2023.12.11 Weekly Notes

Big event risks into bulled-up OPEX

Except for highlighting a few new ideas, there isn’t much on mind that changed over the past week, so diving straight into the weekly review as I’ve been busy and have a plane to catch …

NEWSFLOW

MARKET

• Bull market in view after S&P500 hits fresh year-high (RTS). Market bets for 2024 thrown into chaos by US recession conundrum — Economic analysts split on recession and rate cut forecasts, Earnings forecasts for S&P 500 most dispersed since COVID, Lack of consensus means market volatility ahead, some investors say (RTS). S&P 500 Climbs as Jobs Spur ‘Heat Check’ for Bonds — Labor market defies slowdown forecasts in broad strengthening, US consumer sentiment jumps as inflation concerns dissipate (BBG). Stock Faithful Ride $7 Trillion Rally as Market Timing Backfires — Market timers tempted to call top as index hovers near 4,600 (BBG). Decisive Moment Arrives With $4 Trillion Stocks Rally at Stake (BBG). Expected volatility rises in coming days amid hedging demand — Inflation data, Fed outlook seen as key risks for market rally (BBG). JPMorgan Expects Stocks Volatility to Climb in 2024 — Call is for VIX to reach mid-to-high teens on soft landing, Gauge would rise further in event of a US recession (BBG).
• Global Bond Rally Powers on as Rate Cut Bets Appear Everywhere — Index of sovereign debt excluding US at highest since 2022 (BBG). Traders Show Doubts Fed Will Cut Rates as Fast as What They’re Expecting Now — Demand for hawkish protection starts to emerge in SOFR options (BBG). Fed Rate-Cut Exuberance Ebbs After Jobs Data, Boosting US Yields — Traders price in less easing by the US central bank in 2024 (BBG). Economists see US Fed remaining hawkish until at least July (FT). BlackRock Warns on Rate-Bet Disappointment, Volatility in 2024 — Market focus on soft landing or recession ‘misses the point’, ‘risk of these hopes being disappointed’ (BBG). BofA’s Hartnett Says Bonds Rally May Drag on Stocks in Early ’24 — Sees sentiment no longer a contrarian boost to risk assets (BBG). JPMorgan’s Kolanovic Says Opt for Cash or Bonds Over Stocks — Market drop, economic downturn seen needed for rate cuts, Firm’s 2024 S&P 500 forecast currently lowest on Wall Street (BBG).
• Underlying US inflation pressures eased in October, NY Fed says (RTS). Economists see US Fed remaining hawkish until at least July (FT). ECB to cut rates in Q2, earlier than thought; winter recession seen shallow: Reuters poll (RTS). Investors bet on rapid ECB rate cuts as economic outlook darkens — Markets are pricing in six rate reductions in the eurozone next year (FT). ECB hawk Schnabel takes rate hike off table (RTS). ECB survey shows steadying inflation expectations (RTS). BoE to stay on hold through Q2 2024 despite cooling inflation: Reuters poll (RTS). UK public inflation expectations rise in October -Citi/YouGov (RTS). UK public’s inflation expectations fall to two-year low — average of 12 month expectations dropped to 3.3% in November, from 3.6% in August (FT).
• Big Tech’s Ability to Deliver on AI Profits Looms Over S&P 500 — Top seven stocks in S&P 500 produced most of 2023’s gains, Pressure is mounting to deliver on promise of AI earnings (BBG). DoorDash to Be Added to Nasdaq 100, Zoom to Be Removed — Lucid Group, eBay and JD.com will also leave tech-heavy index (BBG). Bursting of Pandemic-Stock Bubble Fuels Big Wave of ETF Closures (BBG).
• Oil Consumers Pounce on Futures Slump to Lock in Cheaper Barrels — Brent $85-$110 call spreads traded actively for next year, Lower futures, lower volatility make hedging doubly attractive (BBG). US to Buy Oil for Strategic Reserve Monthly Through at Least May — Energy Department solicited 3 million barrels for March, Government has purchased close to 9 million barrels this year (BBG). Tumbling Oil Prices Push Russian Crude Below G-7’s $60 Price Cap (BBG). US Raises Wheat-Export Forecast With China Buying Most in Decade — leaving smaller domestic inventories than analysts had expected (BBG).

