2023.03.27

Aversion-Reversion to continue?

Another quick one as I’m on travels til late April.

Didn’t keep a close eye on markets so a look at the FOMC reaction to start:

Green line marks the initial 2pm announcement and we can see the reaction was clearly a dovish one as the fed dialed back on hawkish phrases in the policy statement. SPX tried to rally but ended on a weak note and close while Dec’23 SOFR continued to rally as the market digests the possibilities of the ‘last hike’, all up until Friday where both markets reverted back towards pre-FOMC levels.

Markets clearly affected by the idea of recession coming sooner, but if confidence towards banking, from where it all started, is slowly restored, I think thats what matters for market sentiment and why I continue to press on trading around the aversion-reversion theme.

NEWSFLOW

MARKETS

• Fed Raises Rates but Nods to Greater Uncertainty After Banking Stress - Officials voted unanimously to increase their benchmark short-term rate by a quarter percentage point (WSJ). Fed Recap — Stocks slid to lows during Powell’s press conference, but later curtailed losses. “Fed will use ‘all of our tools’ to keep banking system safe, Regional bank issues means tighter credit conditions, Powell cautions that inflation fight ‘has a long way to go’, Bank deposit flows have stabilized, Powell slams Silicon Valley Bank management over lack of supervision, committee considered a pause in light of the banking crisis, If the Fed needs to raise rates higher, it will, market is getting it wrong by predicting rate cuts this year (CNBC). What changed in the new Fed statement — notable changes include a shift away from “ongoing increases” to the policy rate to “some additional firming,” as well as saying that the “U.S. banking system is sound and resilient” (CNBC).
• Money market funds swell by more than $286bn as investors pull deposits from banks (FT). Fed’s Kashkari Says Bank Strains Bring Risk of Recession Closer — Says too soon to make any judgment on May 2–3 FOMC meeting (BBG). U.S. Bank Failures Pose Risk to Global Growth - Ripple effects of U.S. financial-system strains could lead to tighter credit, sharper slowdown worldwide (WSJ). Investors slash expectations of global interest rate rises after banking turmoil (FT). Eurozone Banks Cut Lending Even Before Latest Financial Turmoil-Decline in bank lending could deepen as financial institutions move to retain deposits, strengthening effect of ECB rate moves (WSJ).
• First Citizens enters agreement to buy Silicon Valley Bridge Bank, says FDIC (MW), Silvergate Capital shares jump as SVB deal news lifts banking shares on Monday (MW), First Republic stock up 24% as First Citizens deal for Silicon Valley Bank lifts banks (MW).

US

• US Business Equipment Orders Rise While Broader Durable Goods Decline — Bookings for durable goods fell 1% in February after 5% plunge, Core capital goods orders rose 0.2% after January marked down (BBG). Steady Jobless Claims Show Labor Market Remains Strong — New applications for unemployment benefits fell by 1,000 last week (WSJ). Home Prices Fell in February for First Time in 11 Years — U.S. sales of existing homes jump 14.5% from prior month, but down sharply from year earlier (WSJ). Commercial property risks rise up bank investors’ worry list (FT). Where Financial Risk Lies, in 12 Charts — Data show worrisome trends in real estate, banks and private markets (WSJ).
• US House Republicans readying debt ceiling ‘term sheet’ conditions (RTS). Rhetoric over US debt limit boils over as Republicans, Democrats joust (RTS). No Trump bump in New Hampshire as possible criminal charges loom (RTS). Trump hush-money charges would bring ‘zombie case’ back to life (RTS). Trump to face anonymous jury in high-profile New York defamation trial (RTS).

EUROPE

• Bank of England Lifts Rates by Quarter Point, Following Fed — Pickup in inflation in February helps persuade U.K. policy makers to raise borrowing costs (WSJ).
• Largest strike in decades brings Germany to a standstill (CNBC). Macron confronts a mistrustful France (FT). France braced for fresh protests testing Macron’s handling of crisis (FT).
• German Leopard 2 tanks have reached Ukraine -security source (RTS). EU and UK ramp up talks on defence co-operation (FT).

ASIA

• Jack Ma returns to China as government tries to allay private sector fears (RTS). China’s industrial profits slump deepens on soft demand, high costs (CNBC). China is a ‘relative safe haven’ in the face of global banking stress, Citi economists say (CNBC).
• South Korea to Surpass China in Chip Machine Spending Next Year — US pressure weighs on China’s ability to buy key equipment, Semiconductor supply chains are realigning along security ties (BBG).

EQUITIES

MSCI World put in a 2 week bullish reversal back around the 20wma. A lot of chop in this area but should calm continue to come back to markets and we maintain closes above last week’s close, reversion move higher looks set to continue towards the red band — being the area of interest before the Banking crisis set in.

Developed and Emerging markets also pointing to more upside with a weekly confirmation candle with the latter stll further away and one to watch for broader breadth of steadying investor sentiment.

China markets have been trading poorly after the reopening bounce back late last year and weighing on EEM ytd. A slow start to the week today but last week’s bullish engulfing candle in the Hang Seng like the other Index funds above points to a bottoming, while Shanghai composite looks to have defined its range lows and look to test the higher end.

For US equities, large-caps have put in convincing 2-week reversals, trading above some key support levels, and small-caps RUT has printed a turn signal last week at the running trendline from Nov’21 to Aug’22.

Tech stocks clearly driving the US market but around an inflection point in QQQ/SPY and Growth/Value (BL) which suggests that it is perhaps time for the broader market to catch up.

So far cyclical sentiment has not been as strong as I would have expected from the aversion-reversion thesis I made last week. Price action is showing some tentative bottoming signs however and further adding to potential seen for a cyclical rebound should banking crisis-induced recession fears ease in the coming weeks.

COMMODITIES

The core trade idea to express my aversion-reversion theme is Long Crude and Short Gold. Something I’ve been executing exclusively from each other as each their own trade. Since the 13/9 signal on the ratio, its been ticking up with higher closes and still looks like there is more to go this week.

RATES

A quick summary on last week’s change in the yield curves. Some bull steepening seen around the front end of the curve as the belly rallied against long-end bonds. Real yield curve also shifted lower as inflation expectations sag on increasing recession fears.

CURRENCIES

Further to the core long Oil short Gold in commodities, in FX I express similar ideas with the petro-currencies, and some reversion in risk and rates going back higher as recession sentiment towards the banking crisis eases: Short USDNOK USDMXN USDCAD, long AUDJPY USDJPY. The first two proving to work the best thus far.

Have a great week trading! //