2022.06.05 Weekly Note
US equities has seen continuous selling so far year-to-date and to the extent where I’m now of the view that the Market has, for now, adequately discounted Fed policy tightening, or thereabouts.
Although the impact of tightening financial conditions is already becoming visible (e.g falling New and Existing Home Sales and Durable goods spending), the path towards demand destruction and ultimately a Recession should take time.
Assuming recession is to start kicking in by early 2023 and we have indeed seen peak inflation in the US, I expect the 1/2year breakevens to move gradually lower another percentage point. For now, inflation related data remains key: persistent inflation and tight labour market makes a hard-landing likely; inflation cooling off and labour market easing makes softish-landing possible. Speed of deterioration in Growth will also be important especially if activity deteriorates too quickly (e.g. consecutive below 50 PMI’s in the coming months).
NEWSFLOW
Inflation!!!
- Biden Says No Short-Term Fix to High Energy, Grocery Prices (WSJ), Oil Sets Sixth Weekly Gain as Tight Markets Concerns Continue (Bloomberg), Saudis Raise Oil Prices More Than Expected Amid Asia Rebound (Bloomberg), Global Food Prices Stay Near Record as Ukraine War Upends Trade (Bloomberg), Ukraine warns that only lifting Black Sea blockade can avert global food crisis (FT), U.S. mulls lifting some China tariffs to fight inflation (Reuters)
- Eurozone inflation hits record 8.1% (FT), ECB Is Ready to Tighten Just as Global Peers Speed Up (Bloomberg), Bank of America Sees at Least Two Half-Point ECB Hikes in 2022 (Bloomberg)
- Australia Inflation Accelerated Further From 5.1%, Chalmers Says (Bloomberg), Australia Set for Back-to-Back Rate Hikes Amid Split Over Size (Bloomberg), Australia Bond Yields Jump on Bets of Outsized RBA Rate Hike (Bloomberg)
- Inflation Worry Deepens Among Canadians in Blow to Central Bank (Bloomberg), Norway Rate Hike Pressure Grows on Housing, Unemployment (Bloomberg)
- Rate Hikes Spur Bets That Asian Central Banks Will Keep Going (Bloomberg), Korea Inflation Outpaces Forecasts, Adding to Rate Hike Case (Bloomberg), Inflation Weighs on India’s Economic Growth (WSJ)
- Turkish inflation soars to 73%, highest since 1998 (Reuters), Analysts raise Argentina 2022 inflation forecast to 72.6% (Reuters)
Markets
- US stocks end week lower after jobs data bolster case for Fed tightening (FT), Government bonds come under renewed pressure and US stocks slip (FT), Hard-Landing Dread Eclipses Brief Rally in Emerging Stocks (Bloomberg)
- Fed’s Lael Brainard Says Too Soon to Say If Pace of Rate Increases Can Slow (WSJ), Treasury Yields Staring Down 3% Threshold Await CPI for Next Cue (Bloomberg), Summers Sees Signs Fed Tightening Is Having Impact on US Economy (Bloomberg)
- Corporate America Turns Up Volume on Warnings About Economy (Bloomberg), US Services Gauge Retreats as Business Activity Growth Slows (Bloomberg)
- Pressure builds on riskiest corner of US junk bond market (FT), American Dream Mall Owner Skips Interest on $800 Million Municipal Bond (WSJ), Russia Fails to Meet Bond Obligations, Triggering Swaps Payout (Bloomberg)
- Lockstep Stock Market Is Forcing Everyone to Be a Macro Trader (Bloomberg)
- Russia strikes Kyiv for first time in weeks, battle rages in east (Reuters)
China
- Beijing to allow indoor dining, further easing Covid curbs (CNBC), Starbucks Reopening Its Shanghai Stores in Lockdown Rebound (Bloomberg), HK Reports 515 New Daily Covid Cases, Highest Tally in 6 Weeks (Bloomberg)
- China orders U$120 billion infrastructure push amid slowing economy as Beijing steps up stimulus (SCMP), Beijing’s 33-point stimulus plan won’t save China’s economy (Fortune)
- Hope Blooms for China Stocks as Analysts Stop Cutting Estimates (Bloomberg), Investors return to Chinese stocks after sell-off triggered by Covid and geopolitics (FT)
X-ASSET SUMMARY
Equity markets on the turn after some indecisive price action into the highs; Bonds sold off through the lows bring back some rates volatility; Crude oil prices trading almost 4% higher last week benefiting petro-currencies, USD with a bullish inside week hinting a bounce, JPY weaker against higher yields.
EQUITIES
Asian markets was closed while the US jobs data was released and caused a late week slump, so it will be interesting to see how Asia trades against the China reopening and the strong NFP supporting an aggressive Fed policy.
MSCI World is looking short-term overbought on the Daily with Stochastics crossing the signal line. A retest of the 20dma looks in order.
Similar patterns in SPX and NDX, the latter of which is yet to produce a signal line cross but is showing a break in momentum.
US equity index ETF’s have produced a bearish outside week, solid reversal signals showing across the large cap ETF’s, and small-caps finding cheap value buying. Nasdaq for shorts and Russell2k for longs would appear to be a good bias this week.
June is the worst DJIA, S&P 500 and Russell 1000 month in midterm years. Average losses range from 1.5% by Russell 1000 to 1.8% from S&P 500. Of the five indexes, none has a winning track record in June. DJIA and S&P 500 have declined more than they have risen. Small caps tend to fare well in June averaging 0.9% in the month since 1979 .
US equities having been unable to sustain upside moves while it leaning heavily on recent support suggests it needs a break lower to put in a more convincing base for further upside. There is some improving sentiment due to China reopening, but given the toppish price action and upcoming event risks, I lean towards to a bearish pivot and will be looking to sell rallies this week.
RATES
US yields rose across the board last week.
Higher inflation expectations drove the rise in yields, 10yr nominal yield rise was ~4bps larger than the rise in TIP yields, while Eurodollar and Fed fund futures sold off as the September pause was played down.
COMMODITIES
Agricultural commodities have been dropping off but appears to have found support at the May lows; Energy prices continues to rise driving the Aggregate index higher; Precious metals still subdued and appears to be ranging along with real yields.
OPEC+ unlikely to meet production targets despite raising quotas, Saudi Aramco raising Asian Oil export prices higher than expected, and China reopening reigniting the Demand side, higher Energy prices looks likely to continue. This is likely to weigh on global risk sentiment as it is likely to fuel persistent inflation concerns. Oil on dips and related proxies still looks a fair bet.
CURRENCIES
USD looks set to rebound after pulling back in recent weeks. There are numerous central bank meetings and policy decisions over the next 2 weeks and I expect the hawkish discourse to drive risk aversion and support USD.
JPY is very overbought but I do not have any interest in buying JPY other than for quick tactical trades. EUR AUD USD CAD longs with central bank meetings in mind would be preferred ideas this week.
I also expect EUR to be relatively supported with Eurozone’s record inflation being too hot to ignore by the ECB. GBP and ZAR have strong bearish momentum coming out of last week and come to mind as good pairings.
I plan to fairly nimble without holding trades too long this week with a generally bearish risk bias. Have a good week trading!
