Weekly Note 2022.09.12

Coming back from ‘Chuseok’ in Korea where we’ve just had a long weekend break with bank holidays on the Friday and Monday. Chuseok is a mid-Autumn festival that traditionally celebrates a bountiful harvest which in modern times, is about family and extended relatives getting together, catching up and having plenty of (fattening) food. This weekend I spoke to a few relatives who were interested in popular stocks as well as crypto, and with Chuseok being celebrated on the eve of the Autumn full moon, I couldn’t help but having a few quiet jokes to myself about “to the moon” memes and references.

This does tie in with a few thoughts I’ve had about markets this weekend however and the direction it is projecting for the coming week — UP, expecting last week’s momentum to have some follow through this week up until quad-witching where there is $3 trillion notional of options rolling off this Friday. As a close friend and colleague once said to me long while ago — meme stocks (or shitco’s as I like to call them) rallying is a good indicator of BTD sentiment, and I think he makes a good point that is fitting to the kind of action we are seeing now.

LAST WEEK’S ACTION

A complete reversal of prior week’s selling in equities closing around prior week highs; UST futures continues to extend lows, Energy futures trading heavy while Precious metals and Food commodities gained. USD was softer on a more positive sentiment while JPY weakness continues to follow the weakness in bonds.

NEWS HEADLINES

US

EUROPE

ASIA

EQUITIES

US particularly the Nasdaq led the recovery in global equity sentiment…

MSCI World is eyeing a test of the trendline with the ex-US chart (rhs) suggesting gains could be limited for the broader market…

Nasdaq printed a bullish engulfing on the weekly chart pointing to a potential return to the 13k area…

There is a lot of resistance ahead however on the Daily chart…

And $3 trillion of options rolling off this week…

And as it is quite often the case with OPEX, it tends to mark a reversal in the recent trend. [Note: this chart has not updated but we are now close to ‘Zero Gamma’ levels with SPX closing well above the 4k mark last week]

COMMODITIES

Commodities rebounded last week led by non-Energy. Market seems to be less concerned about a hard landing while a softer USD helped to support the rally.

RATES

US inflation breakevens have continued lower but its starting to coalesce around the 2.5% mark.

UST’s continued to stay under pressure with yields up across the board last week mostly driven by the rise in real (TIP) yields.

Rising yields was one reason I was surprised by the strong rebound in stocks last week but with inflation expectations moderating with more hawkish messaging from fed members, I’m inclined to interpret this as the market being encouraged by Fed’s enhanced credibility in bringing inflation down and to the extent of possibly achieving a soft-ish landing. This is also reflected by the market now pricing in 25bps of cuts next year down from 50bps of cuts a few months ago (still calling a bluff on Fed comments that they see no cuts next year).

CURRENCIES

I noted in the one of chat groups that I was observing a good amount of pro-European flows in Equities and Currencies, and the outperformance of European FX is clearly visible on this currency index view.

  • USD — looks set to give back some strength as global sentiment gradually recovers, especially if CPI comes in softer this week.
  • JPY — still not a long! I still see long JPY ideas and trying to anticipate the BOJ caving in being discussed and there really isn’t anything to suggest global yields will broadly come down nor the BOJ will intervene.
  • EUR — is still a sell on rallies imo. EURUSD has reached a critical area today (Monday) and is on course to print a daily reversal bar and I don’t think USD will give up much of its gains against the Euro. Thus I think EUR shorts is best expressed via the crosses given the improved sentiment and commodities rebounding, such as EURCAD EURNOK EURSEK and possibly EURMXN.
  • High-beta FX — CAD NOK SEK are the most attractive especially considering that the RBA and RBNZ are considered to be nearing the end of their tightening cycles. Last week I tweeted that AUDNZD could be following the downtrend in rate differentials lower, but this is already looking like a very wrong idea. I’m now coming to the view that AUD is simply benefiting from the huge improvement in their Terms of Trade via Natural Gas exports and China still continuing to purchase industrial metals.

That’s it for this week. Keeping it short as I want to catch up with the Monday action!

Have a great week trading.

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