2023.02.19 Weekly

fomo momo (uh oh?)

We’ve had some solid fear-of-missing-out (fomo) momentum (momo) in the lead up to OPEX. That was to me the easy part, but what next? So many traders I speak to seem to be so focused on the market pulling back (the uh-oh) but I just can’t see it, yet. Perhaps post NVDA earnings could see one of sorts, but I don’t think it will get very far.

For starters, gains in US equities appear to be on solid footing as the rally broadens. Secondly, equities have dodged a few bullets from the big repricing in rates, but I think they could dodge yet another with rates beginning a consolidation phase with very little on the calendar this week (more on this below under Rates). Lastly, volatility (though low) is on the high side vs recent standards and should vol get crushed again on the other side of the NVDA earnings, that’s more fuel for equities to grind higher again.

Beyond that short-term view, I do have some concerns brewing about the trend in macro data emerging — that is, some softening in activity while inflation is picking up). Potentially a reversal of the goldilocks narrative (strong growth and disinflation) that the risk rally was built on. Still too early to be concerned about it, but something that’s on the back of my mind as we continue to assess the incoming data.

NEWSFLOW

MARKETS

• Rally in US stocks shows signs of becoming broad-based — Having hit a new record high of 5,040 points on Monday, the S&P 500 index quickly went into reverse on Tuesday after a hotter-than expected January inflation report (Shares). S&P 500’s True Tech Weighting Tops 40% (Barrons). Nikkei soars to within sight of all-time peak, closes at 34-year high — within a quarter of a percent (RTS). Japanese stocks see biggest weekly foreign inflow in four weeks (RTS). French, German stocks sprint to record high on earnings cheer (RTS). World’s Major Economies Fall Behind US — Shrinking economies in the U.K. and Japan echo similarly weak conditions in much of continental Europe and China (WSJ).
• Goldman Lifts S&P 500 Target to 5,200 on Profit Expansion — Increased profit estimates are the driver of revision, sees stronger economic growth and higher profits in 2024 (BBG). Goldman Sachs raises Europe’s STOXX 600 2024 target to 510 (RTS). ‘Peak Euphoria’ Warning Blares as Stress Vanishes on Wall Street — Goldman’s Garrett spots ‘SPX 5k’ hats, rush for call options, BofA’s financial stress indicator hits lowest level since 2021 (BBG). Bullish investors drop recession calls for first time since April 2022 (RTS). Investors hope strong US economy can insulate stocks from yield surge (RTS). Money-Market Fund Assets See the First Outflows Since January (BBG). Biggest outflow from cash in eight weeks, investors buy stocks, bonds — BofA (RTS). Stocks and bonds diverge as investors worry less about inflation (FT). Morgan Stanley Says Firms Are Focused on Costs Like Never Before (BBG). AI mentions rise in S&P 500 earnings calls, Goldman says (RTS). High-flying Nvidia’s earnings could test US stock market’s AI dreams (RTS). Nvidia options traders brace for monster share move (RTS). High-flyer Super Micro shares hit record, then sink 20% (RTS).
• Global Bonds Erase All Gains Since Powell’s Pivot in December (BBG). Treasury Yields Reach Year-to-Date Highs as Rate-Cut Hopes Wane (BBG). Real Yield Rises to 2% for First Time Since December Fed Pivot (BBG). Great Inflation Hedge Unwind Sees TIPS ETFs Lose $43 Billion (BBG). Bond Traders Need to Price In Risk of Future Fed Hikes — Citi (BBG). Rate Hike May Be Fed’s Next Move If Growth Picks Up, SocGen Says (BBG). Japan 10-Year Yield Seen Breaking Above 1% Even Before BOJ Hike (BBG).
• Fed’s Main Inflation Gauge to Get Boost From Rally in Stocks — PPI report showed pickup in porfolio management category, Analysts boosted forecasts for January core PCE price index (BBG). Bostic: More time needed to weigh prospect of rate cut (RTS), open to summer time rate cut (RTS). Barr: ‘Bumpy’ path to 2% inflation means soft landing jury still out (RTS), [Bank] supervisors more aggressive, honing in on interest rate risk (RTS). Daly: Fed needs time, data, patience on inflation fight (RTS).

