2023.02.12 Weekly

Chase into OPEX is on! Part deux.

Strong momentum into OPEX week

Views largely unchanged from my prior notes as US equities head into OPEX (which I mistakenly believed was last week) in strong shape.

While I’m positive on US equities for the medium-term, there is a growing sense of vulnerability stemming from the concentrated positioning in mega tech stocks. And technically, there is reason to be cautious — SPX (NDX) RSIs are very overbought: monthly 77.1 (85.7), weekly 91.1 (86.7), and daily 73.3 (66.8) though much lower than monthly and weekly readings is showing negative divergences (something at the top of my mind and of which I plan to run some backtests this week as we trade into OPEX).

Another point of vulnerability is the fact that equities, riding on a good earnings season, has largely shrugged off the rebound in yields. For instance if we backtrack the YTD action:

• Stocks had a bumpy start to the year which coincided with yields trending higher from the December lows. But the extremely strong guiance from TSMC led to semis driving SPX to break above the 4800 handle even as yields were making new YTD highs.
• Next came the QRA which announced less than expected treasury refunding giving Equities a temporary boost, but that was until Powell stated there would be ‘no rate cut in March’ resulting in NDX selling off almost 2%. I chose to go long NDX on that dip and AMZN and META earnings did not disappoint!
• Then came the strong NFP blowout report that saw yields rebound sharply but once again, Equities ignored the moves and continued to power higher riding off the strong Tech earnings.

• Fast forward to today and nominal 10 and 30yr yields are back to just below January highs, whereas real yields have risen to new YTD highs (chart). SPX is up more than 5% YTD(more than 6% for NDX) while real yields are up ~25bps YTD — doesn’t quite add up.
• Real yields are back to levels where equities have traded less comfortably last September, and also for a short period at the end of November to the beginning of December.

To sum up my trading view for the week, I look to keep chasing momentum (tends to be a good strategy into OPEX) while keeping a close eye on yields. Should yields decide to push on from here at fast pace, I’d expect the risk of equities selling-off to be quite high. If it ends up being a slow grind higher however, I expect equities downside to be limited ahead of more tech earnings the week after, including NVDA’s.

DM CB’s are pivoting

Doves are growing in support to start cutting rates — citing risks to the economy while Hawks are reluctant to move too soon — citing the risks of inflation flaring up if they do so. I can sympathise with the Dovish arguments of creating unnecessary recession risks — i.e. the more CBs are slow to adjust to the disinflation, the more real rates are pressured higher.

But I think ‘reluctance’ and ‘patience’ will remain the dominant theme for the rest of Q1, and thats the message we’ve been getting from CB’ers. Markets like to get ahead, want their cuts and perfect-landing, but they’ll continue to get disappointed in some way or another since, other than in crisis mode, CB’s behave in a dilatory manner and thus stay fashionably behind the curve.

US exceptionalism

TSL states “real yields and the curve are finally restrictive enough to lead the economy to recession sometime in the next 7 to 12 months”, but I think there may still be a decent chance of pulling off a near perfect-landing (even with the hits to CRE and regional banks).

As TSL also notes, the “Fed is right to be concerned that current disinflation could prove somewhat illusory if growth continues apace” and given that economic momentum remains exceptionally strong and policy transmission on US growth has been far from impactful, I’m warming up to the idea that the US could well withstand higher-for-longer policy rates. As I wrote on a short thread — unless data suggests the real economy is slowing rapidly, I will continue to be optimistic on this record-breaking bull run in US equities.

And if disinflation trend continues on it’s current path, then theres even more reason to be optimistic about the US growth outlook if and when the finally decides to adjust policy rates lower.

And might we still be early in the tech driven bubble? 2024 could surpass 1995 at the current pace…

US Earnings

It’s been a good earnings season so far across sectors (ex-Financials)…

But it came off the back of a sizeable downgrade in expectations (~2% greater than pre-pandemic average over the 3 months leading into Qend.

Looking at the trend of actual earnings results, it’s all about the Big Tech — EPS contribution reached a record high of ~23% …

YoY EPS growth tracking +60% while rest of SPX is negative at -4.5%…

And if earnings growth drives stock returns, it probably shouldn’t come as a surprise that Mag7 has outperformed the SPX by 60% as well.