AMERICAS

• US Consumer Confidence Jumps in December as Inflation Pressure Eases — UoM confidence index surged to 69.4, surpassing economists’ expectations of a 62.4 reading (WSJ). Solid US job growth, drop in unemployment rate underscore labor market resilience — Nonfarm payrolls increase 199,000 in November, Unemployment rate falls to 3.7% from 3.9%, Labor force participation rate rises to 62.8% from 62.7%, Average hourly earnings gain 0.4%; up 4.0% year-on-year (RTS). US layoffs jumped in November led by retail and tech (RTS). US job openings hit more than 2–1/2-year low as labor market cools (RTS).
• US service sector picks up in November — ISM services PMI rose to 52.7 in November from 51.8 which was a 5-month low, new orders was 55.5 and unchanged from October, prices paid dipped to 58.3 from 58.6 in October (RTS). US manufacturing mired in weakness, economy heading for slowdown — ISM Manufacturing unchanged at 46.7, New orders continue to decline but at moderate pace, Factory employment decreases as hiring slows down (RTS). US factory orders fall 3.6% in October — constrained by weakening demand for durable goods and transportation equipment and bolstering the view that high interest rates are beginning to bite into spending (RTS). US infrastructure building boom revs up extended-stay market — extended-stay lodging bookings are up 120% in the two years through the end of November. More broadly, the industry has outspent all other sectors on work travel overall by 9.2% in the 12 months through August as more workers temporarily relocate to live around project sites (RTS)
• Bank of Canada Keeps Rates Unchanged, Cites Progress on Cooling Inflation — Central bank officials remove reference in statement about worries over slow progress toward 2% inflation target (WSJ). Canadian services PMI hits 3-year low on uncertain outlook — headline business activity index fell to 44.5 in November from 46.6 in October. It was the sixth straight month that the index was below the 50 threshold (RTS). Canada Keeps Bank Capital Requirements Steady as Economy Weakens — Balance sheets strong enough to handle a rise in losses, country’s six largest banks all have CET1 ratios above 12% (BBG).

EUROPE

• Fall in euro zone business activity adds to recession expectations — composite PMI rose to 47.6 from October’s near three-year low of 46.5 and coming in above a 47.1 preliminary estimate; “The service sector maintained its downward slide in November. The modest improvement of the activity index does not leave much room for optimism regarding a swift recovery in the immediate future”, “The sombre outlook is reinforced by the fifth consecutive monthly shrinkage in new business. A fall in GDP is on the cards for the fourth quarter” (RTS).
• Xi Jinping and EU Officials Seek to Ease Economic Tensions at Beijing Summit (WSJ). EU ministers narrow gaps on fiscal rules, eye end-year deal — France and Germany still differ on how to sustain investment when budget deficits are above EU limits, and other countries wrangling over other issues, including the minimum pace of debt reduction (RTS).
• Britain’s dominant services sector rebounds, cost burdens persist — Services PMI rose to 50.9 from 49.5 in October, above the 50 threshold for growth and stronger than the 50.5 provisional estimate for November; “note of caution with regard to the near-term inflation outlook as service providers signalled another round of strong input cost pressures, largely due to rising staff wages” (RTS). UK’s hot labour market shows sign of cooling: Indeed data (RTS). UK retailers see weak sales growth in November despite Black Friday deals (RTS).
• Swedish Housing-Price Decline Confirmed by Broker Data — Prices of flats, detached houses fell 1% on month in November (BBG).

ASIA

• Hedge Funds Held Big Bet Against Yen in Days Before Its Surge — Data through Dec. 5 shows shorts near highest since April 2022 (BBG). Yen Strengthens by Most in Nearly a Year on Bets That End of Negative Rates Is Near — Yen-shorts were liquidated, stop losses were triggered: Daiwa (BBG). Market Bets on Impending BOJ Change Overblown, Ex-Official Says (BBG). Softening consumption may delay BOJ’s exit from easy policy — Yen rallies on expectations BOJ will exist loose policy soon, But Gov Ueda’s remark not signal of imminent shift , BOJ eyes exit from negative rate but timing up in air — sources, Weakening domestic consumption a concern, Tankan, branch managers’ meeting among key events for BOJ (RTS). Shrinking economy in Japan casts doubt on BoJ rate raise bets (FT). Japan’s Q3 GDP falls faster than first estimates as consumption sags — Q3 GDP revised to annualised -2.9% vs preliminary -2.1%, Consumption -0.2%, capex -0.4% after revision, Real wages -2.3%, household spending -2.5% in October (RTS). Inflation in Japan’s capital slows, clouds BOJ exit path (RTS). Japan manufacturers’ mood jumps, second straight month of gains — Dec manufacturers’ sentiment index +12 versus +6 in Nov, Service sector index +26 versus Nov’s +27, Business mood seen deteriorating ahead, Reuters Tankan points to improvement in BOJ Q4 tankan (RTS).
• China’s Nov services activity accelerates on boost from new orders — Caixin PMI (RTS). China’s exports grow for first time in 6 months in relief for factories — Exports grew 0.5% from a year earlier in November, customs data showed on Thursday, compared with a 6.4% fall in October and beating the 1.1% drop expected (RTS). China’s Nov consumer prices fall, factory-gate deflation persists (RTS). China Stocks Test Critical Support Levels as Selloff Extends — Key equity benchmarks slide toward long-term trendlines (BBG). Hong Kong’s Stock Slump Triggers Wave of Brokerage Closures — The Hang Seng Index is set for a record fourth year of losses, Liquidity has dried up amid foreign disinterest, IPO drought; 30 local brokerages have closed down this year, after a record 49 shut up shop in 2022 (BBG).
• Australia’s central bank holds rates steady until at least February (RTS). Australia’s economy slows to a crawl, consumer spending surprisingly weak (RTS). RBA Says Increased Financial Stress Unlikely to Impact Stability (BBG).