AMERICAS

• Strong services price increases lift US producer inflation in January — Producer price index increases 0.3% in January, PPI excluding food, energy and trade jumps 0.6% (RTS). US producer prices revised lower in December (RTS). US import prices post largest gain in nearly two years in January — import prices jump 0.8%(RTS). Frigid temperatures chill US retail sales, factory production — Retail sales fall 0.8% in January, December revised down; Core retail sales drop 0.4%, December sales revised lower; Weekly jobless claims decline 8,000 to 212,000, Manufacturing output falls 0.5% (RTS). US consumer sentiment steady in February — sentiment was little changed in February while one-year inflation expectations ticked up, “Consumers continued to express confidence that the slowdown in inflation and strength in labor markets would continue” (RTS). Labor worries, costs drag small business sentiment down by most in 13 months -NFIB (RTS). US single-family housing starts fall in January; permits rise (RTS). US New-Home Construction Plunges by Most Since April 2020 — January decline was led by steep drop in multifamily projects (BBG). US Homebuilder Sentiment Climbed to Six-Month High in February — Sales, outlook and buyer traffic all improve in NAHB report (BBG).
• Democratic Donors Feel Resignation, Anxiety Over Biden — and Trump-Fueled Hope — Key backers see no effort to push Biden aside and are counting on Trump’s legal woes and controversies to keep the race competitive (WSJ). Trump Foreign Policy 2.0: Fewer Allies, Less Trade, More Loyalists — Biden and others warn another Trump term would yield global chaos and an emboldened Putin (WSJ). Citi sees 5% dollar jump if Trump clean sweeps U.S. election (RTS). Trump will quit NATO, Hillary Clinton says, as anxiety mounts over U.S. commitment to the alliance (CNBC). Trump Fraud Ruling Threatens to Handcuff Family Business Operations (WSJ).
• Bank of Canada to Halt Its QT Program Within Months, RBC Says — first cut to BOC’s policy rate in June (BBG). Home Sales Rise Again in Canada as Falling Prices Attract Buyers (BBG). Housing Minister Banks on Canada Rate Cuts to Spur Building Boom — Lower rates will open way for ‘marginal’ projects, early signs the housing market is heating up again (BBG).

EUROPE

• Pill: First BOE Interest-Rate Cut Is Months Away Despite Recession — weak economic capacity is a block on cuts, Underlying measures of inflation still a ‘reason for caution’ (BBG). Greene: More evidence of inflation easing needed before rate cuts (FT). ECB policymakers push back on hasty rate cuts even as inflation falls (RTS). Schnabel: ECB Must Be Careful Not to Cut Rates Too Soon — Most officials split between lowering starting April or June (BBG), Productivity boost needed to keep inflation low (FT). Villeroy: should not hold off first rate cut for too long (RTS). Lane: ECB Shouldn’t Cut Rates Too Soon or Too Late (BBG). De Cos: ‘There Is Some Time Left’ for Rate Cuts (BBG). Nagel: History Suggests Worse to Cut Rates Too Early (BBG).
• Traders Bet on Swiss Rate Cuts by March as Other Wagers Fade — Markets pricing more than 50% chance of SNB cut in March, Weak Swiss inflation ramps up view for cuts, FX intervention (BBG). Hedge Funds Erase Swiss Franc Bets as SNB Risks Dovish Pivot — Leveraged funds turned short on week ended Feb. 6: CFTC data, Reserves data suggest SNB has pivoted to become net seller (BBG).
• Norway Committee Sees 2024 Inflation at 4.1% to Guide Wage Talks (BBG). Norges Bank Governor Warns Against Rushing Into Key-Rate Cuts — Norway is seen as one of the last rich nations to begin easing (BBG). Nordea Now Sees First Rate Cut by Norges Bank in December (BBG).
• UK economy slipped into recession in 2023 (FT). UK inflation holds steady at 4% (FT). UK shoppers pick up their spending, signalling quick end to recession (RTS). UK wage growth slows again but BoE likely to remain on alert — Regular wages +6.2% vs Reuters poll +6.0%, Basic pay increase slowest since 3 months to Oct. 2022, Jobless rate falls in re-weighted data, Investors scale back rate cut bets (RTS). UK’s Stronger-Than-Expected Wage Growth Bolsters BOE Caution — Pay excluding bonuses rises 6.2% during three-month period, Labor market remains tight as unemployment declines further (BBG). UK Energy Bills Set to Drop 15% in Boon for Taming Inflation (BBG).
• EU Commission cuts 2024 euro zone growth forecast, sees smaller inflation (RTS). France cuts 2024 growth forecast as outlook darkens (RTS). Germany to slash 2024 economic growth forecast to 0.2%, source says (RTS). Germany’s chamber of commerce warns of heaviest slump in 20 years (RTS). Investors upbeat about economic rebound in Germany this year — Optimistic outlook contrasts with gloomy current view of the EU’s largest economy, ZEW survey finds (FT).

