The opinions expressed in this report are those of Inspirante Trading Solutions Pte Ltd (“ITS”) and are considered market commentary. They are not intended to act as investment recommendations. Full disclaimers are available at the end of this report.

Executive Summary

In the November 21 report, Inspirante Trading Solutions delves into the new investment paradigm shaped by inflation, where stocks and bonds tend to move in tandem. The report explores what constitutes a balanced hedging approach in a scenario when the inverse correlation between stocks and bonds seen in the past two decades may no longer apply.

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Correlation conundrum

Upcoming economic events (Singapore Local Time):






Eurozone PMI (Nov)



U.S. GDP (Q3)



China PMI (Nov)



Eurozone HICP (Nov)



U.S. Core PCE (Oct)



Japan CPI (Nov)


Investors continue to watch inflation metrics from the major economies. The Chinese PMI will tell if the economy is finally re-accelerating.

Markets in focus

Figure 1: E-mini Nasdaq-100 Index Futures

The Nasdaq has had an impressive rally since November. 16000 is an important psychological level to watch, and the previous high was established in July at the very level. It is also the second attempt by the bulls at the uptrend channel support-turned-resistance.

Figure 2: Nikkei 225 (USD) Futures (Weekly)

Nikkei rebounded right at the multi-year support above 30000. It has now completed a bull flag and the next leg higher seemed to have started.

Figure 3: U.S. 10-Year Treasury Note Futures

After many months of decline, the U.S. 10-year Treasury bond prices have arguably completed an inverted Head-and-Shoulder (H&S) bottom.

Figure 4: Rolling five-year correlation between S&P 500 Index and U.S. 10-year Treasury yield

Historically, stocks and bond prices are positively correlated (inverse in bond yield terms), especially in the 1970s and 1980s. Only in the past two decades have we observed an inverse correlation between stocks and bond prices (positive in bond yield terms), which many of the modern asset allocation strategies are relied upon.

Figure 5: RBOB Gasoline Futures

Gasoline has arguably completed a giant three-year H&S top, especially as the economy cools down and demand softens.

Our market views

“Finally! The rate hikes are done,” echoes investors’ collective sigh of relief following the latest softer-than-expected CPI figures. It appears the inflation dragon has been slain, with the market emerging relatively unscathed. Could this be the fabled Goldilocks scenario? Inflation is tamed, economic growth is solid, and there is just a slight uptick in unemployment.

The market breathes a sigh of relief with no further tightening on the horizon. This, combined with the typical year-end bullishness and the historical uptick in performance during election years (don’t forget, 2024 is just around the corner), has rekindled the animal spirits in equity markets with gusto. This bullish sentiment, now the prevailing market narrative, has propelled U.S. equities sharply upward in the past three weeks.

Both the S&P 500 and Nasdaq-100 indices are now tantalizingly close to their all-time highs. We acknowledge the validity of these bullish factors. Yet, the pressing question remains: what’s next? How do we construct a resilient and safeguarded portfolio in this landscape? The first instinct for many investors might incline to Treasury bonds as a prudent hedge, especially given the attractive yields and technical setups hinting at a potential bottom in bond prices.

Historically, the inverse correlation between stocks and bonds has been the linchpin of modern asset allocation strategies like Risk Parity. However, a deep dive into the annals of cross-asset correlation tells a different story. Cast your gaze back beyond the 1990s and you’ll find that a positive correlation between stocks and bond prices was more the rule than the exception, particularly during inflationary periods like the 1970s and 1980s. It wasn’t until the era of the “Greenspan Put” and proactive liquidity management by central banks in a deflationary, globalized world, that we saw these asset classes diverge in their paths.

With inflation’s grand resurgence post-pandemic, after decades of absence, the market might have entered a new paradigm. The erstwhile bond-stock relationship of the past 20 years may no longer apply. Recent trends suggest a return of the historical norm, with numerous instances where stocks and bond prices have moved in tandem. Consequently, a portfolio long on both stocks and bonds might not be the balanced, hedged approach it once was. In today’s macro environment, the savvy move might be to position short on bonds, particularly those with longer durations. Such a position could serve as an effective hedge, offsetting potential downturns in equity markets caused by a further rise in bond yields.

How do we express our views?

We consider expressing our views via the following hypothetical trades:1

Case study 1: Short Nasdaq ratio calls

We would consider taking a short position on the E-mini Nasdaq-100 ratio calls. We would sell one December 2023 call option with strike price 16000 at 217 points, and buy two December 2023 call options with higher strike price 16300 at 106 points. To set up the ratio call, we buy two calls at 212 points (106 x 2) and sell one call at at 217 points; in other words, we receive five points credit for setting up the position. If Nasdaq fails to break out and falls below 16000 by option expiry, both calls expire worthless and we keep the five points. If Nasdaq continues to go higher and moves above 16595 [the breakeven is calculated as 16300 + (16300 – 16000) – 5] by option expiry, the strategy would be in profit. The maximum loss happens when the underlying index settles at 16300 by expiry, and the potential loss amout is (16300 – 16000 – 5) = 295 points. One point move in an E-mini Nasdaq-100 option contract is USD 20. 

Case study 2: short 10-Year Treasury futures

We would consider taking a short position on the 10-Year Treasury futures (ZNZ3) at the current level of 109, with a stop-loss above 111, which could bring us a hypothetical maximum loss of 111 – 109 = 2 points. Looking at Figure 3, if the H&S bottom fails, the 10-year Treasury price has the potential to fall back to 106, a hypothetical gain of 109 – 106 = 3 points. Each point move in a 10-Year Treasury futures contract is USD 1000. Micro 10-Year Field futures are also available for investors to trade in direct yield terms.

1 Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.


The opinions and statements contained in the commentary on this page do not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs. This content has been produced by Inspirante Trading Solutions Pte Ltd (“ITS”). CME Group has not had any input into the content and neither CME Group nor its affiliates shall be responsible or liable for the same.



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