EQUITIES

Global equities are huffing and puffing away the past 2 weeks. It’s never easy calling local tops but we are clearly in the zone where I think its getting increasing reasonable to take that view while momentum continues to stall out.

Europe is screaming overbought as the DAX printed new all-time-highs last week, CAC back to a key resistance level, and UK FTSE tagged the 200dma and key pivot level on Friday. I’ve included the UK FTSE / DAX spread in the chart as I think it’s a compelling spread trade idea with UK to outperform European stocks.

Economic data has been more resilient for the UK while the Euroarea has faltered against expectations, particularly in the powerhouses Germany and France. Also from an FX perspective — GBP has outperformed EUR and but GBPEUR is slowly rolling over since printing a DeMark 9 countup on Dec1st and UK FTSE tends to react favourably to weakening GBPEUR.

Asian equities are in an interesting spot which imo makes bullish China and Japan equities as interesting ideas to keep in mind this week. China indices is now trading below book value while semiconductor-heavy Kospi and Taiex rally looks to be short on upside room.

US equities is showing weakening momentum with the rally looking overcooked for the short-term, paritcularly with S&P500 trading at the 4600 handle which I think is a couple hundred points too strong for the moment.

With SPX trading around 19x and forward earnings estimates looking too optimistic beyond their natural tendency to do so anyway. Given margins are likely to continue tightening coming off massive expansion of prior years and high cost burdens going forward: 220 EPS (assuming flat growth) at 20x (assuming a strong mulitple on the back of rate cutting sentiment) would put the SPX at around 4400 (i.e. 220 x 20). Even assuming 7% earnings (trend) growth at about 235 and 19x, that would put SPX at 4465.

US Cyclical rally momentum has slowed significantly over the past month and it’s looking like a shaky top while the market narrative for cuts and a perfect soft landing needs dialing back.

NYFANG+ has found its way to July peak again and attempting to reassert itself to drive further index gains. But again, market narrative is stretched and this week’s event risks in CPI and FOMC could be a possible trigger for the ‘everything’ rally becoming an ‘everything’ pullback.

The most-shorted stocks index closed the week at the highs but has yet to surpass the 50% retracement. Seeing ‘meme’ stocks rallying could be the last shoe to drop for the everything rally with RSI for the above index beginning to rollover from the overbought region.

Index volatility and hedging demand continues to decline and showing absolutely not sign of immediate danger for stocks. Front month VIX spread has begun to narrow slightly so far this month, and while this is hardly saying anything, a continued upward motion could throw some doubt on the Santa rally which, as noted lasted week — I’ve grown skeptical of.

This from GS indicating the highest net long dealer gamma on record from last week presents a big risk for this weeks OPEX. I see any rallies this week as good fading opportunities given the risk of gamma unwinding into the Friday expiry.

COMMODITIES

Bloomberg commodities index went to new lows below the 50% retracement level.

The rebounding USD, decline in Energy and Precious metals weighing on the index.

I still continue to be tactically bullish Crude and bearish Gold, more so for Crude Oil to drive the retracement in the relative performance ratio.

30 year seasonality chart I posted at the end of last month shows the tending to begin rallying from this point on too.

RATES

We’ve seen some unwinding in 2yr note rally last week leading to shorter-end yields finishing higher while the long-end continues decline. We have approximately $100 billion in UST auctions to start the week — 3 and 10yr on Monday, 30yr on Tuesday. We’ve seen some sizeable tails in recent bond auctions and we could see some term premium pressure come back as a result.

US10 year rates are also at an interesting juncture and showing tentative signs of finding relief from the declining trend over recent months. On top of the mostly good economic data we have been seeing, weak bond auctions, persistently elevated CPI and Fed leaving hiking optionality on the table could see renewed upward pressure in rates. We also have ECB and BOE this week who may reinforce that message, although far less likely for ECB while BOE could be more hawkish than market expects.

CURRENCIES

We start the week with a mildly bullish USD backdrop in FX with 1month risk reversals skewing towards the USD over recent weeks.

Last week saw JPY the strongest performed followed by USD, AUD the weakest followed by NZD GBP CHF EUR, with CAD almost unchanged.

Some strong technical biases as I see it heading into the week:

• Bullish USD CAD based basing structure and upside RSI break;
• Bearish JPY with reversal beyond key resistance and RSI overbought;
• Bearish NZD CHF in particular, mildly less for EUR and even more so for GBP.

In FX this week, I particularly like:

• long GBPNZD and short and NZDCAD short — fresh ideas
• long USDJPY USDSEK — accumulated last week
• long AUDNZD and short EURUSD — continue to hold on bigger picture themes
• long USDCHF CADCHF and possibly GBPCHF — also on the radar with SNB meeting in mind; and NOKSEK in view of a potential Energy rebound and maintaining a bearish bias on Swedish fundamentals.

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