2024.02.05 Weekly

Chase into OPEX is on

I have turned positive on risk last week as I became less convinced that markets would soon enter a period of weakness. Equities simply do not care until they have to, and for now, I can’t see what upsets the robust risk sentiment.

As we start the new year, economic surprises are turning increasingly positive, and observing x-asset action over the past week, I’m beginning to believe that the positivity in growth expectations could offset any potential angst from interest rates rebounding.

Returning to this chart I posted almost 6 months ago as slightly whimsical take on how I thought things could unfold. It’s quite interesting to see how things have unfolded over the past 6months, as well as how very laughingly wrong I and so many market participants have been that expected a cyclical slowdown into 2024. Instead, equities cyclicals-defensives spread is trending higher while there hasn’t been much to suggest that there will be a broad recession, or as many feared last year — a great depression of sorts!

Low recession risks, Momentum in data and Equities is strong, and it’s OPEX [next]* week … Onward and upward!

*While I was ill-informed about OPEX being this week, it does not impact my view of being bullish till the end of the month after seeing some solid earnings results, while there is some anticipation of positive results from semiconductors and AI related stock later this month. In addition, seeing Equity markets hold up well after last week’s rate volatility that saw 10yr yields rebound more than +30bps in one swoop after Powell pushed back on rate cuts and a blowout NFP report reinforces the view that Equities will continue to be resilient. Meanwhile the growth narrative remains strong, to the extend that I think it can withstand higher-for-longer rates repricings until the data suggests otherwise, which isn’t shaping up to be anytime soon.

NEWSFLOW

MARKETS

• S&P 500 closes at a record, rises for a fourth-straight week on strong tech earnings (CNBC). European stocks close mixed after US jobs report surprise (CNBC). South Korea stocks lead gains in Asia, China’s CSI 300 hits new five-year low (CNBC). Rallying Australian Stocks Propelled by Bonds on RBA Hopes (BBG). Oil posts weekly losses as US data dents hopes for near-term rate cuts (CNBC). Gold drops as dollar, yields rise on stronger US jobs data (CNBC).
• Wall Street Gets Reality Check as Powell Saps Fast Rate-Cut Bets (BBG). March ‘not base case’ — Stocks suffer worst day in four months after comments from central bank chair (FT). Fed’s Bowman Says It’s Still Too Soon to Consider Lowering Rates — important upside risks to inflation remain (BBG). Goldman Sachs, Bank of America Throw in the Towel on Fed Rate Cut in March — Swaps traders raise bets on May, June interest rate cuts (BBG). ‘Stunning’ US jobs growth of 353,000 far outstrips estimates — Investors rein in expectations of rate cuts after January payrolls almost double economists’ forecasts (FT). Strong job gains may dent Fed confidence on inflation (RTS). 10-year Treasury yield tops 4% after surprisingly strong jobs report (CNBC). Strong US economic outlook buffers stocks against rising yields -Goldman (RTS).
• Fourth-quarter earnings are shaping up to be the best of 2023, but there’s a catch — earnings expectations tumbled going into the reporting season, and there’s no positive momentum looking forward (CNBC). Megacap stocks keep lifting US market, but worries over their dominance grow (RTS). Projected buyback revival stands to bolster US stocks in 2024 (RTS). Meta shares surge 20% on soaring profit, better-than-expected guidance and first-ever dividend and $50bn buyback (CNBC). Amazon rose as much as 9 per cent, “a record-breaking holiday shopping season” and forecasting accelerating growth in AWS, seeing “significant interest” in its generative AI services; Apple fell 3 per cent after-hours, $3.2bn fall in greater China sales, but “all-time revenue record in services” (FT).
• As Navies Focus on Red Sea Houthis, There Are Worrying Signs Somali Pirates Are Making a Comeback — Piracy incidents have increased sharply since late last year (BBG). French Container Shipping Giant Halts Red Sea Route (BBG). Hamas ‘studying’ proposal for six-week pause in hostilities with Israel — Initiative from Qatar, Egypt and US and agreed with Israeli intelligence chiefs was put to heads of militant group (FT). US launches retaliatory strikes in Iraq, Syria, nearly 40 reported killed (CNBC). Iran and Iraq warn US air strikes risk stoking instability (FT). Iran-backed Iraqi militia says it has suspended attacks on US forces (FT).
• OPEC+ Nations Set to Decide on Extending Cuts in Early March (BBG). OPEC Cuts Oil Production as Coalition Begins New Supply Pact — Output declined by 490,000 barrels a day, survey shows (BBG).

