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Yield Curve Inversion: A Big Deal for Equity Markets?

There has been a lot of focus recently on the yield curve. For the purposes of this blog, we define it as the spread between 10-year US treasury yields and 2-year US treasuries. 

Today it is tracking at ~30 bps, the tightest it’s been since the Financial Crisis.

One would typically expect a positive yield spread since a 10-year instrument has higher risk than a 2-year instrument. For example, investors should demand a premium yield for 10-years vs 2-years. Historically, this spread has averaged 100bps, with a range of roughly -100bps to +300 bps (see chart below).

Posted by Luis Ahn on Jul 24, 2018 3:36:57 PM

Topics: From the Desk of Luis Ahn, International Equity

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World Cup Fever and Equity Alpha

There have been numerous academic studies on the economic benefits of hosting the World Cup. A few, out of a long list of studies, can be found here: 

 

Infrastructure spending, increased tourism (both short- and long-term), higher labor/civic morale, and increased profile of the host country are often cited as the benefits. On the other hand, the cost of building (and financing) the stadiums, crowding out of private investment, congestion, and the cost of security are some potential disadvantages.

But as international equity investors, we are more focused on the simple question:

what about the impact on equity prices?

Posted by Luis Ahn on Jun 28, 2018 10:17:42 AM

Topics: From the Desk of Luis Ahn, International Equity

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Increasing Probability of 5-10% Correction in International Equities

Here is some potential good news and some potential bad news. The good news – international stocks are not expected to implode anytime soon. The bad news – a correction of 5-10% seems fairly likely. This increasing probability of a near-term correction is supported by the diverging relationship between stock prices and macroeconomic data.

Posted by Luis Ahn on May 31, 2018 2:59:00 PM

Topics: From the Desk of Luis Ahn, International Equity

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Taper Tan-Trump

Are geopolitical risks beginning to impact stocks? While 2017 was marked by low volatility and little consideration for risk in general, the first quarter of 2018 feels different. 

Posted by Luis Ahn on May 3, 2018 9:32:39 AM

Topics: From the Desk of Luis Ahn, International Equity

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Oil Inventories Just Did Something Not Seen Since 1996

One of the more interesting developments in the oil markets is the fact that oil inventories have not had their seasonal build. We don’t blame you for not noticing. This news was likely drowned out by all the macro “noise” around trade wars, flattening of yield curves, rise in inflation, tax reform, new Fed Chair (hawkish or dovish?), spike in VIX, and volatility in FANG stocks. Admittedly, there is a lot of macro news to digest.

Posted by Luis Ahn on Apr 11, 2018 8:34:50 AM

Topics: oil, From the Desk of Luis Ahn, International Equity

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The Impossibly Hard to Predict Equity Market Correction

After equity markets hit all-time highs earlier this year, market pundits have been eager to “call the top.” We have one of the largest hedge funds in the world taking on significant short positions in the European market, an equity strategist at a bulge bracket firm calling for a potential 40% market correction “at some point” and a recent article claiming that high cross-asset correlation is a sign of an impending sharp correction. These headlines have analysts all asking the same question: should we brace for a big sell-off?

Posted by Luis Ahn on Mar 15, 2018 11:38:01 AM

Topics: From the Desk of Luis Ahn, International Equity

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Oil: Don’t hold your breath on rig counts

In June 2017 we wrote about oil prices being likely too low; a lot has changed since then. With WTI now at over $60 per barrel (and Brent almost $70 per barrel), market participants are wondering how much higher we can go, or worse yet when prices will revert. One ‘signpost’ analysts quote very often is the (Baker Hughes) U.S. oil rig count, which is published on a weekly basis on Fridays. The logic is that if oil prices get too high, rig count will rise, production will grow, and prices will be depressed. Conversely, if rig counts stay flat or drift lower, oil prices will continue to grind higher.

Posted by Luis Ahn on Jan 24, 2018 6:15:36 PM

Topics: oil, From the Desk of Luis Ahn

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Mercedes to Tesla: Can I Borrow Your Electric Car?

Earlier this year the international equity team at R Squared Capital Management wrote a blog about the potential winners and losers in the electric car race. There’s been some recent news that adds some fun color to that debate.

Posted by Luis Ahn on Dec 20, 2017 7:40:00 AM

Topics: From the Desk of Luis Ahn, Electric Cars

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“Gotta See it to Believe it”

Nothing seems to faze the market. Regardless of which market or asset class, the price appreciation continues with little regard for risk.For investors and asset allocators who are actually focused on risk management, this environment can be maddening. When a bull market, like the current one,subscribes to the belief that nothing materially negative can happen, it is abundantly clear that risk is being ignored.Below, we feature three different asset classes – Bitcoin, South Korean equities and U.S. volatility – as case examples. These are not meant to imply that markets will correct or that investors should be fearful. Rather, we highlight these extreme levels of complacency so that RIAs and other asset allocators will proactively analyze the risks hidden within their portfolios. Now is not the time to be lulled to sleep. 

Posted by Luis Ahn on Dec 13, 2017 5:21:58 PM

Topics: From the Desk of Luis Ahn

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Supercharging Electric Vehicle Uptake

At the end of last month, we wrote a blog about the global shift to electric vehicles (EV). In this R Squared Capital Management blog, we’ll take a closer look at battery costs, EV adoption rates, and emerging battery technologies.

According to a 2016 survey by Japan’s Ministry of Economy, Trade and Industry (METI), the three most important impediments to buying an EV were battery-related: 

Posted by Luis Ahn on Oct 18, 2017 2:22:53 PM

Topics: From the Desk of Luis Ahn, Electric Cars

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