/ɪnˈfleɪʃ(ə)n/
LAST WEEK’S ACTION
USD reigned supreme alongside PM’s last week, some gains in $JPY $GBP, inside week for US index futures and $ZB reversal closing at prior week’s low.
EQUITIES
Mean reversion across Equity indices — Hang Seng led gains (+1.84%) from being the worst performer (-2%) the week before, Russell2000 weakest (-1.05%) after the big (+6%) rally the previous week.
US sector performance reacting to higher inflation concerns — Materials posting another week of strong gains, Consumer cyclicals weakest after a very strong start to the month, Financials perking up on higher rates.
Little fear of a decent correction. Risk premiums back to levels where Equities have been toppish recently so should be interesting to see how Skew and Taildex moves this week.
RATES
Yields higher mostly around the belly from previous week (Purple).
Inflation expectations on the bounce this month driving a wedge between nominals and real yields.
Eurodollar spread for 2022 jumped almost 20bps last week after the huge CPI beats. However by this point at, I’m inclined to believe risks are skewed towards disappointment i.e. FED continuing to lag behind expectations while price surges stabilizing and inflation begining to slow I consider the higher probability scenario going forward.
KING DOLLAH
Being long USD versus low yielders still seems the obvious idea given the widening rate differentials driving broad USD strength.
PRECIOUS METALS
10year real yield is at the lows and both Gold and Silver are still some ways off last year’s high.
Looking at the price action of recent months, CRB Metal Producers Index has broken above the neckline which should bode well for Gold Silver as well as GDX SIL.
Long Silver positions working great as planned last week and thought charts look great for a break higher, I will be taking squaring up majority/all of my positions while we are at a major resistance point.
My reasons being — 1) I wouldn’t expect inflation expectations to move much higher from here (e.g. 5yr BEI ~2.3% and 10yr ~2.5%) and therefore see limited downside in real yields which has been driving recent moves; 2) the Move Index is elevated at recent extremes and sudden sell offs in bonds could drag up real yields, as well as drive 3) broad USD strength we’ve already been seeing.
TRADE VIEWS/IDEAS
From current levels I see limited room for higher inflation expectations and markets unlikely to price anymore than 3 hikes for 2022. I think longer yields and cyclical assets will perk up while techs underperform as a result. On the whole I lean towards being neutral risk as yields looks like it could accelerate higher and cause volatility in mega-caps.
Current book is short USDNOK EURNOK AUDCAD (increase on rallies), long Silver (trimming this week). As I’m neutral to mildly constructive on risk, I still like looking long petro-currencies like NOK and CAD, and I’m taking an interest in ZAR for its correlation to metals.
Have a great week trading!