And looks like it can continue as BigTech profitability strengthens…

What about Consumer Discretionary and maybe Industrials?

Could be the one to watch…

As well as SMid-caps given US cyclical resilience.

NEWSFLOW

MARKETS

• Global equities notch third weekly gain; US yields up (RTS). Megacaps rally pushes S&P 500 to first close above 5,000 milestone (RTS). Market breadth suggests narrowing rally as S&P 500 hits records (RTS). Global Share Buybacks Return With a Bang as Stocks Hit Records — US firms see best start to February ever in announced buybacks, Financial, energy firms lead buyback announcements in Europe (BBG). BofA’s Hartnett Says Stock Rally Close to Triggering Sell Signal (BBG). Citi Says US Tech Stocks Face Risk of Big Selloff on Positioning (BBG). JPMorgan Traders Say Buy US Stocks, Breaking With Kolanovic — Kolanovic, has issued a consistent drumbeat of warnings about stretched technology valuations and the risk that high interest rates will stall the global economy. Over at the bank’s trading desk, they’ve reached a different conclusion: It’s a good time to buy US equities (BBG). Japan’s Nikkei hits 34-year high on weak yen (FT). UK stocks fall for second week (RTS). Investors dumped U.S. shares, bought China in week to Wednesday — BofA (RTS). Newly Long Bond Traders See Profits Vanish in Position Wash Out — Sidelined investors likely to step-in, buy dips as yields rise (BBG). US credit issuance breaking records as healthy economy emboldens investors (RTS).
• Dollar Posts Longest Win in Five Months as Treasury Yields Hit 2024 Peak (BBG). Kiwi Jumps as ANZ Bank Predicts RBNZ Will Resume Rate Hikes (BBG). Oil climbs on US fuel stocks draw, geopolitical tensions (RTS). US crude stocks rise as oil refiners take in less oil — EIA (RTS). Gold inches lower on firm dollar, yields; palladium extends fall (RTS). Palladium price drops below platinum for the first time since 2018 (RTS). Cocoa prices soar to record high as El Niño batters West African growers (FT). Base Metals Drift Lower Amid Doubts Over China Stimulus Impact (BBG). China Is Oversupplied With Commodities as Deflation Persists — Last year’s import binge included record hauls of coal and oil, Metals traders eye Beijing’s fiscal response to economic woes (BBG). El Nino waning, La Nina to develop in second half of 2024 (RTS). Warm winter, droughts destroying crops in Italy, farming lobby warns (RTS). Australia records its 8th warmest year as climate change lifts temperatures (RTS).
• New York Fed finds slightly higher supply chain pressure in January (RTS). Houthis say they fired at two ships in Red Sea, damaging both (RTS). Ships diverted from Red Sea pump out more emissions in bid to speed up — Operators ditch ‘slow steaming’ to compensate for longer journey around the Cape of Good Hope (FT). US, UK ship investors hit by soaring Red Sea insurance (RTS).
• Fed expects to make three rate cuts this year, says Jay Powell on 60 Minutes — Central bank chair tries to quash market expectations of six cuts in 2024 as inflation falls (FT). Traders abandon hopes of March interest rate cut but keep betting against Federal Reserve (FT). Mester: “At this point, I suspect we will see further moderation of wage growth, with a gradual slowing in job growth and an uptick in the unemployment rate over the year from its very low level” (FT); “no rush”, “There are reasons to be cautious in assuming that last year’s rapid pace of disinflation will be maintained as inflation gets closer to the 2% goal, That’s in part because reduced supply chain pressures have been key to lowering price pressure, and may not contribute in the future” (RTS); Barkin: “I am very supportive of being patient to get to where we need to get”; Kugler: “March, May, June — every meeting from now until the end of the year and moving forward will be live” (RTS); Kashkari: Fed has time to study data before rate cuts, “Sitting here today I would say two to three cuts would seem to be appropriate for me right now…that’s my gut based on the data we have so far” (RTS). Fed policy shift needs a farewell to ‘elevated’ inflation — With inflation now below the level that caused the Fed to call it “elevated” in the first place, a turn in the policy statement could come as soon as the Fed’s March 19–20 meeting and open the door to rate cuts beginning after that (RTS). Fed balance sheet draw down going well — NY Fed staffer — “Balance sheet reduction has been proceeding as planned and reserve supply remains above ample” (RTS). Falling US inflation opens door to rate cuts within months, says OECD — Price pressures in UK forecast to be highest among G7 nations over next two years (FT).

