2022.03.21 Weekly Note
Inflation Invasion Inversion — what’s changed?
Inflation rampant, Invasion ongoing, Inversion seen in 5s10s on a few occasions, bullish Inflection signaled for Equities and Commodities but will that be an Inception for a broad risk rally? Biased as I may be, but another bullish leg in commodities should hurt equities at some point as it compresses profit margins and consumer spending while stoking fire to the stagflation debate.
It’s been a fairly solid start to the year with my weekly views playing out as well as I could hope for…
03.14 FED and BOE on deck — sticking to the script…
03.07 Sell. Every. Rally.
02.28 Typical bear market rally?
02.21 Staying short Nasdaq and EUR, AUDNZD and NOKSEK appealing
02.14 Staying short NASDAQ and EUR, Long USD and JPY
02.07 Volatility to pick up again
01.31 Pro-risk with a pinch of salt
01.24 BTD. BTFD…
01.17 Volatility is back to being ‘the talk of the town’
01.10 Dose of reality kicking in?
01.03 Higher real yields…
… but seeing the last 1.5 month’s work getting reversed in a matter of days has been gut-wrenching. I’ve been aggressively stacking up Nasdaq shorts on every rally since the beginning of Feb. Though still somewhat nicely in profit (~14800 average), it feels like a massive loss seeing an insane amount of profits disappear before my eyes this past week. Some stop outs trailers on various AUD and EUR shorts, some of which had gone a in-the-money by a couple handles! But hardly bothered by it given my concentrated bet on Nasdaq and EURUSD, the latter of which is looking great still. I’ve not touched those two the past two weeks, and I do not intend to cave in now after taking the gut punches the past week…
As I’ve said in my chatgroup “I’ll feel like a major dumbass” if EURUSD and Nasdaq downtrend doesn’t resume from here and that I’ve gotten way “too greedy and believed my own bullshit” [confirmation bias] that everything was simply going to roll off the cliff-edge as it appeared last weekend. To be continued…
Also as mentioned in my chatgroup was taking stabs on the pullback in Crude which has rallied strongly back above the 100 mark. At least that’s one good thing to come out last week’s trading…
The global economy’s growing risks: stagflation, refugees and lockdowns (FT) This was supposed to be the year the world economy recovered from the shock of Covid-19. By the end of 2022, official forecasters expected the US, European and Chinese economies almost to have returned to the paths they were cruising along before the pandemic. Other emerging economies were lagging behind, but they also expected to be growing at rapid rates and slowly getting back to normal…
Forecasters see growing chance of a recession as Fed hikes rates this year to fight inflation (CNBC) The probability of a recession in the U.S. was raised to 33% in the next 12 months, up 10 percentage points from the Feb. 1 survey. The chance of a recession in Europe stands at 50%. Fed will raise rates an average of 4.7 times this year, bringing the funds rate to end the year at 1.4% and to 2% by the end of 2023. Nearly half of the respondents see the central bank hiking five to seven times this year.
Fed Hawks Seek Half-Point Hikes With Data ‘Screaming’ Action (Bloomberg) Bullard says he favors raising rates above 3% before year-end, One time dove Kashkari backs increases to cool price pressures
Kuroda Doubles Down on Stimulus Commitment Even If Prices Hit 2% (Bloomberg) Japan’s central bank diverges from Fed, BOE rate hikes, BOJ downgrades view on economy, citing the impact of Covid
When is Spring Statement 2022 and what will Rishi Sunak announce (Mirror) Wednesday 12:30pm. Energy bills, National Insurance and inflation are all surging in April, outstripping benefit, pension and wage rises. Meanwhile tax and student loan repayment thresholds are being frozen in a squeeze on the cost of living.
Russia regroups for assault on Kyiv as it tightens grip on Mariupol (FT) Putin’s offensive has been slowed by logistical challenges, tactical missteps and intense Ukrainian resistance. Russia is regrouping its forces for a renewed offensive on the Ukrainian capital Kyiv, according to Ukrainian military officials, as it seeks to cut off the northern cities of Chernihiv and Sumy. Russian forces also continued to tighten their grip around Mariupol, the port on the Sea of Azov in south-eastern Ukraine that has been subjected to fierce Russian artillery shelling for more than two weeks.
Russia’s Assault on Ukraine Uproots 10 Million People (WSJ) scale of the humanitarian disaster showing little sign of easing as Moscow presses its attack with missile strikes and artillery fire.
