2022.06.27 Weekly Note

Last week I noted a strong potential for rally as we get some positioning unwind into the month and quarter-end. BofA shows the market being very oversold according to Margin Debt levels:

JPM Kolanovic making the case for $30Bn in pension fund quarter-end rebalancing flows could send the SPX above 4,000:

and Vincent Deluard with this interesting take on EOQ flows:

as well as some strong seasonals for SPX in July:

MAJOR HEADLINES

MARKETS

Stocks snap weekly losing streak on scaled back rate-rise expectations, S&P 500 gains 6.4% over the week as growth worries temper aggressive outlook for Fed policy (FT); JP Morgan sees portfolio rebalancing lifting U.S. stocks 7% next week (Reuters); Metals Haven’t Crashed This Hard Since the Great Recession (Bloomberg); Crypto feels the shockwaves from its own ‘credit crisis’ (FT); Recession is challenging inflation as top fear among stock and bond investors (MarketWatch).

CENTRAL BANKS

Powell says the Fed could hike rates by 0.75 percentage point again in July, Powell vows that the Fed is ‘acutely focused’ on bringing down inflation, Fed promises ‘unconditional’ approach to taking down inflation, A day after Powell’s assurances, markets worry that ‘the Fed breaks something’, Inflation will not fall to 2% target for two years, Fed’s Mester says (CNBC); Central Banks Should Raise Rates Sharply or Risk High-Inflation Era, BIS Warns (WSJ); Recession in US and Europe ‘increasingly likely’, warn economists (FT); Norway central bank makes largest rate hike in two decades (Reuters); Mexico central bank makes record rate increase, flags more hikes (Reuters); Zimbabwe Plans Triple-Digit Interest Rate Hike to Tame Inflation (Bloomberg); Global CB policy update/summary (Bloomberg).

US

Consumer Sentiment at Record Low Is Another Ominous Sign for Economy, High inflation weighs on Americans’ views; new-home sales rose in May (WSJ); Supreme court overturned Roe v. Wade (WSJ); Clinics have canceled appointments out of fear of prosecution, Women are rushing to find treatment in other states (NYT); US business treads cautious line after Supreme Court abortion ruling (FT); US firms pledge to pay staff travel expenses for abortions (BBC); Joe Biden’s proposed ‘gas tax holiday’ runs into opposition (FT); Biden signs into law landmark gun control bill (BBC); FDA bans Juul products from US market in blow to e-cigarette maker (FT); Record breaking heat (WSJ).

Europe

G-7 Latest: Leaders to Commit to Indefinite Support for Ukraine (Bloomberg); Russia bombs Kyiv in a weekend missile barrage across Ukraine (NPR); As G7 leaders meet, Russia sends a message with missile attacks, Despite the main focus on Ukraine G7 leaders detail a new plan to target China’s influence, To counteract Russia and China G7 welcomes smaller nations to its summit (NYT-updates); Europe must give developing nations alternative to Chinese funds, von der Leyen says (Reuters); Italy’s Draghi backs large investments in gas infrastructure in developing countries (Reuters); Grim times lie ahead for UK as inflation combines with low growth (FT); Russia Is Hours Away From Its First Foreign Default in a Century (Bloomberg).

ASIA

Hong Kong Sees Rising Covid Cases Ahead of Planned Xi Visit (Bloomberg); Macau locks down some buildings as COVID infections creep up (Reuters); Chinese stocks are looking cheap, Fund manager explains why he’s betting on Alibaba (CNBC); Ant, Alibaba plan for less intertwined future after China crackdown (Reuters); Hong Kong exchange sets terms for Evergrande to avoid delisting (FT); Miners/iron ore: faltering Chinese demand highlights problems ahead (FT); US Resuscitates Bid at G-7 to Counter China’s Belt and Road (Bloomberg); Korean economy pushed closer toward ‘perfect storm’ (KoreaTimes).

X-ASSET SUMMARY

US Equities completely reversed prior week losses; US bond futures validated prior week bullish reversal with higher high and close; Commodities softer across the board on slowdown narrative taking hold; and risk currencies followed the recovery is equity risk sentiment.

EQUITIES

Some recovery in broad sentiment last week from being red across the board in the week prior…

MSCI World ex-US has bounced off the Monthly 3sd band with Stochastics (10,5,5) looking to print a bullish cross should markets continue the recovery this week…

Developed and Emerging market Daily charts showing a solid shift in momentum with an upside break of bullish stochastic cross…

KOSPI TAIEX and BOVESPA the weakest index wk/wk performers is showing a glimmer of hope on the Friday close with a bullish stochastic cross.

Bullish momentum in SPX and NDX has been picking up last week with a very strong Friday close.

Market is trading like the Fed could be overly aggressive into an economic slowdown and the paring back of future rate hikes have been supportive for big name equities…

much of which is in XLC and XLK sectors which is showing momentum building and could end up in the improving quadrant by the end of the week.

Options market is increasingly bullish with net dealer inching back to neutral.

QQQ in particular is now less than 1% away from flipping positive.

COMMODITIES

Bloomberg commodity index sunk to new lows to levels not seen since March 1st. It has started to bounce however following the recovery in broad sentiment, and while the Ukraine crisis continues, this could be a risk to a continued rally in equities as the pressure on global inflation and interest rates reemerges.

RATES

Technically, IEF and TLT still looks too early to get excited about the recent bid in bonds…

Rates volatility via the Move index (Orange) has rolledover however leading to a softening of the USD (DXY, Green) and bounce in the Nasdaq (10day change inverted, Blue).

Interest rate futures have been on the bid and Z2-Z3 spread inverting as it became more apparent the Fed would be hiking 75bps, which they did.

Inflation expectations continue to trend lower particularly the 1y1y forward (Blue) coming down ~70bps from pre-fomc levels…

Wk/wk change in yields also reflecting inflation expectations coming down.

CURRENCIES

On currency index view, except for AUD and NZD, the higher beta currencies benefited from the improved sentiment last week.

Looking purely at relative change in future growth and inflation expectations between US, Europe and China, a strong argument can be made for the end of broad USD strength.

EUR and CNH weakness has been stalling in recent months and should US rates volatility continue to ease, these currencies could be putting in a bottom. There are however a huge amount of risks to both Europe and China as well as the global economy that could see more flight to dollars going forward. I’m therefore somewhat neutral on the USD, and mildly bearish should risk sentiment not deteriorate further than it has in the near-term.

VIEWS & IDEAS

The key risk to the base case view of an extended rally in US equities into Quarter-end would be another shock to commodity markets that would exacerbate stagflationary concerns. With the ongoing Ukraine related geopolitical risks, this could very well create another bout of risk aversion following last week’s rally.

For now, the shock from surging commodity prices and yields looks to be in the rear view should support the recovering risk environment, however long or short-lived that may be.

Barring any significant escalation, I continue to remain constructive on last week’s ideas — Short EURNOK, USDCAD, USDMXN; and Long NDX.

I’ve also initiated Short USDJPY positions last week on the view that US rates volatility will continue to ease and yield curve flattening as the focus turns to the impact of monetary tightening down the road.

Giving Long GBPUSD another look this week. Went long Thursday and squared up Friday as it could not produce a good follow through. GBP positioning is still very short and if risk continues to firm up, Cable could squeeze higher with the daily price action signalling downside likely to be out of play.

It’s been a great month, let’s have a safe week!

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