2024.03.04 Weekly

Energy season

Not a great deal to add to last week’s views which remain largely unchanged —short NDX, positive on Energy, long USD and EUR vs high-betas and still somewhat bearish on JPY. As I’ve been a little concered of where the bearish triggers for risk could come from after dodging numerous bullets through earnings season, I will want to see economic data continuing to heap pressure on the narratives of persistent inflation pressures and strong labour market, as well as Energy and input prices continuing to rally higher. Looking at what’s ahead:

• In US/Canada:
  Powell Testimony (Wed-Thu) — likely to fend off Congressional concerns on keeping policy too tight and lean hawkish to steady expectations on cuts coming sooner. FED Barr (Tue), Daly and Beige book (Wed), Mester (Thu) and Williams (Fri). ISM services (Tue) and set of US Labour market data (Wed-Fri). BOC (Wed) — no change expected and presser will probably convey a patient message for future cuts. Canadian employment also released alongside US NFP. Further out — US sees the 2nd biggest monthly Treasury supply in March with details of the 3, 10 and 30s auctions for the week after announced on Thursday. Risk may have difficulty building on gains til NFP.

• In Europe:
  Sentix (Mon) and Final PMI’s (Tue) to be released — I expect the slow improvement in sentiment to continue. UK budget (Wed) — focus will be on fiscal responsibility for Hunt so I’m not convinced this will be hugely market moving. ECB (Thu) — market expects cuts to start in June but ECB is likely stay firm with core inflation proving sticky. Unless PMI’s show a big revision higher, not seeing potential for positive risk catalysts.
• In Asia:
  BOJ Ueda speaks (Tue) — he’s not expressed confidence of 2% inflation being ‘in sight’ last week and will probably reinforce a cautiously dovish message. BOJ Nakagawa (Thu) also speaks and some focus on Japan’s Labor cash earnings (Thu). China’s National People’s Congress (begins Tue) holds strong expectations for more fiscal support measures and optimistic 5% growth target to be announced. Caxin Services PMI (Tue)expected to tick higher. If there are to be any positive risks catalysts this week, it will probably be out Asia.

