2022.06.20 Weekly Note

Risk is very very oversold…

Fed insider reports can be believed — I wasn’t convinced about the Fed delivering the 75bps and was reluctant to believe that it was a certainty as everyone was making it out to be. Well, lesson learned, and I’ll be giving future insider reports much more credit from this experience.

Quick and shallow recession — It now looks increasingly likely recession will come around a lot sooner than thought, and could come and go quicker also. As I alluded to last week, I still believe the US is able to absorb a great deal of stress than previous recessions, for instance the last GFC was risky banking that led to a full-blown credit crunch; and the 1970s (which many are drawing similar parallels to our current environment) was an extremely contentious time for world peace and politics, much more so than now. Prudential regulations have been beefed up, banks are far better capitalized, and the world powers are imo more focused on weathering the storm than to kick it up a gear.

Officially a bear-market —S&P500 finally closed in bear-market territory and now eyeing a correction towards the 3500 handle where there is a very large confluence of technical markers — from fibs, ma’s to anchored-vwaps. You may have noticed on my twitter that I’m looking for a relief rally. Looking at the charts we’ve gone from being very oversold over the last month to more extreme oversold and I see scope for an early week rally, while PMI’s later in the week could limit upside.

MAJOR NEWS

MARKETS

• S&P 500 rises slightly Friday, but still posts worst week since 2020 (CNBC). Stocks suffer steepest weekly fall since onset of pandemic — FTSE All-World index declines 5.6% for the week as rising interest rates threaten outlook (FT). Corporate bond funds bleed billions as Fed ramps up inflation fight (FT). History says the next bull market is just months away, and it could carry the S&P 500 to the 6,000 level, according to Bank of America (MarketWatch)
• Federal Reserve raises interest rates by 0.75%, most since 1994, amid effort to slow inflation (Yahoo). Fed’s Waller Supports 0.75-Percentage-Point Rate Hike in July, Fed is ‘all in’ on re-establishing price stability (WSJ). Fed’s Mester says returning inflation to 2% will take ‘a couple of years’ while she does not predict a recession the risks are growing (FT).
• A shallow recession in the US is a “virtual certainty” in the third quarter, but it done not necessarily mean long-term economic pain is inevitable (CNBC). Economists see interest-rate increases raising likelihood of recession to 44% in coming 12 month (WSJ).
• Swiss central bank surprises markets with first rate hike since 2007 (CNBC). UK interest rates raised to 1.25% by Bank of England (BBC). Japan ‘odd one out’ in pursuing vast bond-buying programme (FT). European Central Bank holds emergency meeting to discuss market rout (CNBC). China likely to keep lending benchmark interest rates unchanged amid global central bank tightening (Reuters).
• Bitcoin’s Price Falls Below $20,000 as Crypto Selloff Deepens (WSJ). Bitcoin Bounces Above $20,000 in Swift Rebound; Caution Advised (Bloomberg). The Crypto Party Is Over (WSJ) The cryptocurrency industry was built on swagger, enthusiasm and optimism. All three are in short supply these days, as losses and layoffs mount.

CHINA

• US Companies Still Not Fully Operating After Shanghai Lockdown (Bloomberg). China’s stock rally is becoming a lifeline for Asian portfolios (BusinessTimes). Chinese Tech Stocks Will Struggle to Buck Global Blues (WSJ). China’s JD.com posts slowest growth ever in ‘618’ shopping event (BusinessTimes). China’s central bank accepts Ant’s application for financial holding company (Reuters).
• Macau Has First Outbreak in 8 Months as Mainland China Cases Ebb (Bloomberg). In stamping out covid, China has stomped on confidence (Economist). China defends ‘zero-COVID’ after US envoy warns of costs (APnews). China’s bank run victims planned to protest. Then their Covid health codes turned red (CNN). China turns Winter Olympic villages into Covid quarantine camps (FT). Freed but frustrated: Chinese tourists struggle to clear Covid travel hurdles (FT).
• China warns Taiwan independence would trigger war (BBC). China Alarms US With Private Warnings to Avoid Taiwan Strait (Bloomberg). US seeks dialogue with China to ease inflation pressure, ‘lifting additional tariffs is not a gift for bargaining’ (GlobalTimes). China’s Xi says trade with Russia expected to hit new records in the coming months (CNBC).