US

• US weekly jobless claims stay low despite high-profile layoff announcements — claims fell slightly more than expected last week pointing to underlying labor market strength despite a recent surge in announced layoffs, mostly in the technology industry (RTS). Job cuts spill beyond tech sector (RTS). AI Is Driving More Layoffs Than Companies Want to Admit — By one tracker, US firms have announced 4,600 job cuts since May related to artificial intelligence (BBG). US driving hits new record in 2023, topping pre-COVID levels (RTS).
• New York Fed sees trouble in auto borrowing as overall debt level rises (RTS). Yellen sees more commercial real estate stress, losses, but no systemic banking risk (RTS). US lenders’ debt to shadow banks passes $1tn — Regulators worry growing financial ties between traditional and non-bank groups could pose systemic risks (FT). US banking profits plunged 45% in final months of 2023 — weighed down by one-off charges to replenish FDIC (FT). NYCB gets third credit downgrade as CRE exposure worries spill to Europe (RTS). New York Community Bancorp shares surge after top executives disclose stake purchases (RTS).
• US stock buyback plans picking up in earnings season, EPFR says (RTS). Jeff Bezos sells roughly $2 billion of Amazon shares (RTS). Tesla Sold Only One Car in Korea in January (BBG). Tesla’s Slide Has Investors Wondering If It’s Still Magnificent — EV-maker’s sliding profit estimates stand out among Mag 7, ‘Tesla has become a one-product company’ (BBG). Options Trader Wagers That Meta Shares Will Double Again — Trade rolls June 2025 $600 calls into June 2026 $950 strike (BBG).
• Donald Trump has 11-point polling lead over Joe Biden on handling of economy (FT). Trump’s media deal partner nears $50 million financing (RTS).
• Bank of Canada says more time is needed to bring down inflation (RTS). Bank of Canada wary of premature rate cuts as underlying inflation persists (RTS).Toronto home sales outpace new listings in January as market tightens (RTS). Canada’s housing bulls risk upending Macklem’s inflation battle plans (RTS). Canada’s job growth beats expectations in January as wage growth slows (RTS).

EUROPE

• Dhingra urges BoE not to take a risk with the UK economy — Dovish rate setter says inflation has been tamed and now is the time to cut interest rates (FT). Mann: UK to lag behind peers in lowering inflation — Mann argued for a further increase in cost of borrowing to 5.5 per cent (FT). BoE’s Mann fears Red Sea hostilities could boost UK inflation (RTS). Lower borrowing costs risk ‘flare-up’ of inflation, warns ECB policymaker — Isabel Schnabel says ‘last mile remains a concern’ in battle to bring inflation down to 2% (FT). Italy central bank chief says time for interest rate cuts is ‘fast approaching’ — Fabio Panetta says eurozone inflation is falling faster than expected (FT). ECB should wait to cut rates, then take a bet — Wunsch (RTS). ECB’s Vujcic urges rate cut patience, sees ‘equilibrium’ higher than in past — we still see also quite a lot of resilience in the services and what we call domestic inflation” also highlighting the ongoing strength of Europe’s jobs market. “You’ve seen the paper by the IMF warning that too many times before central banks have declared victory too early. I don’t think we should risk such a mistake” (RTS).
• Rates tailwind sets sterling for seventh weekly gain vs euro (RTS). UK services activity rises at fastest pace in 8 months: PMI (RTS). UK retail sales growth slowed in January, industry data shows (FT). Cautious consumers and cold weather temper UK retail sales growth (RTS). UK unemployment rate much lower than thought in late 2023 (RTS). UK jobs market slows in sign inflation pressures are easing — Starting salaries’ pace of growth is softest seen in 34 months, recruiters say (FT). More UK Buy-to-Let Mortgages In Arrears as High Rates Bite — Loans in arrears rose 18% in the three months through December (BBG).
• Euro zone economy showing some signs of recovery -PMI (RTS). Euro zone investor morale rises in February — Sentix (RTS). Euro zone wage growth to peak early in 2024, path further ahead unclear -new ECB tracker (RTS). German inflation eases to 3.1% in January (RTS). German Residential Property Dropped Sharpest on Record in 2023 (BBG). German business tax relief package cut to 3.2 bln euros annually — tax relief for small and medium-sized companies cut to about half the amount planned originally (RTS). German industrial output falls more than expected in December (RTS). Italy Dec industry output rebounds slightly more than forecast at end of weak year (RTS). French central bank says economy set for slight growth in Q1 (RTS).
• Tractors drive past the Colosseum as Italy’s Meloni pledges tax help (RTS). Italy readies targeted tax breaks for farmers, minister says (RTS). Spanish police scuffle with farmers, truck drivers on fifth day of protests (RTS). Polish farmers’ protests crank up pressure on EU agriculture head (RTS).

