2023.01.09 Weekly Note

Strong start to 2023 will have legs

Happy 2023 and what a start it’s been!

2022 has been yet another memorable year in financial markets and it does not look like 2023 will disappoint given the significant dislocations we’ve seen the last 2 years. It is also for this reason that I take a large pinch of salt with respect to macro doomsayers with their various models pointing to an ‘inevitable’ hard-landing.

2023 kicks off with weak activity data — ISM mfg 48.4 missing expectations (48.5) and lower than prior (49), ISM services (49.6) with a bigger miss against expectations (55) and prior (56.5); and Labour data has been encouraging — Job openings remain strong while we are seeing higher take up of jobs and weaker wage growth. Economic data now suggests this is no longer a ‘sellers-market’ and this bodes well for inflation pressures easing and markets have clearly responded positively to the data.

Bears will argue that it ‘it’s good til isn’t’ since the Fed would naturally push-back as financial conditions loosens, but I struggle to see how much the Fed can upset markets ‘IF’ economic data continues to head in the right direction, which I’m of the strong opinion it is. Inflation is coming in and Labour market is beginning loosen, and as long as that trend continues, markets can remain optimistic for the near-term.

NEWSFLOW

MARKETS

• Markets boosted by rising hopes of soft landing for US and eurozone economies (FT). Year of the Bond Starts With a $150 Billion Spree (BBG). Signs of Seller Exhaustion Left Stocks Primed for a Big Bounce — Hedge-fund exposure at five-year low while retail dumps stocks, It extends pattern where positioning overshadows market moves (BBG). Optimism Makes Comeback on Wall Street With Soft Landing Eyed — JPMorgan’s Kelly says pessimism is creating opportunities, Consensus view is for high inflation, likely recession (BBG). Goldilocks scenario? Slower increases in worker wages could help U.S. economy avert a recession (MarketWatch). Wall Street Sets Low Bar for Corporate Earnings Season (WSJ). Still bearish?
• Silvergate Capital shares sink as crypto-related deposits plunge by $8 bln (RTS). Wood’s Ark Invest nearly liquidates Silvergate Capital position (RTS). FTX Seeks to Recoup Sam Bankman-Fried’s Charitable Donations — Nonprofits struggle to decide how to handle money received from bankrupt crypto exchange (WSJ). Crypto exchange Huobi to lay off 20% of staff as industry reels from FTX collapse (CNBC). ‘Spectacular’ Trading Drop Plagues Still-Reeling Crypto Market — Crypto ‘effectively nonexistent’ for institutions, Trading volume plunged over 46% in 2022 (BBG). Celsius Network Wins Ownership Rights to Customer Crypto Deposits — A bankruptcy judge rules firm can use $4.2 billion in cryptocurrency deposited with high-interest accounts as it sees fit (WSJ) ouchhh!

US

• Hiring, Wage Gains Eased in December, Pointing to a Cooling Labor Market in 2023 — Unemployment rate edged down to match a half-century low of 3.5% (WSJ). Job Openings Held Nearly Steady in November, Showing Still-Strong Labor Demand — Available positions well exceed number of unemployed Americans seeking work (WSJ). Tech Industry Reversal Intensifies With New Rounds of Layoffs — Companies that grew rapidly during pandemic are now reducing spending and staffing, sometimes repeatedly (WSJ). As White-Collar Layoffs Rise, Blue-Collar Resilience Faces Test in 2023 — Manufacturing and leisure could resist pattern of bearing brunt (WSJ).
• The Fed’s Fear of a Wage-Price Spiral Might Soon Abate — Data start to suggest that the tight labor market isn’t pushing prices higher (WSJ). Fed Minutes Show Officials Feared Markets’ Rallies Could Hinder Inflation Fight — Policy makers worried they could have to raise rates more than projected if higher stock, bond prices spur economy (WSJ). Companies rush to tap US bond market as credit conditions ease (FT).
• Kevin McCarthy Wins Election as House Speaker After Days of Grueling Negotiations — California Republican wins over GOP rebels by agreeing to give more power to rank-and-file lawmakers (WSJ). House Republicans Turn Focus to Spending, China After Dramatic Speaker Vote — Intraparty divides could lead to bruising negotiations over government-funding measures (WSJ).

EUROPE

• Euro zone inflation rate slides to 9.2% as energy price surge cools — Germany showed inflation dropping from 10% in November to 8.6% in December.(CNBC). Falling French inflation sparks hope of end to Europe’s price surge (FT). Warmer Weather Helps Ease Europe’s War-Driven Inflation Surge — While consumer prices rose less than expected in December, the European Central Bank has signaled it has more to do to tame inflation (WSJ).German energy regulator: winter supply is safe, focus on next season (RTS). Eurozone’s construction sector hit by rising costs — Decline in home building is a bad omen for the bloc’s overall economy (FT).
• Train drivers offered pay rise in bid to end strikes (BBC). Sunak signals willingness to discuss pay rises for nurses in bid to end strikes — Apparent softening of tone by PM comes before meetings with unions on Monday (FT). The consumer strains in the UK’s era of less for more — Customers may not be able to keep up the spending while juggling high energy bills and rising mortgage costs (FT).
• Fighting Rages in Ukraine on Orthodox Christmas Despite Vladimir Putin’s Call for Truce — Ukraine’s Volodymyr Zelensky hails new Western aid package as ‘exactly what is needed’ (WSJ). Kyiv Rejects Claim of Deadly Russian Strike — as “nonsense” a Russian defense ministry claim that Kremlin troops killed 600 Ukrainian soldiers in a major strike overnight (BBG). U.S. announces $3.8 billion security assistance package for Ukraine, European allies (CNBC).

