2022.04.25 Weekly Note

This week is shaping up to be a potentially choppy week with earnings and EOM where we will likely see a lot a good deal of portfolio rebalancing ahead of the summer months and the much anticipated 50bp Fed hike the following week. As a result, I lean towards the view that the risk-off will see some respite this week before resuming the downtrend in May where the old maxim “sell in May and go away” just might hold true, again.


— Markets —

US stocks tumble 2.8% as investors gird for higher interest rates (FT) Biggest one-day fall for S&P 500 since March comes after Fed takes tougher stance on inflation. The 2.8 per cent decline in the benchmark S&P 500 came a day after Federal Reserve chair Jay Powell said a 0.5 percentage point interest rate rise was “on the table” in an effort to combat soaring inflation. The weekly decline was also 2.8 per cent.

Gold ETP inflows hit record high of $11.3bn in March (FT) Global net inflows into gold ETPs rose fivefold month-on-month to $11.3bn in March, according to data from BlackRock, eclipsing the previous peak of $9.4bn in July 2020. The biggest winner from mounting inflation fears appears to be the old stalwart of gold, however, with unprecedented inflows to ETPs. Total assets are now just 1.8 per cent below the all-time high recorded in October 2020, according to the World Gold Council. In the fixed income world, rising consumer prices helped flows to European inflation-linked bond ETFs to hit a record $500mn in March, while in the US Treasury inflation-protected securities funds took in $3bn, the first positive reading for three months.

Rising US rates and China’s slowdown hit renminbi (FT) Chinese currency has fallen 1.5% against the dollar on weakening economic outlook and higher US debt yields. Analysts have grown increasingly bearish on the Rmb, but markets had not reacted significantly until this week when the PBoC lowered its trading band and the yield advantage offered by Chinese bonds vanished as a result of rising US rates. Yields on dollar bonds recently jumped above those on Chinese debt for the first time in 12 years. That vanishing yield advantage has spurred foreign investors to dump a record Rmb193bn worth of Rmb-denominated bonds over the past two months.

Japanese Yen’s Drop Raises Potential for Broader Market Trouble (WSJ) Weakening currency raises hedging costs for Japanese investors holding U.S. assets. The yen has fallen 12% against the dollar in 2022, even as the Russia-Ukraine war sent global stocks sliding. Its fall has been so steep that it ranks as the worst-performing currency this year out of 41 tracked by The WSJ — worse than the Russian ruble or Turkish lira. The Federal Reserve is poised to begin winding down its extensive bond-buying program as early as next month and counting on investors like Japanese institutions — the biggest foreign buyers of U.S. Treasurys — to step in and help absorb the increased supply of Treasurys on the market. But the yen’s rout might cut into Japanese demand for Treasurys. Because of “a fear of the unwinding of the weak Japanese yen and pricey U.S. stocks,” Japanese institutions such as insurance companies are likely to focus their portfolios more on ultralong-term Japanese government bonds instead of U.S. assets, said Daisuke Karakama, chief market economist at Mizuho Bank, in emailed comments.

Pound slides to weakest level since 2020 as British retail sales fall (FT) Sterling fell to its weakest level since late 2020 on Friday as storm clouds gathered over the UK economy, with falling high street sales, plunging consumer confidence and rapidly cooling business activity. Andrew Bailey, BoE governor, said he hoped that the central bank could still pull off a soft landing. But Bailey warned that “it is a narrow path” and the BoE was dealing with the opposing forces of a strong labour market adding to inflation and risks of a recession caused by higher food and energy prices squeezing household incomes.

Historic sell-off lures bargain hunters to bond market (FT) ‘Inflation mania’ has knocked a gauge of long-term Treasuries down 18% in 2022. “We view the current level of 10-year [US yields] as a compelling location [to buy the debt],” said rates strategists at Bank of America on Wednesday. “Inflation concern has reached a level of mania or panic,” the bank said, citing the “extreme” inflows into inflation-protected bonds as well as a spike in internet searches for “inflation. Our forecasts point to inflation peaking this quarter and falling steadily into 2023. We believe this will reduce the panic level around inflation and allow rates to decline.”

