00:00I think there needs to be a policy response to this now. And the reason why I ask is there's
00:03headlines crossing the wire right now with the president on social media calling for rate cuts now, not waiting for
00:10another meeting, etc.
00:11And it raises the question that if everything you're talking about here and the historical precedence of things being able
00:17to snap back and the fungibility of oil, do you need a policy response at this point two weeks into
00:22the war?
00:22I mean, the war is a policy, so definitely we need a response. But whether the right response, I don't
00:31think so.
00:32And, you know, I think it's relatively well understood in a slightly different context when we're talking about Fed independence
00:39and the like.
00:40I mean, the experience of 1973, 74 oil shocks is that if you start accommodating them, yes, short rates will
00:47go down and maybe that provides relief to some people.
00:50But the 10-year yield starts going up. We are in a phase where, you know, all rates are going
00:56up.
00:57We can talk about how and why and the like. But I think if we do, if you consider a
01:04hypothetical of just suddenly cutting interest short-term policy rates, you usually see the 10-year go even higher.
01:09It would be my concern.
01:11It's amazing because that's what we've seen the 10-year do. I think we're more than 30 basis points higher
01:16at this point versus prior, immediately prior to when we saw the initial action taken in Iran.
01:21And I want to talk about how that's filtering through into the equity market because overall it seems like oil
01:26is in the driver's seat.
01:28But you think, for example, about the small caps that I highlighted. They have been absolutely crushed over the past
01:33two weeks or so.
01:34I mean, how much of that is purely a rate story at this point?
01:38I would say some of it is definitely a rate story.
01:41But I would say that what's been going on across markets, what's been going on basically within equities is, you
01:49know, and I hate to use technical jargon, but it's really degrossing.
01:52So what people are doing is cutting basically their longs or overweights and also their shorts and underweights.
02:00And I would say, you know, and the same chart that I'm going to describe works, whether we are talking
02:07about sectors and industry groups in the S&P, whether we are talking about regional equities, whether we're talking about
02:13asset classes.
02:14And that is that if you look at the performance basically over the prior three months before the shock and
02:22how performance has basically been recently, there's a very strong negative relationship with about half coming just simply from what
02:32I would describe as positioning.
02:34I would say some of what's happened in rates is exactly the same story where the market basically got long,
02:43maybe for other reasons.
02:44AI is going to impact the labor market and the like.
02:47So you're seeing those shorts get covered at a time of uncertainty.
02:51It's not necessarily a fundamental directional view that is playing out.
02:56And I mean, so, you know, we've all been concerned about software, talking about software.
03:01Yeah. And when oil prices go up, software did well.
03:05I mean, that's the clearest indication that it's just a positioning unwind of shorts and software that were the highest
03:12they've been since the global financial crisis.
03:15Yeah, we're going to get another taste of that tonight.
03:16Some more software earnings.
03:17And we should also point out the sell offs that we've seen over the last few days, not necessarily broad
03:21based and certainly nothing off the cliff.
03:23Pinky, you have to leave it there.
03:24Pinky Chata, chief U.S. equity and global strategist over at Deutsche Bank Securities.
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