NEWSFLOW

MARKETS

• S&P 500 Posts 15th Record This Year as Tech Roars (BBG). Equities gain on in-line US inflation, Treasury yields dip (RTS). Impossible to Call the Top in Stocks, Goldman’s Rubner Says — The return of the YOLO has been a major driver in recent gains, Says there is no catalyst for potential selloff in US stocks (BBG). European Stocks Notch 4-Month Winning Streak After PCE Reassures (BBG). Foreigners Sold Japanese Stocks Last Week as Nikkei Hit a Record (BBG). Investors snap up ‘Magnificent 7’ tech stocks and crypto — BofA (RTS). Bitcoin is back with one eye on record high (FT). Gold hits 1-month high as dollar dips after U.S. PCE data (RTS). Oil Hits $80 for First Time Since November as Market Tightens (BBG). OPEC+ Extends Oil Supply Cuts Until Mid-Year to Avert a Surplus (BBG). Oil Demand at 4-Year High to Hold Steady for 2024, EIA Says (BBG). US slowly replenishes strategic petroleum reserve (RTS). Qatar’s Gas Boost Will Bring Energy Dominance — setting itself up to control about a quarter of all LNG by the end of the decade (BBG).
• Major central banks stand pat again in February — All four of the central banks overseeing the 10 most heavily traded currencies that held meetings in February (Australia, New Zealand, Sweden and the UK) kept benchmark lending rates unchanged (RTS). Fed’s Powell to Double Down on ‘No Rush to Cut’ Message — Set pieces include Fed testimony, China congress , UK budget — ECB, Bank of Canada may keep interest rates unchanged (BBG). Short Cover Risk Seen in Bonds as Market Pricing Nears Fed Dots — Leveraged funds aggressively unwind shorts over past 2 weeks, Swaps close to matching Fed forecast of three cuts this year (BBG). Goldman CEO Sees More Uncertainty to Soft-Landing Expectations (BBG). Global factories struggle for growth as China demand remains weak — HCOB’s final euro zone factory PMI dipped to 46.5 in February from January’s 46.6, beating a preliminary estimate of 46.1 but in contraction for a 20th month amid weak demand although firms were optimistic about the year ahead; conflicting signals out of China with the government’s official PMI showing factory activity continuing to fall, in contrast to a slight pickup seen in the private-sector Caixin PMI; South Korean export growth exceeded forecasts in February and India’s PMI showed manufacturing activity expanded at its fastest pace in five months (RTS).
• Tech companies cash in on ‘frothy’ stock rally with convertible bond sales — US borrowers raised $7bn this month by selling convertible debt (FT). AI boom makes Nvidia third US stock to close above $2tn valuation — Chipmaker joins Apple and Microsoft in reaching milestone after blistering share price ride (FT). Nvidia Becomes Tesla’s Successor as Market Flips From EV to AI — Chipmaker’s strong results are justifying wild rally, for now (BBG). Elon Musk sues OpenAI and Sam Altman for breach of contract — Suit alleges start-up’s deal with Microsoft broke agreement to build ‘artificial general intelligence’ for humanity (FT). ‘Simply good’ Chinese electric cars power ahead of inferior US rivals — Better performance and affordability are driving the market Beijing’s way (FT). Joe Biden says Chinese smart cars could pose US security threat (FT). Apple ends its decade-long secret effort to build an electric car (NPR). Apple’s Car Was Doomed by Its Lofty Ambitions to Outdo Tesla (BBG). NYCB replaces CEO as loss mounts to $2.7 bln (RTS). NYCB shares tumble 26% after ‘material weakness’ disclosure rattles investors (RTS). NYCB Turmoil Contained as Calm Prevails Among Regional Banks (BBG).
• Fertilizer Ship Attacked by Houthis Last Month Sinks in Red Sea (BBG). Houthis say they will introduce military ‘surprises’ in Red Sea (RTS). Yemen’s Houthis say they will continue sinking British ships (RTS). Only grain ships from Black Sea and for Iran still crossing Red Sea (RTS).

AMERICAS

• Services drive US prices higher in January; inflation gradually cooling — PCE price index increases 0.3% in January, Core PCE price index rises 0.4%; up 2.8% year-on-year, Consumer spending gains 0.2%; personal income jumps 1.0%, Weekly jobless claims increase 13,000 to 215,000 (RTS). US economy on firmer footing heading into first quarter — 4th-qtr GDP growth trimmed to 3.2% rate, Consumer spending raised to 3.0% pace from 2.8% rate, inflation increase revised slightly higher (RTS).
• US Supreme Court to decide Trump criminal immunity claim in 2020 election case (RTS). Trump appeals $454 million judgment NY civil fraud case (RTS). Biden dogged by Democrats’ anger over Israel, Reuters/Ipsos poll finds (RTS). Joe Biden and Donald Trump berate each other over border in rival Texas visits (FT). Biden cracks down on US data flows to China, Russia (RTS).

EUROPE

• Eurozone inflation slows to 2.6% in February — Higher than expected figure shows persistent strength of core prices (FT). European inflation falls but sticky services costs raise doubts for ECB (FT). Euro zone Feb factory activity contracted for 20th month, PMI shows (RTS). ECB to keep floor under market rates but with eye on demand — ECB to unveil ‘demand-driven floor’ system, reviewing how it steers short-term interest rates, framework needs changing now that interest rates are far above zero and massive amounts of excess reserves are unnecessary — and are even causing huge losses to the ECB and some of the 20 central banks around the euro zone, Announcement might come as soon as March 13 (RTS). First fall in eurozone loans for five months dents recovery hopes — €12.2bn drop in credit supply to private sector shows how record high interest rates are ‘crushing’ demand (FT). Europe Commerical Real Estate Risk Hasn’t Materialized Spectacularly, ESM Chief Says (BBG).
• UK factories struggle in February as job cuts accelerate, PMI shows — Manufacturing PMI rose last month to 47.5 from 47.0 in January — revised up from a preliminary 47.1 — stuck below 50 threshold since August 2022 (RTS). UK shop prices rise at slowest pace since March 2022, trade group says (RTS). UK trade volumes suffer record five-year decline — Drop in goods imports and exports attributed to Brexit by economists (FT). UK food inflation near 2-year low, data shows (FT). Most UK exporters hit by Red Sea disruption, survey shows (RTS). UK credit card complaints hit a record high (FT). UK Tax Burden Unlikely to Fall After Jeremy Hunt’s Budget — Whatever the “fiscal headroom”, it isn’t enough (BBG). Pension funds turn to credit to bolster LDI trades — Two of the UK’s largest fund managers have begun using corporate bonds to underpin their leveraged gilts trades (FT).