Oil prices extend losses as Shanghai lockdowns hit demand outlook (Reuters) The benchmarks lost nearly 5% last week on demand concerns. “Bearish sentiment outweighed concerns over tight global supply as China continued lockdowns in Shanghai and investors prepared for a series of U.S. rate hikes, but oil prices are not expected to fall below $90 a barrel due to the prospect of a potential ban by European Union on Russian oil amid a deepening Ukraine crisis”. Morgan Stanley raised its third-quarter price forecast for Brent by $10 per barrel to $130 citing a “greater deficit” this year due to lower supply from Russia and Iran, which is likely to outweigh short-term demand headwinds.

Iron Ore, Steel Futures Slump on China Lockdown Fears (MarketWatch) Iron ore and steel futures slump as demand expectations are weighed by Shanghai’s extended lockdown and fears that other parts of China, including Beijing, may be subject to similarly harsh curbs. The most-traded September iron ore contract on the Dalian Commodity Exchange fell as much as 11% on Monday. They were recently 8.4% lower at 815.0 yuan ($125.35) a metric ton. Iron ore futures in Singapore also declined by as much as 11% in response to the negative sentiment and were recently 6.2% lower at $141.40 a ton. The most actively traded October steel rebar futures contract on the Shanghai Futures Exchange fell 3.2% to CNY4,857 a ton.

Goldman’s VAR climbs to $98 million in Q1 (Risk.net) It was the hottest reading since Q2 2020, when the Covid-19 pandemic caused the average to climb to $122 million. Goldman Sachs’s average value-at-risk climbed 18% in the first quarter, as commodity, currency and interest rate risk spiked to multi-year highs. Daily VAR — management’s gauge of the most the trading desk could lose on any given day — averaged $98 million, up from $83 million for the previous three months. Commodity VAR rose 53% to $49 million compared with the previous.

— US —

Surging US inflation expectations defy Fed’s efforts to tame price growth (FT) Barometer reaches new high on concerns central bank was ‘complacent on inflation for too long’. A historic bond rout has intensified this week as officials from both the Fed and the European Central Bank stepped up their inflation-fighting rhetoric. But the hawkish message has done little to arrest a rise in long-term inflation expectations (breakevens), which are watched closely by central bankers concerned that they can become self-fulfilling.

Fed Dashes Cold Water on Shock-and-Awe Hike of 75 Basis Points (Bloomberg) Chair Jerome Powell and other officials haven’t backed a suggestion by their St. Louis Fed colleague James Bullard to consider the first 75 basis-point hike since 1994. Federal Reserve officials are showing scant support for what would be the most drastic single policy tightening in almost three decades, though they’re on board with a series of still-large moves aimed at curbing an inflation spiral.

The Fed Wants to Raise Rates Quickly, but May Not Know Where to Stop (WSJ) Jerome Powell is shifting monetary tightening into a higher gear. His goal sounds straightforward — lift interest rates to “neutral,” a setting that neither spurs nor slows growth. But there’s a catch: Even in normal times, no one knows where this theoretical level is. And these aren’t normal times. There are good reasons to think the ground beneath the central bank’s feet is shifting and that, after accounting for elevated inflation, neutral may be higher than officials’ recent estimates. Officials still think the real neutral rate is low; the question is whether inflation will end up higher than 2%, which would mean a higher nominal neutral rate. If inflation settles out closer to 3%, for example, the nominal neutral rate would be closer to 3.5% than 2.5%, and the Fed might need to raise rates to 4% to actually slow the economy down.

Retail sales rose 0.5% in March amid inflation jump; import prices hit 11-year high (CNBC) Consumers continued to spend in March even as inflation rose to its highest level since late 1981, CPI rising 1.2% for the month according to government data released Thursday. Retail sales data is not adjusted for inflation. Consequently, the biggest gain in sales for the month game at gas stations, which saw an 8.9% increase in sales as gasoline prices rose 18.3% during the period. The sector has seen a 37% sales burst over the past year. By contrast, online sales slumped sharply, falling 6.4% for the month. General merchandise stores saw a gain of 5.4%, sporting goods and electronics stores both had 3.3% gains, and sales at food and beverage stores along with bars and restaurants rose 1%. Inflation continued to hit imports, with prices rising by 2.6%, the largest monthly increase since April 201, higher than the 2.2% estimate. On a 12-month basis, import prices jumped 12.5%, the largest such gain since September 2011.