AMERICAS

• Treasuries Surge as Bank Stock Rout Rekindles Fed Rate-Cut Hopes — US five-year note’s yield falls to lowest level since June (BBG). US regional bank sell-off a cautionary sign of more pain to come (RTS). JPMorgan Says Exit Five-Year Treasury Bets, Bank Angst Overdone (BBG). Credit Markets Get a Jolt From Property Losses at Banks — Global credit spreads are heading for the biggest weekly increase in four months as bubbling property market stresses prompt banks to increase bad-loan provisions (BBG). Blue-Chip Bond Market Is Set for Another Bustling Month of Sales — record boom in US investment-grade bond sales is set to spill into February as a comeback in corporate acquisitions meets insatiable investor demand (BBG). Municipal-Bond Investors Chase Returns Ahead of Fed Rate Cuts (BBG). Investors are unlikely to dump cash in favor of locking in bond yields, JPMorgan says (CNBC). US Increases Quarterly Debt Sale, Sees No More Boosts Coming — Treasury announces $121 billion in refunding auctions, Start date for new buyback program to be announced in May (BBG).
• US Jobless Claims Rise to Two-Month High as Labor Market Cools — Initial applications unexpectedly jumped to 224,000 last week, California, New York and Oregon saw the largest gains (BBG). Private payroll growth slowed to just 107,000 in January, below expectations (CNBC). US job openings unexpectedly rise, but resignations decreasing — openings increase 101,000 in December, Quits decline for fourth straight month (RTS). US job cuts more than double in January -report (RTS). Strong US worker productivity keeps labor costs in check in fourth quarter (RTS). US consumer confidence rise to two-year high in January (RTS). Stronger US Factory Payrolls Signal Manufacturing Is Turning Corner (BBG). US manufacturing sector on cusp of recovery in January — ISM (RTS). US factory orders rise moderately in December (RTS).
• Rate Cuts to Start in July, Former Bank of Canada Official Says (BBG). Bank of Canada says federal budget could hinder inflation fight (RTS). Canadian Economy Gains Speed as Manufacturing, Trade Rebound — Preliminary data point to 1.2% annualized expansion in 4Q, BoC had forecast zero growth in last three months of 2023 (BBG). Canada braces for possible wave of business bankruptcies (RTS).

EUROPE

• Bank of England puts high rates ‘under review’ but treads carefully about cuts — keeps rate at 5.25%, split three ways in vote, two backed a rate cut, one wanted a cut, Bailey says inflation moving in “right direction”, Investors continue to expect four rate cuts this year (RTS). UK Bonds Pare Worst Start to Year as Rate-Cut Hopes Run High (BBG).
• UK businesses start 2024 with confidence at two-year high — Lloyds (RTS). UK shop price inflation drops sharply to lowest level in almost 2 years — Pace of growth slows as retailers offer heavy discounts, raising hopes inflationary pressures are lifting (FT). New Brexit border rules will hit UK supply chains, food industry warns — British consumers risk higher prices after January 31 roll-out of checks on all EU products of plant and animal origin (FT).
• Euro zone inflation eases as expected, but core figures disappoint (CNBC). Falling German and French inflation fuels hope of interest rate cuts (FT). Eurozone economy flatlines in fourth quarter — Shrinking German output and stalled French growth offset improved figures in Italy and Spain (FT). German recession on cards for Q1 after end-of-year slump — Q4 GDP down 0.3% Q/Q, Ifo institute forecasts Q1 contraction, Industry appeals for ‘economic turnaround’ (RTS).
• Euro area governments smash bond sale records in hefty funding year — Euro governments raise record 73 bln euros from Jan debt sales
  Demand exceeds funding by record 10 times (RTS).

ASIA

• US Companies Turning More Optimistic on China, Survey Shows — Firms tell AmCham China their profit potential looks better (BBG). ‘Uninvestable’: China’s $2tn stock rout leaves investors scarred (FT). State-backed ‘national team’ of investors piles in to support China stocks (RTS). China Vows to Keep Up Spending in 2024 After Stimulus Cut — 2023 overall deficit hit $1.2 trillion, 1% shy of record, Sovereign bond issuance will be front-loaded this year: MOF (BBG). China unveils new property support measures amid concerns about Evergrande fallout (RTS). Evergrande liquidation to test Hong Kong’s legal reach in mainland China (FT). China’s factory activity expands on export order boost — Caixin PMI (RTS).
• S.Korea inflation softens to six-month low, policymakers remain wary (RTS). S.Korea exports rise for fourth month on surge in chip sales, China rebound (RTS). South Korea factory activity expands for first time in 19 months — PMI (RTS).
• Taiwan Q4 preliminary GDP beats forecast, bodes well for 2024 (RTS).
• Japan Union Group Seeks at Least 6% Pay Raise in Bid to Push BOJ Policy — UA Zensen chief Matsuura believes 4% wage hikes not enough, Will fight for 6%, but hurdles remain for smaller-sized firms (BBG). Japan Jan factory activity shrinks modestly on softer demand — PMI (RTS). Japan Dec factory output rises on production machinery (RTS). Japan December jobless rate falls to 2.4% (RTS).
• RBA Seen Cutting Rates Only in Late-2024, Asset Manager IFM Says — Market pricing for RBA rate cuts in mid-2024 is ‘optimistic’ (BBG). Australia Q4 inflation slows sharply to two-year low, bringing rate cuts nearer (RTS). Australia’s Wild Weather Triggers Heat Wave and Flood Warnings (BBG).
• New Zealand Home Building Consents Drop to Five-Year Low (BBG).