ASIA

• China Reopens to the World as International Travel Restrictions End — Thousands of people flew into mainland China as Beijing scrapped mandatory hotel quarantines for arrivals (WSJ). ‘There is a lot of pent-up demand’: world awaits return of Chinese tourists — Hospitality industries brace for influx of millions to gather pace as Beijing opens borders after three years (FT). China Stock Traders Bet Consumption Will Supercharge 2023 Rally (BBG). Bottom in for China?
• The US Keeps Offering China Its Covid Vaccines. China Keeps Saying No (BBG). New Chinese mRNA Covid vaccine shows positive early results — Jab developed by CanSinoBio could help nation grappling with a wave of infection (FT). China May Ease ‘Three Red Lines’ Property Rules in Big Shift (BBG). Financing for Chinese real estate firms jumps 33% year-on-year in December (RTS).
• Tesla slashes prices in China, other Asian markets as sales stumble (RTS). Tesla owners in China protest against surprise price cuts they missed (RTS). Jack Ma Cedes Control of Fintech Giant Ant Group — Chinese billionaire entrepreneur is taking a step further away from the business empire he created decades ago (WSJ); “bad news related to Alibaba and some of its peers may be coming to an end, for now, reflected in the 65% rise in the stock since late October. China allowed U.S. audit watchdogs to inspect the disclosures of Chinese companies, avoiding delisting for now, and Beijing has indicated its crackdown is, at least, on pause. The government this week approved Ant’s request to double its registered capital adding to that view. Plus, improving investor sentiment bodes well for the stock long used as a proxy for China (Barrons)”.
• Taiwan exports fall for fourth month, decline may extend into first quarter (RTS). Samsung’s quarterly profit plunges to 8-year low on demand slump (RTS). 2023 Kia EV6 GT: Fast, Furious, Almost as Good as Tesla — The performance version from Kia’s EV6 lineup boasts the kind of acceleration and handling normally found in high-end sports cars. Dan Neil likes how this family hatchback punches above its weight (WSJ) hm almost as good? think build quality will be far more superior.. The World’s Love Affair With Japanese Cars Is Souring (BBG). Hyundai’s IONIQ 5 SUV won Japan’s Import car of the year recently, and Ioniq’s are even being adopted into Japan’s taxi line…

STOCKS

MSCI World indices bounced out of its tight trading range with charts highly suggestive of breaks higher in the weeks ahead.

US Dow Transportation Average bounced back with a +3.38% rally on Friday after trading heavily the past month; Consumer Discretionary vs Staples ratio put in a weekly higher high; and Cyclicals vs Defensives as a ratio also pointing to a turn in sentiment towards recent data.

Growth vs Value has been far less impressive while High-beta vs Low volatility made a strong bounce back, indicating the market’s preference for early/mid-cycle assets such as Materials Financials Industrials.

SPX gamma neutral level was at 3889 as of last Thursday close and after the Friday NFP rally, we appear to be on the cusp of a ‘gamma-flip’ with SPX closing the week at 3895.

Location/levels are what gives price action signals strength, and last week produced a fairly strong one — SPX produced a strong bullish reversal bar breaking the highs of the preceding doji’s printed at technically significant levels.

COMMODITIES

The slump in commodities coming into the new year has begun to stall and given the strong hints of a cyclical rebound in equities, Energy and Industrial metals will have my close attention.

Unlike equities Oil has not been able to break out of its tight range and continues to trade heavy and last week’s huge above consensus inventory builds (which may be due to severe weather disruptions in the US and SPR releases) looks to have stunted the Friday rally. Despite that, I do expect Oil to bounce back along with the cyclical rebound (towards to the 80 handle in WTI and 85 in Brent). Meanwhile Copper has bounced +27% from Jul’22 lows and broke out of its recently consolidation range to 7month highs.

RATES

Significant move lower in US yields last week, front-end real yields finished higher however with inflation expectations coming in.

UST volatility eased with the 20day moving average pointing firmly down as a result of the bounce back in bonds.

High-yield also bounced back putting in a solid right shoulder reinforcing the pick up in broad risk appetite.

Big moves in European bonds also in response to inflation data appearing to have peaked. CACIB noted that positioning was stretched short in all EGB futures, especially Schatz and Bund futures as a result of new shorts being added in the aftermath of the Dec ECB meeting — it appears the squeeze got underway last week.

CURRENCIES

Equal weight G8 FX indexes also reinforcing the reversal in risk assets — bearish price action in low-yielders USD JPY EUR and CHF, and bullish action in the commodity-dollars. AUD longs still looks the best pick to express the risk on trade vs USD and the crosses.

EMFX should benefit from the bounce back in cyclicals — JPM EMFX index is already breaking out of its downtrend and I MXN longs is my pick for the FX carry trade.

TRADE VIEWS/IDEAS

You may have noticed I have been mildly constructive on risk for some time and based on last week’s developments, my pro-risk conviction grows. China’s reopening is a big welcome for the global economy to refuel global demand/trade/consumption activity while we continue to see reports of governments announcing fiscal support measures to support strained budgets of businesses and households all around the world.

The risk to that view is if inflationary pressures comes back with Central bankers holding rates high into a global slowdown then having to tighten policy even further before having a chance to relax policy. I think there is a big risk of this happening (due to fiscal stimulus and rising wages globally) and one that could deliver the a knock-out blow to markets, but it will be a much later story should it happen.

For now, with markets having finished 2022 on an extremely pessimistic note, I see broad risk appetite coming back to start the new year.

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