U.S. Companies Face Hurdles in Moving Production Closer to Home (WSJ) Companies looking to make their supply chains more resilient with nearshoring strategies may only be bringing production problems closer to home, experts say. Although 70% of CEOs have planned, are considering or expect to move manufacturing to Mexico, only 17% have already done so, according to a recent Kearney study of American manufacturing executives. “Undeniably, China is the single biggest market for all sorts of nuts and bolts, everything from your basic components to sophisticated components,” said Kamala Raman, a vice president at Gartner Inc. who advises companies on supply chain networks. “You cannot recreate that ecosystem in any other country of the world.”

Apple, Amazon, Microsoft Headline Busy Earnings Week (WSJ) About a third of the S&P 500 and nearly half the Dow Jones Industrial Average are set to provide their quarterly updates starting Monday. Covid-19-related supply-chain issues remain a problem, and the Russian invasion of Ukraine is presenting new obstacles for businesses. Investors are looking to see how companies are addressing those topics as well as maneuvering amid a macroeconomic backdrop marked by high inflation. “Technology companies have a free pass right now, because the sector’s down,” Mr. Belski said, adding that CEOs will use supply-chain issues tied to China to lower expectations. “It doesn’t mean that the earnings are going to suck. It just means that this is their opportunity to really set the bar lower and under promise and over deliver.”

Cathie Wood’s Flagship Fund Is Down 45% This Year. Money Is Still Flowing In (WSJ) ARKK through its investment theme of “disruptive innovation” declined 45% so far in 2022 including 21% in April alone, as rising interest rates punish stocks that are valued on the prospect of robust future growth. Its big holdings include Tesla Inc., Zoom Video Communications Inc. , Roku Inc. , Teladoc Health Inc. and Coinbase Global Inc. With the exception of Tesla, those stocks have all fallen more than 35% this year. Despite the drawdown, investors haven’t fled ARKK. Instead, they have funneled more than $658 million into the fund this year, according to FactSet data through Thursday, including about $59 million in the latest week. That is even as investors yanked $2.3 billion year-to-date from the Invesco QQQ Trust.

— Europe —

Vladimir Putin abandons hopes of Ukraine deal and shifts to land-grab strategy (FT) Russian president was considering settlement with Kyiv last month but now sees no prospect. The Russian president appears to hold a distorted view of the war as set out by his generals and depicted on Russian television, the people briefed on conversations with him said. They added that he insisted, despite all evidence to the contrary, that his forces have not targeted civilians during attacks such as the siege of the Azovstal steelworks, Ukrainian forces’ last holdout in the largely destroyed city of Mariupol.

Ukraine to call for heavy arms when top U.S. officials visit Kyiv (Reuters) Ukraine will ask U.S. Secretary of State Antony Blinken and Defence Secretary Lloyd Austin for more powerful weapons during an expected visit by the officials to Kyiv on Sunday as the Russian invasion enters its third month. Ukrainian officials plan to tell Blinken and Austin of the immediate need for more weapons, including anti-missile systems, anti-aircraft systems, armoured vehicles and tanks, Zelenskiy aide Igor Zhovkva told NBC News on Sunday.The United States and NATO allies have shown growing readiness to supply heavier equipment and more advanced weapons systems. Britain has promised to send military vehicles and is considering supplying British tanks to Poland to free up Warsaw’s Russian-designed T-72s for Ukraine.

Ukraine’s military says Russian forces are trying to storm Azovstal plant (Reuters) despite Russian President Vladimir Putin’s comments last week that the complex did not need to be taken. “We are taking casualties, the situation is critical… we have very many wounded men, (some) are dying, it’s a difficult (situation) with guns, ammunition, food, medicines… the situation is rapidly worsening,” Volyna said, commander of Ukraine’s 36th Marine brigade forces in Mariupol speaking from his location at the plant.

Macron defeats Le Pen in French election: Projections (AlJazeera) French President Emmanuel Macron has defeated his far-right rival Marine Le Pen by a comfortable margin in a runoff election and has won a second term, early projections by pollsters showed. Macron would be the first French president in a generation to win a second term since Jacques Chirac in 2002: “I’m not the candidate of one camp anymore, but the president of all of us”, LePen: Promising to “carry on” her political career and saying that she would “never abandon” the French, “The result represents a brilliant victory.” Italian Premier Mario Draghi hailed Macron’s victory as “splendid news for all of Europe” and a boost to the EU “being a protagonist in the greatest challenges of our times, starting with the war in Ukraine”.