Flow of Ukrainian refugees testing limits of central Europe’s capacity (Reuters) Officials in Central Europe voiced concern on Sunday that they were reaching capacity to comfortably house some of the nearly 3.5 million refugees who have fled Ukraine since Russia’s invasion and are now camped in temporary accommodation.
Finland warns of ‘major escalation risk’ in Europe amid Nato membership debate (FT) Finland’s president has warned that applying for Nato membership would carry a “major risk” of escalation in Europe as the Nordic country explores [alternative] ways to improve its security set-up after Russia’s invasion of Ukraine.
Germany says it has clinched long-term gas supply deal with Qatar (FT)
for the supply of liquefied natural gas as Berlin seeks alternative energy suppliers to Russia. Berlin’s coalition government has ruled out prolonging the life of Germany’s remaining nuclear plants, which are due to be switched off at the end of the year, and is pinning its hopes on LNG terminals to reduce the amount of gas it imports via pipelines from Russia.
Yemen Houthis attack Saudi energy facilities, refinery output hit (Reuters) “The assault on Yasref facilities has led to a temporary reduction in the refinery’s production, which will be compensated for from the inventory,” it said, referring to Yanbu Aramco Sinopec Refining Company, a joint venture between Saudi Aramco and China Petrochemical Corporation.
LAST WEEK’S ACTION
JPY sold off as rates went higher across the board. Nasdaq outperformed, Bonds sold-off, and Commodities attempting a bounce at their high prices. Big question this week is whether Equities can sustain the bounce with the threat of higher rates and commodity prices...
A dead cat bounce or start of a bull rally? Given how equity markets have performed YTD, the stronger case would be towards a dead cat bounce considering the geopolitical and macroeconomic uncertainties.
Global equities produced an extremely bullish weekly morning-star. Short-term averages are still pointing downwards while price is backing up into 100-handle which has been solid support for 2021. 20 and 50 WMA’s are also just a few cents away from a bearish cross.
Stripping out US equities, the bounce took off from pre-pandemic levels and 200WMA and now being held by the 100WMA and January lows. There is a strong resistance level about 2–3% higher from last close — 2021 area of support and 38.2 fib.
EEM (left) bounced strongly from the area I previously forecasted it would correct to, helped by the big bounce in HSI and Chinese Tech stocks from the China regulatory easing announcement. Stripping out China equities EMXC (right), it does appear EM equities still has substantially more room to fall despite the big reversal last week.
US equities retraced roughly over 2/3rds of the sell-off from the Feb highs. Prior week’s lows marked a solid floor with the weakest YTD sectors leading the bounce in Consumer discretionary and Growth stocks. Price action is now very bullish and at a significant area, being the key support level for 2021. Signs of exhaustion around these levels just above the recent highs should significantly negate last week’s momentum however and there is reason to suspect this could be the way this week plays out now that OPEX is behind us.
Dealer gamma has now flipped positive as a result of the massive amount of options rolling off last week…
Worth noting that the gamma neutral level has also been dropping from 4550 at the end of January to just under 4400 currently. This is something to watch for the weeks ahead and in my case, although I would like to see gamma build start to go heavy again, the probabilities have decreased substantially as the lower neutral gamma level could now lend support to the spot market.
IV has dropped off while risk premiums (Skewdex) have increased back to recent highs. This looks like a typical reset as implied volatilities become realized. Should be interesting to see, particularly in my case, whether IV picks back up while Skewdex stays elevated and Taildex to move higher also.
Yields have been going higher so far this month along with inflation expectations. Last week saw a strong bear flattening move (top-row) with the 5s10s inverting on a few occasions (middle).
Curve shifting higher particularly in the shorter-end and curve inverting across a few tenors doesn’t paint a rosy picture for Equity markets…
White line is the 3-month rolling average of SPX daily returns and we can see the average returns being particularly heavy during periods faster flattening. Should we see the longer-end steepen up a little, the bottom in equities could be justified, but it is difficult to see that happening especially with the Fed doves now sounding the alarm like Kashkari and Evans this past week —increasing the odds for some 50bps hikes.
CRB commodities indices looks like it has completed a classic ABC correctional move and breaking above its respective trendlines.
A look closer at the price action via the Bloomberg commodities index shows a nice congruous move down from the top and a solid base being put in last week.Looks like commodities could put in a strong leg from here.
Big week ahead after last week’s shenanigans and there could be more from this week’s fully loaded calendar. I expect the hawkish rhetoric to stay in high gear and will continue to sit on my core short Nasdaq and EURUSD positions. Also initiated Crude longs and will be trading around that theme on top.
Best of luck trading this week!