Terminal Terminal Terminal

Terminal rate spook, crypto dissolve, and Netflix credit warning

Equities 7 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  The past week has been dramatic with the Fed's terminal rate in June 2023 being repriced a full percentage point to 4% suggesting that the FOMC will likely go 75 basis points tomorrow and again next month in order not to get behind the curve. The equity market is responding with a fresh selloff wiping out the gains from the recent bear market rally. Cryptocurrencies are in a state of shock over the fallout in "stablecoins" and now recently a big crypto lender causing spill over effects into equities. Finally, we are talking about high yield and highlighting Netflix as a sign of the tighter financial conditions even for big companies.


New market low but still no panic

Unlike many of the previous setbacks in global equities since early 2015 this drawdown, that has now officially taken S&P 500 into bear market, has been orderly in the sense that the VIX forward curve has been well-behaved. But yesterday’s price action took the VIX Index 34 which inverted the VIX forward curve the most since the late April selloff. However, the inversion has still not reached levels where suddenly the market snaps and it moves into intense selling driven by illiquidity and volatility hedging. But yesterday’s price action was definitely a warning to investors.

Today S&P 500 futures are bouncing back together with crypto with the latter likely being the main source of injecting fresh risk-off sentiment into equities as a large crypto lender suspended withdrawal (see yesterday’s equity note for a discussion) and later during yesterday’s session Binance suddenly temporarily halted withdrawal spooking the market. Like a heat-seeking missile the Bitcoin market was moving towards that $21,000 level that has been highlighted as approximately where MicroStrategy would begin getting margin calls on its massive Bitcoin position which is used as collateral for several bonds. As the market got no news about margin calls despite Bitcoin breaking below the $21,000 level it turned around and positive risk sentiment spilled into equities.

The culprit of the latest big moves in risky assets such as equities, real estate, crypto and high yield bonds has undoubtedly been the pricing of the Fed’s terminal rate measured by the expected Fed Funds Rate by June 2023. The market pricing was rather stable during April and May after the initial selloff in Fed Funds Rate futures Jun23 (see chart below) indicating around 3% terminal rate, but the market has moved another 1%-point in just a little over two weeks to 4%. This move and the underlying stickiness in core inflation have caused chills down the spines of Fed members because it is likely pressuring them to go 75 bps. tomorrow and again next month adding considerable pressure to short-term funding rates and potentially also on longer term interest rates adding more pressure to equity valuations.

Talking about interest rates it is worth noting some deteriorating signs such as the Netflix April 2028 4.875% bond is now trading as low as 93.345 which is only 3.4% from the lows during the height of the pandemic stress in the market. Not a good sign in the credit market for a big name such as Netflix that is a $30bn recurring revenue business. But Netflix is increasingly using debt to finance its content creation, which by the way has been declining in quality lately, as it is cheaper than equity and it has enabled Netflix to accelerate production that would otherwise have been impossible from its operating cash flows. While we are not overly concerned over the rising rate on Netflix’s bonds as it represents a general move higher in interest rates it is worth keeping an eye on credit market. Global high yield spreads have widened considerably this year to around 424 bps. which is a bit off the around 500 bps. that would set off the alarm bells.

Fed Funds Rate futures Jun23 | Source: Bloomberg
VIX Index | Source: Bloomberg
Netflix April 2028 4.875% bond | Source: Bloomberg
Bitcoin | Source: Bloomberg
S&P 500 futures | Source: Saxo Group
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.