2022.04.11 Weekly Note

NEWSFLOW

-USA-

The S&P 500 will plunge 11% by the end of 2022 as ‘inflation shock’ sparks a recession, Bank of America says (Insider) After the “inflation shock” comes the “rates shock,” which will ultimately lead to a “recession shock,” according to the note. And that recession will cause the S&P 500 to fall below the key 4,000 level by the end of 2022 which represents potential downside of 11% from current levels. Nearly all prior recessions have been preceded by inflation surges, including in the late 1960’s, early 1970’s, and in 2008. “Last dominos to drop in terms of recession expectations is higher yields and weaker dollar.” After the “inflation shock” comes the “rates shock,” which will ultimately lead to a “recession shock,” according to the note. And that recession will cause the S&P 500 to fall below the key 4,000 level by the end of 2022 which represents potential downside of 11% from current levels.

-EUROPE-

Ukraine, Russia Gear Up for War’s Biggest Battles (WSJ) Ukraine and Russia poured reinforcements into eastern Ukraine this weekend, preparing for what is likely to become the war’s biggest battles as refugees continued to flee the looming Russian assault. Russia’s main objective now is to seize the parts of the eastern Donbas region not yet controlled by Moscow. Unlike the first phase of the six-week-old conflict, that shift is forcing Ukraine into fighting conventional battles involving tanks, artillery and aircraft on flat, often barren terrain that allows Russia to leverage its superiority in military equipment. Attempting to disrupt the Ukrainian redeployment, Russia has said that its forces carried out a series of airstrikes on Ukrainian railway hubs. Some 52 people died in Friday’s Russian missile attack on the railway station in the Donbas city of Kramatorsk just as it was packed with civilians trying to board evacuation trains toward the relative safety of western Ukraine, according to Ukrainian authorities. Moscow denied it carried out that particular strike. “The battle for Donbas will remind you of the Second World War, with its large operations and maneuvers, the involvement of thousands of tanks, armored vehicles, planes and artillery. And this will not be a local operation, based on what we see in Russia’s preparations,” Ukraine’s Foreign Minister Dmytro Kuleba said after meeting North Atlantic Treaty Organization ministers this past week. “Either you help us now — and I’m speaking days, not weeks — or your help will come too late and many people will die.”

-CHINA-

Shanghai Has Recorded More Than 130,000 Covid Cases — and No Deaths (WSJ) In a Covid-19 outbreak that has locked 25 million people at home, the city of Shanghai has reported more than 130,000 cases since March 1, but says there have been no deaths and currently only one patient with severe illness. Hong Kong has followed a similarly strict model as mainland China in the pandemic, and saw a steep rise in deaths following a recent outbreak there. In March, the city reported tens of thousands of cases and hundreds of deaths a day. Taiwan, with many fewer cases than the mainland, reported a Covid death on Saturday, the fourth this year.

-MARKETS-

Elon Musk suggests people who subscribe to Twitter Blue should be able to pay with dogecoin (CNBC) Billionaire CEO of Tesla and SpaceX who revealed this week that he owns 9.2% of Twitter is a prolific Twitter user, often moving markets with his tweets, and tweeting about Twitter again: appointed to Twitter’s board of directors on Tuesday and said he looked forward to working with the board to make “significant improvements to Twitter in the coming months.” “Everyone who signs up for Twitter Blue (ie pays $3/month) should get an authentication checkmark,” “Price should probably be ~$2/month, but paid 12 months up front & account doesn’t get checkmark for 60 days (watch for CC chargebacks) & suspended with no refund if used for scam/spam,” “And no ads. The power of corporations to dictate policy is greatly enhanced if Twitter depends on advertising money to survive,” also proposed pricing “should be proportionate to affordability & in local currency. Maybe even an option to pay in Doge?”

LAST WEEK’S ACTION

EQUITIES

RATES

US 10year TIP yield (Green) vs QQQ/SPY ratio (Blue, inverted)
MOVE (Purple) vs VXN (top) and DXY (bottom)

COMMODITIES

Bloomberg Commodities Index
CRB Commodities Index (Orange) vs Ex-Energy index (Purple)

CURRENCIES

2week (Purple), 1month (Blue)

TRADING VIEWS/IDEAS

Lookout for Turnaround Tuesday…

On the lookout for some tactical pro-risk opportunities as the market is coming off some selling pressure last week, which would set us up for a potential Turnaround Tuesday bounce, especially if we finish the Monday with some continued weakness. I like buying Semi-Conductor stocks (I’ve initiated a position in NVDA on last Friday’s close and may add another if it dips towards 225) as Demark sequential is signalling the sell-off in these stocks is nearing exhaustion. SMH should be a good alternative for the more ETF-minded. Also the backdrop of supply chain tightness while these goods are in high demand across all product classes should still remain supportive. For macro instruments, Nasdaq looking for a squeeze as we head into earnings season and AUDJPY would appear the most suitable candidates, while long GBPUSD makes for an interesting tactical choice.

but maintain short-risk bias big picture

Lack of positive news and persistence of supply chain issues is turning into negative feedback loop of negatives upon negatives.

Stay pro-USD

March inflation (CPI on Tuesday, PPI Wednesday) is strongly expected to have accelerated and while it may be starting to slow on m/m-basis, inflationary pressures are expected to continue reverberating through the economy and we are still some ways from Fed’s target rate. To add, strength of US consumers points to strong Retail Sales while surging prices-paid data for upcoming Import prices and Jobless claims trending lower (all on Wednesday) should bolster the case for higher rates.

Sell EUR rallies

There could be some knee-jerk rallies from headlines around the French elections in the coming weeks. While the Ukraine conflict does not look like resolving anytime soon, any EUR rallies should be good opportunities to get short an economy that is already cratering from rampant inflation, lowered output/growth and sentiment.

Long high Commodity-beta assets

Currencies with high Terms of Trade paired tactically against EUR and JPY where I would maintain a short bias due to the backdrop of higher rates, particularly of US treasuries — stronger real yields and USD.

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