ASIA

• China’s Premier Urges ‘Forceful’ Action to Boost Confidence — Li Qiang tells cabinet meeting he wants real achievements (BBG). China Holds Key Rate Steady as Yuan Limits Room for PBOC Moves (BBG). China’s travel spending during Lunar New Year holidays beats pre-COVID levels (RTS), Travel Data Hit Record Highs (WSJ). China State Banks Earmark Over $8 Billion for Property Projects (BBG).
• Japan’s economy contracts for second straight quarter on weak demand (FT). Japan December core machinery orders rise, recovery seen limited (RTS). No lunch in Ginza: Japan’s scaled-back spending helps push economy to recession (RTS). Unfazed by recession, BOJ keeps April policy shift on table (RTS). BOJ Still Appears on Rate Hike Track Despite Recession Shock — “We will continue to carefully analyze economic data and information to gauge whether a gradual recovery continues in the economy and a virtuous cycle between wages and inflation will strengthen” (BBG). Yen’s Slide Past 150 to Dollar Prompts Stern Warnings From Japan (BBG). Japan’s Kanda: MOF Will Take Appropriate Steps on FX as Needed (BBG). Yen Watchers in Tokyo See 152 to Dollar as Next Level of Concern (BBG).
• Australia unemployment hits 2-year high as jobs growth sputters (RTS). Australia Business Conditions Ease as Households See Improvement (BBG). Sydney Home Auctions Surge as Rate-Cut Expectations Drive Buyers — City’s preliminary clearance rate is highest since late 2021, CBA sees six cuts starting September, 2.85% rate in mid-2025 (BBG). Australia’s Services Inflation to Cool Only Gradually, RBA Says (BBG). Westpac Sees Drop in Stressed Assets, Lower Australian Rates (BBG).
• Orr Says RBNZ Still Needs to Anchor Inflation Expectations (BBG). Traders See New Zealand Policy Error Risk in Rate-Hike Bet — A rate increase will increase odds of a hard landing: Nomura, ANZ Bank sees RBNZ raising borrowing costs twice this year (BBG). New Zealand Population Jumps The Most Since End of World War Two (BBG).

EQUITIES

Key focus for me in equity markets is the pre-US CPI levels as a reference point where, markets had begun to sell-off, but had since put in a remarkable recovery to those levels to finish the week strongly.

MSCI World ACWI made a strong bounce from the recent pivot level to print a higher ‘than pre-CPI’ high. There are some reversal bars printed on Friday, but is an OPEX Friday which makes the signals less reliable than usual. On the Weekly however, we have a potential long-legged hangman doji, so some caution would be warranted.

Similar observations can be made of US indices.What is particular of note is the broadening in S&P400 (mid-caps) and S&P600 (small-caps) whose post-CPI bounces have validated strong support at the trendlines, as well as the breakout.

NYFANG+ showing tentative signs of exhaustion but rather unclear due to the strong post-CPI bounce off the trendline running from the October and December highs (marked in White), and the Febuary trendline support holding the sell-off on OPEX Friday to close very slightly above the pre-CPI Monday low (Yellow).

Last week’s action in PRFZ Small-Mid index had solidified 37 handle as support which looks to be shifting the range higher now.

Squeeze is still very much alive on the most-shorted stocks index with action maintaining a bullish bias with bounces at pivot levels and higher weekly high and close.

Volatility indicies are slowly coming off the lows with the VIX having a peek above the 15 handle on the CPI print. Put protection premiums are slowly rising but still below their 1yr rolling averages (Green). These will be important to watch as the risk of a broad pullback creeps higher. Should these indicators pick up further this week, that would give me more confidence to flip towards a tactically bearish view.

European equities via the Stoxx600 is looking paritcularly strong. The Dutch AEX continues to lead that pack while other major european indicies and breaking higher from there recent consolidation range.

European equities start the week on the front foot with the Stoxx600 Cyclicals-Defensive spread finishing the week higher.

MSCI emerging Asia index printed a powerful reversal signal on Friday from a technical perspective, but it is again, an OPEX Friday and the weekly bar remains constructive. Given the weekend news from China and a full return from the Lunar NY break, I think there is a strong possibility of Asia continuing to build on mtd-gains.

Overall, while gains appear to be on solid footing, there are risks of a pullback building against the move higher in rates, fed pushback, and volatility indices beginning to creep higher.

I am still running some long NDX and with the NVDA earnings in mind, I may look to put on a short hedge again (like I did pre-CPI) on the earning pop which I’m sure will beat expectations again. I don’t expect much downside however as the volatility coming off post-earnings should help to stabilize equities.

COMMODITIES

Bloomberg Commodities index put in a lower high low and close last week but structurally, the descent has slowed significantly over the last 2-months that suggests it is on the verge of accumulation.