ASIA

• Japan’s steel workers demand record pay hikes in spring talks (RTS). BOJ eyes new indices to capture labour cost impact on services inflation (RTS). BOJ rules out rapid rate hikes, signals ending risky asset buying (RTS). Pimco Sees Multiple BOJ Rate Hikes Starting as Soon as March (BBG). IMF’s Gopinath urges BOJ to go slow in raising interest rates (RTS). Japan’s Dec real wages, household spending fall again — Dec real wages -1.9%, 21st month of fall, Nominal wages +1.0%, extending gains from +0.7% in Nov (RTS).
• Australia’s central bank cuts growth forecast as consumers tighten belts — Inflation eases but new-look RBA does not rule out more interest rate rises (FT). Australia c.bank warns on inflation, market pushes out rate cuts (RTS). Australian strikes hit 8-year high as unions make up for ‘lost time’ — Number of industrial disputes has jumped since Labor government took office in 2022 (FT).
• China’s central bank to keep policy support for economy (RTS). China’s Jan services activity expands at slower pace — Caixin PMI (RTS). China new bank loans in Jan hit record high on policy support (RTS).

EQUITIES

Global equities index continues to push ATH’s for the 3 straight week. Ex-US index lagging far behind, but the the v-shaped rebound off the 20wk-ema suggests it is looking to catch up.

YTD

It’s not been a broad rally globally so far this year however…

MTD

but there has been a pickup in laggards and noticeable improvement in risk appetite across markets in the recent weeks, particularly in APAC.

Focusing on US equities, SPX continues to power higher and now in the region of it’s measured breakout objective. Price action over the last 2 week’s is getting increasingly ‘wedged’ and coincides with extreme overbought RSI readings and negative divergence on the Daily highs.

Despite the negative divergence see on the index charts, NYFANG+ is not showing any signs of stopping after the 3-touch trendline offered momentary resistance, while RSI is looking to break to the upside again.

MSCI US Cylical sectors index also showing a similar complexion.

Invesco’s US 1500 Small-Mid caps index broken though key resistance and trendline with Friday’s wick suggesting the breakout was well-supported.

Refinitiv’s Most-shorted stocks index breaking higher after forming a solid a double-bottom base and closing right into resistance.

XLY Consumer Discretionary and XLI Industrials continue to push ATH’s and looking particularly strong. Could be ones to watch along with small-caps as mentioned in my opening notes above.

While there is a slight pick up in demand for downside protection, put premiums near the lows…

And Index options gamma dashboard continues to show a bullish profile into OPEX, but losing the 5k handle in SPX could begin to suggest an imminent pullback.

COMMODITIES

Commodities via the Bloomberg index are broadly trading very heavily in what appears to be shaping up as a bearish consolidation.

Looking at the Bloomberg sub-indexes, Energy has been the only category to trade more positively. Agriculturals mostly sideways so far this year, Precious metals sideways but on the heavy side, while Industrials metals continue to sag lower.

For my ongoing commodities trade — Long Crude Short Gold ratio has turned up as expected, and I continue to believe it can go higher due to my view on real rates, and the bounce in Crude to further compound the view of higher rates. I am however looking to start scaling out on Crude as completed its reached my breakout objective on the hourly timeframe and not being terribly convinced of explosive upside.

