Leverage and fixed income risks (with Tom, Lizzy)

Asks if the KOSPI sell-off is a buying opportunity.

Tom

Colin Lancaster

The leverage needed to maintain positions in the KOSPI is finite; the sell-off is a risk management exercise and prudent profit-taking.

The concentration and amount of leverage in leveraged expressions, plus the size of the notional now with KOSPI up 100% this year, means the street needs to find a way to continue to finance this activity.

Asks what level on yields or pace of rise derails the rally.

Lizzy

Colin Lancaster

Another bout of a taper tantrum would derail the rally. Terminal levels will continue to rise due to economic strength and inflationary pressures.

The importance of today's payrolls number will be overshadowed by Warsh's first meeting, where market anticipations will center on forward guidance, balance sheet size, and how he begins to shape the Fed.

Asks about the possibility of Warsh scrapping press conferences.

Lizzy

Colin Lancaster

It's a possibility. Warsh stands for a smaller balance sheet, but Lori Logan owns that agenda item. On forward guidance, he can have more impact. Changing press conferences or dot plots would add volatility to front-end rates markets.

Prior to Chairman Powell, press conferences only happened quarterly or even less frequently.

Asks when higher yields become a problem for equity markets.

Tom

Colin Lancaster

If we start moving towards 5% and above on yields, that is a challenge for current valuation levels in the US or DM.

Asks about the sustainability of the US growth story and AI capex through 2027.

Tom

Colin Lancaster

The US economy is surprisingly stable despite external issues. AI capex-driven growth is sustainable for at least another 12 months to two years.

Financial markets move at a very different pace to the economy. It will take a very long time for productivity gains to emerge in the real world.

Asks about UK equities and whether they are just a war trade.

Lizzy

Colin Lancaster

UK equities are a diversifier from AI tech. The FTSE 100 benefits from higher energy prices and is less exposed to Middle East tensions.

Think of it as a barbell strategy: own the tech theme because there's more to go, and find something that's a little bit more diversifying.

Asks about stepping into Gilts and what level would bring him in.

Tom

Colin Lancaster

There will be buyers at 5.5% on the 10-year Gilt, but there is scar tissue from the March episode. There is probably less buying power at the moment.

Market participants don't have the embedded built-up P&L to be able to take more risk in markets like that.

Asks about sovereign debt in places like France and political risk.

Tom

Colin Lancaster

Over the last 10 years, there were many price-insensitive buyers of duration (central banks, LDI, Japanese institutions). Those buyers are withdrawing, and there is more competition for funding capacity from hyperscaler issuance and mortgage hedging.

Asks about gold and whether he thinks the hikes are coming.

Lizzy

Colin Lancaster

Gold is a lower quality alternative in a regime where bonds are very volatile and the Fed may not provide forward guidance. It's an alternative asset to own when thinking about currency debasement and volatility.

We no longer have price-insensitive buyers of bonds, which is making bonds very volatile.

Asks how he would position if there is a deal between Iran and the US to reopen the Strait of Hormuz.

Tom

Colin Lancaster

A bonafide long-term deal would be a significant easing of financial conditions. However, he remains skeptical and expects more of a 'skinny deal' or glorified ceasefire.

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