Agricultural sub-index remains heavy which I find somewhat surprising given the adverse weather patterns we’ve been seeing like we have been seeing on Cocoa supply. Particularly of note is the rebound in metals, especially industrial metals which has seen a continuous slump for over a year.

It’s beginning to look more constructive suggesting sentiment is becoming more balanced at these levels.

Updating on Crude Gold long short theme: I noted last week that I will be looking to scale out of Crude longs which I have done completely, but have also squared up on the Gold short after the CPI print. In fact, seeing the basing action coinciding with 10yr rates hitting my targets, I decided to go long.

I’ve sliced some of the Gold position as it hit my targeted area of 2015/25, but I think there is good potential for a return to the 2030/40 level where Gold has been pivoting around over the last few months.

RATES

We’ve seen a huge repricing in Fed funds rate expectations so far this year from going as much at pricing 160bps of cuts, to roughly 85bps cuts.

Last week’s change in Red, Month-to-date change in Yellow

That has caused a big shift in the yield curve higher as a result of the front end repricing.

The key question for becomes whether yields can move much higher from here in the coming weeks and I suspect we will begin to consolidate in a more sideways trend from here:

1. While the Fed has been pushing back on rate cut expectations for some time, December fed funds now looks more fairly priced at ~85bps that it would make it less likely to see further repricings.
2. Also, there isn’t an awful lot on the calendar this week other than some Fed speeches, FOMC minutes and low-key UST auctions, all of which I see little impact from.
3. 10yr rates have hit my targets where I suspect there will be enough demand at these levels to cap upside moves for the time being...

Upsides in 10yr nominal rate has been stalling around the 4.3% handle, and around the 2% handle in the 10yr TIP. Latest set of data was on the soft side while inflation data has been picking up to the upside which makes me believe we will see some inflation hedging into TIPS and thus see real rates continue to consolidate below last week’s high.

This would help to ease some USD strength as well as support risk assets. Equities might have just dodged another bullet if rates consolidate this week (for reasons above), and why I remain on the bullish risk side.

CURRENCIES

• USD has done a full 61.8 tracement with longer topside tails and is shaping up to mean revert some more as per rates views expressed above.
• JPY continues to trade heavy and while I see no reason to flip bullish just yet, I continue to hold my long USDJPY runners with the intention of holding into mid-March in case we see a drift towards the 152 handle as I have adjudged there is still decent risk reward from this stage onwards trailing just above the 148 handle. Also, I do not feel as though we will see another BoJ intervention with market fully expecting a BoJ pivot out of NIRP and Kanda showing no-sense of “Urgency” from his comments last week.
• CHF was the weakest performer last week with the index breaking down. SNB reserves data suggest they have begun to sell and I think we begun a major trend change in the Franc. I continue to like USDCHF upside but I would consider NZDCHF longs as well as EURCHF and GBPCHF given that I’m turning more neutral on the USD for the near-term. CHFJPY shorts is on the radar and it may soon be the time to start building a longer-term short position
• EUR and similarly the GBP hasn’t really budged over the past few weeks and looking rather uninteresting. Thematically, I still like EUR as a funder against NOK CHF NZD AUD longs while I’m unsure about GBP though I am more optimistic about GBP than I am EUR. I’m currently short EURNZD EURAUD, but looking to add EURNOK to the mix this week (chart below).
• AUD NZD CAD commodity dollars — Antipodeans are looking much more constructive while the CAD is closely mirroring the USD. For risk on trades, I favour NZD given strong signals in consumer spending and pick in up housing market and immigration. There is a lot of negativity priced into AUD, as reflected by CFTC positioning (below)), so there’s a lot of potential for AUD to squeeze on the back of potentially stabilising/improving China sentiment while Industrial metals appear to be on the bounce also. CAD is rather uninteresting to me for the time being.

EURNOK looks ready to break down from its bearish consolidation with RSI <50 and MACD turning negative. The recovery in Crude off the 70 handle looks to be a durable one and seasonality generally favours Crude and NOK at this time of year. From a macro perspective, NOK still has sticky inflation and very strong economic data which makes it likely that Norges will be one of the last in G10 to cut interest rates, and geopol risks around Ukraine have been coming off the simmer for a good while now.

CFTC positioning shows the market has increased length in USD longs against AUD, and JPY which saw the biggest wk/wk change.

CFTC positioning remains very long dollars against AUD with Asset Managers (Green) being the most bearish since October last year! Leveraged funds (Purple) has flipped bullish coming into 2024 but has seen little change since.

AUD positioning as a % of OI shows how bearish sentiment is. Perhaps its time for AUD to catch a break now that metals are on the bounce …

That’s all for now, have a good trading week! //