EUROPE

• ‘No need for any concern’: Germany plays down fears of economic fragmentation in Europe after bond yields soar (CNBC). Bridgewater vs Europe — Ray has radically ramped up his bets against European stocks again (FT). Heat wave shatters all-time records in Europe (Axios). Less carbon, more autonomy: Europe says yes to clean hydrogen (EC).
• Ukraine Intensifies Strikes Against Russian-Controlled Areas (WSJ). Russia says eastern attack is going well, strikes Ukraine with missiles (Reuters). Ukraine turns to EU as Russian invasion cuts off regular fuel supplies (FT). Russia Slashes Gas Flows, Aiming Economic Weapon at Europe (WSJ). Ukraine moves closer to joining the EU; Zelenskky says historic decision will help to defeat Russia (CNBC).

WEEKLY ACTION SUMMARY

• Equities started the week with gap downs and never recovered.
• Bonds sold off further but mustered a rally post Fed meeting.
• Commodities largely rolled over led by Energy
• CHF strongest after surprise SNB 50bps hike while JPY wekness continues with BOJ (somewhat mind-blowingly) committing to further asset purchases. New highs in USD seen but further strength could begin to cool off alongside US Bond market volatility.

EQUITIES

The worst week for global equities since March 2020, with a few exceptions. China had a mildly positive week continued to benefit from gradual reopening and easing of regulatory crackdowns on tech companies. Being at compellingly cheap levels with a Central bank that is focused on easing while the ROW is tightening, it’s a great market to look for some bargains such as Alibaba (9988) and Tencent (700) for the long-term.

MSCI World Index has fallen back deep into this area of support beyond the 200wma and not far from the 50fib retracement level. If risk assets are to find short-term relief, I would expect it to do so around this area.

SPX

US stocks have led the sell-off and quite clearly feeling a great deal of pain. As is widely observed, Fed meetings have often been good inflection points for relief rallies and looking at the Up/Down volume ratio (bottom panel), looks like the one-way selling has begun to cool off.

Daily charts are hinting a potential trend change with some indecisive price action on Friday — Harami-cross print on ES and a mildly more bullish Harami on NQ, while Stochastics is readying to make a bullish signal line cross.

Developed and Emerging (ex-China) is showing the speed of selling slowing down substantially, also with some late week indecision prints and bullish Stochastics cross.

RATES

Yields finished higher last week (Orange vs Purple), but lower since the Fed meeting (Green —Tuesday close).

Bonds are beginning to find some solid bid in the longer-end printing a bullish weekly reversal bar. Fed comments this week will likely reinforce the message that they mean business and calm inflation concerns and sustain yield curve flattening pressure as a result, and help to support the bid in the longer-end bonds.

Bond volatility via the Move Index is also beginning to head lower, which should take the edge of the selling in Nasdaq stocks (3month rolling returns inverted in Green).

COMMODITIES

Commodities have been rolling over in recent weeks and it looks like disinflation is starting to become more visible.

• Agricultural mostly sideways since Feb/Mar surge
• Energy price rise slowing and on the turn in June
• Precious metals in support vs strong US $ and yields
• Industrial metals sinks further on slowing production/demand

This has been a primary concern for markets and the surge notably slowing will help to take the edge off inflation expectations and equities.

CURRENCIES

High beta currencies were the worst hit last week as risk assets sold off. NOK CAD and MXN were among the worst hit, and I like fading this weakness, while keeping an eye on Oil which I feel will consolidate from last week’s sell-off and remain supported ongoing structural supply tightness. With bond volatility easing and price action in risk assets hinting a bounce, I expect USD strength to ease also and support a constructive risk picture this week.

TRADE IDEAS

Some new trades I’ve initiated on the market relief view:

• Short EURNOK — Norges bank meets this week and the NOK is looking very very cheap. It was mostly unaffected by the Friday sell-off in Crude and should it consolidate and find support, this should help the NOK find some firmer footing.
• Short USDCAD — BOC tends to mirror their US counterpart in monetary policy and I think this will keep the market pricing in an aggressive response from the BOC. USDCAD has also reached a key pivot area above 1.30 and 200wma, and given my view on crude and risk, I think the pair is setup for a move back to 1.2750.
• Short USDMXN — Daily price action is highly indicative of a move lower and I expect a move back towards the 20 mark. I also like the potential of collecting the additional weekend carry on Wednesday before Thursday’s round of PMI’s should my risk view play out.

• Long Nasdaq100 — I’ve been buying up low ones last Thursday and Friday on the view that the market is very short, and I see strong potential for an unwind of hedges, along with the observations above that should be a welcomed sight for equity markets.

I will reassess my risk view on Thursday when the Flash PMI’s are released.

Wish you profitable week trading!