4min chapter

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The AI 5 versus the S&P 495

The Macro Trading Floor

CHAPTER

The Liquidity Stress in Dollar Markets

When you look at partial shutdowns of the US government, you tend to see liquidity stress and dollar markets around the implementation date. And I'd actually say that typically you see a, if anything, a stronger dollar when the liquidity stress arises in dollar markets. But most importantly, credit spreads have been tying that tracking very closely with the equal weight SMP 500 is doing. They've been shopping around the same levels for the last five months or the last 12 months.

00:00
Speaker 2
So what I've noted is that when you look at partial shutdowns of the US government, you tend to see liquidity stress and dollar markets around the implementation date. And I think, again, the reason relates to the liquidity in dollar markets, once the treasury general account is close to the zero lower bound. And typically, we are very, very, very close to the zero lower bound when a partial shutdown is implemented. The whole purpose of the partial shutdown is to ensure that the TGA runs on fumes for even longer. And the point here is that you typically see 15, 20 basis points of whitening in IPA or OIS spreads. So, I think that's a little a measure of the liquidity stress in dollar markets. And I'd actually say that typically you see a, if anything, a stronger dollar when the liquidity stress arises in dollar markets. So the chart here is a chart on the dollar development, 100 days prior and 100 days after the implementation of partial shutdowns. And you actually have 100% hit rates, you should never say that but 100% hit rates over the past, for instances of partial shutdowns of being long the US dollar from the actual date of the shutdown and 100 days after. So what I'm saying here is that all the doom and gloom around the dollar is not necessarily fair, just because the US government pulls out another few tricks out of it, out of its sleeve basically.
Speaker 1
Yeah, fair to say as well that you're measuring the DXY here. So you're basically measuring the dollar, most of the currencies and most of the euro because of the composition of the other DXY. I mean, euro dollar is a very important effects pair and around shutdowns basically you limit the supply of dollars to market participants in general, which probably makes funding for people sitting outside the United States funding in dollar more expensive and that reflects as well in the DXY which is 60% the dollar against the euro. So basically cyclical currencies and other currencies apart from the very safe events like maybe the Japanese yen or the Swiss Frank tend to not do very well against the dollar when the government is shutting down. This is basically the thesis there. So I also noticed something else because before we're chatting about Nvidia which makes me think about market cap SMP against equal weight SMP. So let's take the 500 and three components. I think it is a 5500 and let's leave each of them the same point put them into an index. There is actually an ETF for that. It's called RSP. And then if you look at this chart here, you see that the equal weight SMP 500 first of all, hasn't really gone anywhere this year. So it's really basically flat line and chopped around the same level. But most importantly, credit spreads have been tying that tracking very closely with the equal weight SMP 500 is doing. And the reason why I'm plotting this chart here is to explain that both of them equal weight and credit spreads tend to be a more nuanced measure of how markets are trading, about risk assets are trading. So you don't tend to overweight by looking at an index like the SMP, the 5700 largest companies would give everybody the same weight. You look at credit spreads as well to try them and understanding about the broad corporates are doing out there. And the answer is, man, I mean, they're doing okay. I mean, they're going nowhere. They've been shopping around the same levels for the last five months or the last 12 months. Actually, so what do you make of this equal weight market cup discussion, credit spreads, broad markets in general?

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