. 

The world of equites was mostly red for the week. The Hang Seng, Nifty 50, and NASDAQ Composite were the worst performers on the week, each down about 3%. Japan’s Topix and Europe’s Stoxx 50 were the only two major indices that ended the week in the black. Other assets on the move were Nat Gas, with the Jan ‘22 futures dropping 6%, and Crypto assets. Bitcoin (-7%) and Ethereum (-4%) both continued their selloff. Turkey’s central bank wasn’t the only one busy last week. Many of the world’s monetary policy leaders are taking much different approaches to inflation, while also trying to combat the pandemic. Federal Reserve Chair, Jay Powell, has already tried to remove the “transitory” label and has noted that they are now more focused on the prices side of their mandate over employment, which has been the focus. The Fed noted that they’re looking to double the pace of tapering. Now, projections think that we should expect three rate hikes in 2022. The Bank of England already started hiking, moving their policy rate from 0.1% up to 0.25%. The Norges Bank also raised its interest rate for the second time since September and indicated another by March. On the other side, the ECB noted that it is “very unlikely” to hike until it ends its net bond purchases. The Bank of Japan made no changes to its loose policy, but said it would scale back the emergency support program by March. The Swiss National Bank also kept its rates as is.

It’s a short week for most with most traders probably checking out on Wednesday, if not sooner. Officially, we have a market holiday on Friday. There are a few companies reporting this week, but it’s a super light schedule.

Going to skip the Earnings Season and Equity Capital Markets sections this week.

Best of the Week

This conversation on alternative credit was eye opening. Jillian describes alternative credit as nonbank lending. She explained the loans are typically less than $250,000, because banks will not touch those. There’s a lot of conversation around the plumbing of everyday lending and how the underlying banking works around those. They get into the buy now, pay later phenomenon that’s happening today. This was an enlightening conversation around part of the financial markets that doesn't often make it in the press.

Jillian Jaccard Murrish – Alternative Credit - Listening time: 67 minutes

Best of the Rest

Every year when the annual S&P index rebalances come, it brings back memories of being on the trading desk. This year was another big volume day, especially for those names involved in the in index changes. The index constituents traded about 1.7x their 20 day average. FactSet, which was migrating from the Midcap 400 to the big index, traded 27x its normal daily volume. Below is a screenshot of some of the largest volume names by relation to average.

Signature Bank, SolarEdge Technologies and FactSet Research Systems Set to Join S&P 500; Others to Join S&P MidCap 400 and S&P SmallCap 600

The drastic differences in trading volume got me thinking. How much variation is there in volume vs. the 20 day average? Turns out a ton. I looked at the 20 day average because it’s a common benchmark in trade analytics. What I did here was look at the percentage variation of the day’s turnover versus the trailing 20 day average. I chose turnover, because I plan on looking into more with this, and wanted to normalize to the value traded. I then looked at the average deviation for the year as well as the standard deviation of that set. To normalize this, I looked at the coefficient of variation, which for you non-data geeks is the standard deviation divided by the mean. I also looked at the absolute value of the deviation because the ups and downs around the average can make a more volatile name less so. Below are the index stats for the Russell 3000, along with a breakdown by market cap. I also showed the top 10 names for average absolute value of the deviation and the top 10 by coefficient of variation. I looked at these in three size groupings. So why does this matter? Well, if your pre-trade analytics tell you that an order is going to be 10% of the average 20 day volume, but the stock is trading 30% more than average today, that is going to impact the calculations, or at least it should. Even though using turnover adds some variability here, because it also includes price, I think it's still a viable data set to see the volatility around the average trading day. Look at some of those small cap names with a max deviation of 900-1800%. Putting in an order expecting it to have a large impact and measuring a traders performance versus this is not all that informative. On the other hand, if a name has traded some large blocks over the past few days, your pre-trade will show a lower impact than if you factor in lower volume trading. When you talk about volatility, most people think only about prices, but volume volatility also has a huge impact on executing your trades.

This chart is behind a paywall, via The Market Ear, but you can still see the idea that some people are just crazy. Someone thinks we’re going up 25% from here. That’s pretty aggressive.

Why so serious?

As mentioned above, the Fed is now expected to do multiple rate hikes next year. Liz Ann shared this chart from Ned Davis Research around what we might expect from the S&P 500 over the next few years.

S&P 500 Around Rate Hikes

Another segment to look at as rates begin to rise is Muni bonds. This article from Capital Group shows that Muni bonds might be a decent place to be as rates move higher. In the chart below, they show four periods of rising rates, 50% hit rate on these doesn’t seem all that bad. The article warns of volatility in the space, not something you probably think about with bonds, especially municipals.

Muni bonds and rising rates explained: 3 facts to know

Tracy and Joe seem to get into the weeds often. This episode is another one of those. They spoke with Professor Marshall White, from Virginia Tech, about one of the most low tech but highly used pieces of the supply chain, the shipping pallet. The conversation gets into the types of pallets, their life cycle, and the business of this niche part of the industry. Did you know that some pallets have titles? Seriously! I worked in a warehouse in college for a bit. Pallets are a serious cost. I spent one day a week just repairing pallets. This was more than 20 years ago, so things have become more technical since.

Why the Price of Wooden Shipping Pallets Has Soared - Listening time: 59 minutes

Nice quick summary of the changes around the VC space. It quickly covers the deals getting bigger, done faster, and tremendous exit activity. It’s a good year end review of this market from a very high level.

To the Moon? Venture Capital Trends

One for the Road

There are small groups of sales traders in each region that work covering clients or markers in other regions. When I was at SocGen, we had two guys that worked European hours. They would be in the office about 2am NY time. This article talks about the people in Europe that cover things the other way. They stay after hours and work US orders for European investors. It’s a specialist market, and one person moving can often cause a cascade of other people moving around. As the article notes, this is essentially an extension of the investor’s trading desk. Because the clients are not sticking around, or in the case of the US waking up to trade Europe, these broker relationships are a much bigger factor than the traditional sales trading done in the region. Brexit has caused a shake up in the way some of these desks in Europe are staffed. This might be another place that sees some shake up in the future as outsourced trading continues to gain steam.

Musical chairs and the world of US sales trading

Happy Holidays to you and yours,

Michael