Rising energy prices push almost half German companies to cut new investments (Reuters) German companies are already feeling the impact of rising energy prices. Around 40% of want to reduce investments due to rising energy costs, an IFO survey showed on Monday. Around 46% of companies said they want to reduce investments due to rising energy prices and a quarter of German companies expect to see a burden from price shock in the second half of the year. Almost 90% of companies said they would probably have to raise prices to counter soaring costs, while three quarters plan to expand their investments in energy efficiency, it added.

Germany to Borrow Extra 40 Billion Euros to Cushion War Blow (Bloomberg) The ruling coalition has suspended constitutional rules limiting new debt for three consecutive years to deal with the economic fallout from the pandemic but is standing by a pledge to restore them in 2023 — at least for the time being. Since the start of the coronavirus pandemic, the German government has broken long-standing fiscal taboos and unleashed an unprecedented borrowing binge with net new debt of 130 billion euros in 2020 and a record 215 billion euros in 2021.

— China —

Covid-19 Cases Jump in Beijing as New Deaths Triple in Shanghai (WSJ) China’s capital ramps up testing to halt outbreak; Hangzhou restricts movements in some parts of tech hub. The Chinese capital recorded 22 new cases on Sunday, its highest daily tally this year. Shanghai, which a week ago had recorded no new deaths in the latest wave of infections, said 39 Covid patents died Saturday — more than three times Friday’s toll. While still low by global standards, the latest numbers are a challenge to the ability of China’s top leaders to wipe out outbreaks with their zero-Covid policy. The virus had been spreading undetected among different communities for a week, Beijing health officials had said Saturday. More cases will be found as the city steps up its screening efforts, they said.

Shanghai: Green fences baffle locked down residents (BBC) Authorities battling Shanghai’s latest Covid outbreak have installed fences to restrict the population’s movement. Public criticism of government policies is rare in China, but in the past few weeks some Shanghai residents have posted complaints on social media sites. Some in locked-down areas of Shanghai say they have been struggling to access food supplies, and forced to wait for government drop-offs of vegetables, meat and eggs.

Many factory workers in Shanghai can’t get back to work, even after Covid controls ease (CNBC) In the last week, authorities announced a whitelist of 666 companies that would get priority for resumption of work. Foreign business organizations said the list is a step in the right direction, but it’s difficult to get more than half of workers to factories due to lockdown restrictions. Lockdowns in the southeastern metropolis of Shanghai, which began at scale in late March, have been among the most disruptive — to daily life, and to foreign businesses and their supply chains. The city accounts for about 3.8% of China’s GDP but is home to the world’s busiest port. A measure of China’s road freight transport turnover fell by 27.2% nationwide from April 1 to 17 from a year ago, Nomura’s chief China economist Ting Lu pointed out in a report Wednesday. For Shanghai, that same transport measure plunged by 82.6% over the same time period, the report said.

Shanghai’s Shipping Standstill; Hiding Russian Tankers; Embedding Amazon (WSJ) The impact of Covid-driven lockdowns in Shanghai on logistics operations is growing and threatens to add new disruptions across global supply chains. Daily truck volumes moving through Shanghai were down 70% this week from the end of March, according to Wind Information, and trucking costs are up significantly. Japan’s Yusen Logistics packed only 6% of its usual daily volume for shipment from Shanghai’s port over the past weekend. The lull in outbound container business may give overworked ports in the U.S. and Europe breathing room in the short term, but logistics experts say Shanghai’s cargo buildup is a bubble waiting to burst.

Foxconn suspends production at two factories in eastern city of Kunshan, putting Apple’s China supply chain on edge (SCMP) Apple’s prime supplier halted operations in its two plants located at Dianfa and Fuhong in Kunshan on April 20 after new Covid-19 cases were reported on site. That has put further strain on Apple’s supply chain in China, where a few other manufacturing partners stopped production because of coronavirus restrictions. Operations have been suspended since Wednesday last week after new Covid-19 cases were reported at the two plants, where employees are confined to dormitories inside those campuses, according to two workers at the affected factories, who declined to be named because they are not authorised to speak to media. Those two dormitories have been put under strict lockdown, according to a statement by local government authorities on Thursday.