For Gold, I will continue maintaining my shorts as the Precious metals complex continues to look heavy on a stronger USD. 5yr real yields (inverted Purple) continues to put in a streak of higher highs while Gold has been holding up with higher lows. So if yields continue to rebound as I expect, Gold could start trading losing the 2020–30 price range this week. ETF flows also show a a reduction in holdings into Lunar New Year which may also leave buying sentiment muted.

CURRENCIES

G8 FX Index observations

USD index is holding the breakout but showing some indecision, while JPY has put in fresh lows for the year and the weakest last weak (-0.74%) after CHF (-0.96%).

EUR holding trendline support but looks as though it is in a 2-month bearish consolidation. GBP on the otherhand looking much more constructive carving out a more bullish consolidation structure. CHF closed into a strong trendline that has seen numerous touches running from the beginning of 2023 and beginning to look particularly weak with what appears to be an exhaustive structure and RSI support breaking lower last week.

CAD showing similar price action to the USD which isn’t unusual to be the recipient of spillovers during periods of US dominance and leaves me mildly constructive on select crossees with Crude prices also putting in a huge rebound last week. NZD was the strongest last week while AUD suffers from weaker data, weaker commodity prices, and despite a hawkish RBA last week.

Still bullish on USDJPY

One of the best G8FX trades imv has been the long USDJPY trade, and while there is some strong resistance in the mid-149s, I don’t see why I should sell back longs as there is still some time before the March BoJ meeting and Shunto wage negotiation results.

A number of the banks are calling for hike in March, but based on Uchida’s speech the week before, I would think it’s too soon. Nonetheless there is a chance they could take a more hawkish tone at the March meeting to set policy normalisation so I will be looking to square at the turn of the month which is still 2 and half weeks away.

Positive on USD

There is good reasons to be positive on the USD to play for both ends of the dollar smile — the risk rally is increasingly at risk of unwind (risk-off), while US exceptionalism makes it more resistant to selling off that other DM currencies. For those reasons, I think we could well see USD resilience persist throughout the 1H of 2024.

As TS Lombard notes: USD strength is self-reinforcing. The relationship between DM equities and currencies used to be inverse as most FX flow was through the current account; but as capital flows have taken a greater share of the total, the relationship isno longer as straight forward.

Market turned net short USD coming into the new year, but has uwound to being net long last week driven mostly against the EUR (Purple). Momentum from this change in positioning is with EURUSD shorts and I expect it continue with given the economic divergence.

For now, I continue to like expressing pro-USD via USDJPY and USDCHF.

EUR Funder

Though EURUSD is a fine way to express USD longs, I prefer EUR as a funder against higher-betas such as MXN NOK and AUD.

AUD continues to trade poorly and while I have decided to get out of the EURAUD short for the time being seeing Industrial metals continue to push new 2yr lows. EURMXN is now the favoured carry trade while EURNOK chart is looking particularly appealing while below the 20dma. EURCAD is less appealing technically and I could be enticed if it rebounds to nearer to the 1.46 handle.

Increasing conviction on short CHF

As observed on the CHF index above, technicals could soon look much more convincing if the CHF puts in another lower daily close and with RSI already breaking lower. Swiss inflation has been the lowest in G10 in the post-pandemic era, and given the massive 2-year rally and stickier inflation pressures elsewhere, CHFJPY short is an idea worth keeping on the radar for the weeks/months ahead.

Persistent CHF strength could push SNB to turn early and start buying foreign FX again

UBS notes: participants are hoping to see the SNB switch back to an explicit CHF-selling stance in the near future, in a 180-degree reversal of its aggressive CHF-buying posture from 2023. Together with the possibility that inflation falls enough in Switzerland to prompt SNB rate cuts even if US growth stays buoyant and delays Fed cuts, this produces scope for a wider rate differential that persists and drives interest in using CHF as a funding currency.

JPY longs

With Spring wage negotiations likely to be substantially higher than in the past which concludes at March-end to early-April, we could see the BoJ set the scene for the pivot out of NIRP. As I think the USD will continue to be resilient, I currently have CHFJPY (as mentioned above) and EURJPY GBPJPY on the radar as European households and property markets are already feeling the pinch from high policy rates.

In the meantime, I still think it’s too soon to pull the trigger given World Government Bonds (Orange) are trading on the heavy side.

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