00:00What is the consensus at BNP Paribas about the implications of this move for the market,
00:05how long they'll last and whether it's helpful or hurtful?
00:10I think if anything, this news is basically showing the willingness to cap the yield curve
00:16at this point. But I think more importantly, we think that the ripple effect and the implications
00:21are going to be mostly a bearish dollar move we could have, which is by ripple effect bullish
00:27dollar. But taking a step back, I think overall, it's going to reinforce the view that we could
00:36potentially have a bit more risk taking in the short term.
00:39All right. So let's dive into some of what you said. Let's start with the fact that you said
00:44it is likely to be dollar bullish. We're seeing the dollar sell off and there's also the possibility
00:49of foreigners maybe fleeing at this point because the government might intervene in the bond market
00:55at any time. So why is the dollar bullish? Oh, it wasn't actually a dollar bearish.
01:01So I think in terms of positioning, what you've seen is since NFPs and CPI, but also the retail
01:06sales, the dollar has been hit with positioning moving really on negative territory. I think at
01:12this point when you start to cap bond yield, but also uncertainty about what the Fed is going to do
01:20in September and October, we think that overall, it's going to reinforce further unwind of dollar
01:26longs. And we think there's more room for that. And that's why we could easily see your dollar at
01:32118 in the next couple of months. All right. Well, what is the consensus now around what the Fed will
01:38do?
01:39I mean, the Treasury is kind of engaging in a little bit of fiscal maneuvering here. The Fed needs to
01:45do
01:46some monetary maneuvering of its own, but do the two intersect or collide?
01:51I think it all depends on the next data print. Like one thing we saw from yesterday is like
01:56post-DF for MC Minutes, the market pricing on the September and October high didn't really move at all.
02:02If anything, the latest print from NFP and CPI and retail sales were much more important data points.
02:09We're still waiting for the Fili Fed, waiting for the jobless claims. That will be important
02:14additional data points to monitor in order to understand if a hike is credible or not in the
02:21next meeting. Just more on this Treasury move. I mean, it is pretty small fiscal operation. At the
02:28same time, it did have a major impact on long end yields. Does that impact need to have legs?
02:32Sophie, in order for this to be successful? Or will the Treasury Secretary have to do something more?
02:40Overall, I think it caps the yield curve. But if you take a step back,
02:43it's much more important to have a clear understanding of what's going to happen with Iran.
02:50Oil prices back to $92 per barrel if you look at Brent. If you look at products margins,
02:56so the gap between product prices versus like Brent or WTI, it's an all-time high. I think this will
03:03be
03:04much more important to monitor in order to understand where inflation expectations are going to go. And
03:10that itself has been putting a dent on how much risk-taking we got in the market past the July
03:19momentum
03:19unwind.
03:21What did you take away from the FOMC minutes yesterday? They almost seemed to be an afterthought
03:25for the market. But they did indicate that many, many officials were very, very unclear about the path forward.
03:34Yeah, but it's all depending on where inflation is going to print. So I think the next data points on
03:40inflation on jobs are going to be like giving much more insight. The worry on inflation is one thing.
03:47But if it's all about oil at this point, you want to understand how much the energy, potential energy
03:54shock is putting a strain on bond yields, especially at the back end of the curve with the fiscal ripple
03:58effect.
03:59But I think overall, we've been waiting for some cracks on the economic outlook due to a potential energy
04:08shortage for a while. But now if you look at energy inventories, it's starting to be at quite critical low
04:15level. So there is like this breaking point where higher oil prices forever, or are we going to have at
04:21some
04:21point such low inventories that you're going to have to start pricing demand destruction? I think that
04:30are going to be the story for the rest of the year. Sophie, in terms of portfolio management,
04:36which you have to think about, I mean, are the short positions all closed now in the treasury market?
04:41Is that it? Have we seen the highs in yields for the year?
04:46Professioning wise, I think what you've seen is if you look at the CTA signal on the treasury,
04:53we're not at trough yet. So there could be a bit more momentum there in terms of like
04:59a bit more pressure on higher bond yield. But the buyback announcement yesterday is clearly
05:04putting a cap on that. I think what is more concerning for asset allocation perspective,
05:11it's much more this ongoing positive correlation between equities and bonds and this inflation
05:17uncertainty and the fact that at the back end of the curve, we're not going to have that much rally
05:25if anything happens. So how do you manage this environment at the point where
05:31hedges and portfolio hedges are becoming much more rare at the moment?
05:36Would yesterday's move make you more interested in other countries dead or were you already
05:42getting more interested anyway because it was providing great competition for the United States?
05:48It's clear that it's going to create much more cherry picking. So countries where the fundamentals are a
05:54bit weaker, inflation has already turned versus countries where you have worries on the fiscal side,
06:02worries on inflation. So I think rather than look at duration like as a whole in portfolios, there's going
06:08to be much more cherry picking picking countries where let's say you have much more carry. And that's
06:14why in our portfolio we've been cherry picking within the EM space. So long Brazilian bond, long Mexican bonds
06:21and long South Africa.
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