Risk-off — Equities and Bonds continued to sell-off to new lows, Commodity futures reversed sharply, and most currency indices traded to new lows last week.


Japan, Taiwan, Korean, and Sweden were the few that avoided closing the week in red.

ACWX (MSCI World ex-US) and EMXC (MSCI Emerging Markets ex-China) looks set to revisit March lows.

US stocks saw large declines particularly in larger-caps, Techs, Materials and Energy. Consumer Staples and Real Estate the only sectors to close positive.

SPX at-the-money volatilities (Orange) has ticked up but demand for downside protection via Skewdex (Green) and Taildex (Red) still remains subdued.

If not for the major quarterly reports this week, I’d give strong chances of March lows getting taken out. However, as I think Q1 will have been reasonably strong for US companies on the back of strong consumer and economic activity trends coming into the new year, I see relief for US equities this week with earnings reports triggering some rebalancing, value-buying, and potentially a short-covering rally.


Front-end yields surged higher as the market entertains the potential for a 75bp hike in the upcoming meetings — 1year yield jumping almost 35bp while the 30year was 2bp lower last week reversing from the 3% mark. If long-end yields are indeed finding a pivot lower from the 3% mark, we may start to see some demand come in at presumably ‘great value’, a statement which is starting to make the rounds in bank research/notes.

Bond levels across the charts are back in the thick of the 2018 range and interestingly, the IEF/TLT ratio has stalled at the mid-point of the 2018 range mid-point as well as the snugly fitting parallel trendlines. Looking ready to consolidate and drift lower from here, especially when it is looking increasingly likely the Fed will deliver a ‘rougher-landing’ than they would hope.


Bloomberg Commodities index (top) pushed the highs on Monday but has slumped 7% since, dragged down by the pullback in Energy (middle) while Agricultural commodity prices (bottom) remained strong. The Energy subindex looks as though it may have completed the pullback with some could find some support in this region.

Precious metals has been coming more volatile and confusing at times in recent months as it battles renewed demand from reflation/stagflation dynamics while fighting stronger USD currents and higher real yields. The subindex is now showing possible hints of false-breaks.


Dollar gained against most currencies extending well beyond their recent lows and DXY reaching it’s highest level since March of 2020. RUB traded back to the highs, while ZAR gave back its YTD gains.

USDCNH broke out and up +2.29% last week and has added another 1% today reaching the key 6.6 figure.

EURUSD continues to sag lower with a continuous weekly close below the trendline. Current path exposes the March 2020 lows and towards the 1.04 handle.

USDJPY is seeing a lot of commentary for continued JPY weakness and calls for 135 and beyond, but I’m somewhat skeptical believe there is significant risk of the JPY weakness unwinding due to positioning and various market risks. On the otherhand, the BOJ seems to have a lot more tolerance for JPY weakness than many would suggest. A lot of technical resistance around the 130 handle, and I’ll be closely watching for the ‘great’ unwind trade.


NDX short-covering, tactical longs favoured

I will be looking to take some profits this week as I would rather avoid getting caught up in headline risks around earnings, month-end rebalancing, and FOMC next week.

Stay short EURUSD, add on rallies

As per comments of previous weeks…

Stay short AUDCAD

The pair looks well on its way to the 0.9 handle with a weekly close below the trendline and 20wma:

Relative value themes are still supportive — China lockdowns, increasingly larger Chinese growth slowdown, weakening CNY to weaken purchasing power of Australian exports, USD strength tendency to exert topside pressure on the pair.

Long USDCNH, buy on dips

There has also been a good number of analysis/recommendations by the banks on further CNH weakness such as:

Both the technical (chart earlier) and fundamental case will remain compelling for the trend to continue.

Short EMFX

On a more intra-day basis, I like the idea of looking for short EMFX opportunities. Asian FX has also been weak for sometime now and ZAR, which has been one of the stronger EM currencies, has given up all YTD gains in just one week. Add to that the weakness in CNH and the downgrading of global growth, I think we are seeing signs prolonged weakness in EMFX.

— — —

Finally, I’ve recently discovered @fxmacroweekly on Twitter who has a Substack publishing a very detailed report on the macro landscape for traders every week. It looks fantastic and worth subscribing especially if you like following my journal!

Have a great week!



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