EQUITIES

Global equities are in strong shape with many trading near ATH’s — Nasdaq continues to lead while China remain laggards.

Yellow: mid-2023 peak, Green: prior ATH

Global equities ACWI (TL) printed new ATH last week while ex-US ACWX (BL) is resisting against the Jul’2023 peak. Developed markets EAFE (TR) came within less than 0.5% from making new ATH and Emerging ex-China EMXC (BR) looks firm after the 3 week rebound.

Strong performers were hinting a possible correction leg in prior weeks but the action has not followed through, and instead, they no longer show any signs of pulling back from their surging rallies.

NYFANG+ keeps busting out new ATH’s on the back of better than expected earnings in AMZN and META. It’s so far capped by the 61.8 fib extensions which warrants close attention, but there is absolutely nothing to suggest the market will begin to sell-off even though rate cut expectations are being pushed back.

Most-shorted-stocks index was one that was showing some signs of potential weakness after breaking lower from its ABC consolidation moves from mid-last month. Thursday and Friday candles however suggests the 78–80 area of support remains strong.

MA deviations against (from top to bottom) 20 50 100 and 200 dmas

Looking at index MA deviations, indices are beginning to looked stretched against bot shorter and longer term moving averages suggesting equities are in need of some ‘healthy’ consolidation.

But looking the % of stocks above the 20dma for main benchmark indices is hardly suggestive of an overbought market. Tech-stocks breaking new highs could offer some positivity to the broader market to play catch up.

It’s OPEX next* week and the leadup in OPEX tends to exacerbate the prevailing momentum into expiry.While we have a gamma profile that is very bullish for equities, I think equities will trade continue to trade positively this week, and I suspect, til the end of the month with expectations for strong earnings and guidance from semiconductors and AI-related sectors.

COMMODITIES

Bloomberg commodity index made new lows last week to levels not seen since the end of 2021.

Decline was broad based with metals having the biggest losses last week.

Considering the gradually improving manufacturing outlook, I’m a little surprised by these declines (as exhibited by the JPM Global Manufacturing PMI) which makes me look at potential opportunities to take advantage of the price vs soft data divergence.

I continue to like trading around the long/short Crude/Gold theme. Gold was centred around the view that continuous Fed pushback will pressure real yields higher while strong economic momentum keeps yields higher-for-longer.

Crude is looking very attractive around current levels in the low 70s where supply demand is looking better balanced and while OPEC+ meets to discuss extending production cuts. There may not be so much upside as a geopol-hedge, but it could be effective when the time comes to it and while global manufacturing outlook appears to be taking a turn.

RATES

It was a very volatile week in rates with the 10yr starting the week around 4.15% (Blue) to going as low as 3.82% on Thursday post FOMC (Purple) and then rebounding strongly on Friday in reaction to the blowout jobs report (Orange).

10 yr real and nominal yields have returned to what would appear more reasonable levels, after last week, I suspect we have justified the range has indeed shifted higher off the December/January lows.

The USD was the big beneficiary of the rebound in US yields, and if rate volatility continues to tread higher, this could be problematic for the above risk view (i.e. equities maintaining their rally).

CURRENCIES

There is some dislocation in FX from Equities surging higher and yields rebounding strongly which I believe presents some very strong opportunities (e.g. into risk-currencies and EUR-funded carry trades) based on the view that Equities is setting itself up for another strong month.

USD leaves me somewhat conflicted in my views — a surging Dollar tends to be cancerous for the broad risk spectrum and technically, it is breaking out from its inverted HnS pattern and already trading above the neckline, and a sustained move would imply a structural target around the 2023 highs. I’ve been picking up USDJPY last week and the strong NFP report has really helped to get that trade going (along with Gold shorts).

While I continue to prefer limiting long USD trades to USDJPY USDCHF to express US exceptionalism, I think carry trades are becoming attractive again to express the positive risk sentiment seen in Equities, and especially after the USD rally last week left no currency behind with higher-beta FX seeing the most damage. EURCAD EURAUD (possibly EURMXN) shorts is the theme I’m most interested in trading around for the forseeable future. my main interest.

Finally, many will know I have been vehemently opposed to any idea of being long JPY given the surge in sovereign debt sales and lingering risks to inflation reaccelerating and higher-for-longer rates (a theme which I see continuing to wrong-foot the market that is trying to get ahead of long bond, long slowdown, sooner rate cuts etc). I continue to think those long BoJ pivot trades will continue to be disappointed for the rest of this month as the latest data hasn’t been of anything to note.

That’s all for now. Good luck trading! //