ASIA

• Japan Two-Year Yield Rises to Highest Since 2011 on BOJ Bets (BBG). G20 optimism on global outlook gives BOJ impetus for early stimulus exit — G20 summary says chance of global soft landing increased, Group’s optimism in line with BOJ’s global outlook view — Ueda, Ueda sticks to recovery scenario for Japan, focus on wage talks, Some analysts bet on March move if wage outcome proves strong (RTS). Kanda Warns Against Unstable FX at G-20 (BBG). BOJ Signals Rate Hike That May Roil Markets Is Getting Closer — Seven of 15 economists see a March policy shift as possible, BOJ price target ‘coming into sight,’ board member Takata says (BBG).
• Beijing is due to open the annual session on Tuesday of the National People’s Congress (FT). China approves plan aimed at spurring investment and spending (RTS). China’s factory activity shrinks for 5th month, raises pressure for more stimulus — NBS PMI fell to 49.1 in February from 49.2 in January, sizeable drop in the output component, New export orders shrunk for 11 consecutive months, year-long contraction in employment in the factory sector pointed to persistent strain on businesses. On the brighter side, the official non-manufacturing PMI, which includes services and construction rose to 51.4 from 50.7 in January, marking the highest reading since September last year, thanks to robust activity during the LNY holiday (RTS). Country Garden liquidation petition adds to China’s property woes (RTS). Hong Kong scraps property tightening measures to boost economic recovery — Stamp duties for home buyers to be scrapped, Analysts see rebound in property mkt, transaction volumes, 2024 GDP seen growing 2.5%-3.5% versus 3.2% in 2023, HK$101.6 bln 2023‑24 consolidated deficit, seem improving (RTS). New World to Cut HK$1 Billion of Non-Core Assets to Trim Debt — Core profit rose 12% after it discontinued some operations, Firm to speed up home sales with 2,500 units in six months (BBG).
• A tale of two bull markets — While the US rise in stock prices is all about tech, India’s boom is more broad-based (FT). India’s factory growth at five-month high in February, cost pressures cool — final Manufacturing PMI rose to 56.9 in February from January’s 56.5, beating a preliminary estimate of 56.7 (RTS). India’s economy grows at its fastest pace in six quarters in election boost for Modi — Oct-Dec GDP at 8.4% vs 7.6% in Sept qtr, FY24 GDP estimate upped to 7.6% from 7.3%, Strong manufacturing, construction, investment activity, Farm sector contracts 0.8% (RTS). India Q3 GDP growth boosted by fall in subsidies, say officials (RTS). India’s April-Jan fiscal deficit at 64% of 2023/24 target (RTS).
• South Korea unveils measures aimed at boosting stock markets, tackling ‘Korea discount’ — Measures are aimed at supporting its stock markets and take a leaf out of Japan’s playbook that has helped take Tokyo markets to record highs (CNBC). Korea Faces Long Road in Unlocking Corporate Value Like Japan (BBG). South Korea’s Yoon, Meta’s Zuckerberg discuss AI, digital ecosystems (RTS).

EQUITIES

ACWI Global Equities finally takes out ATH set at the height of the Covid QE period with a record high and close last week and interesting signals have emerged — namely the Demark sequential 9 countup printed on the weekly which comes on top of being in RSI MFI and vol-adjusted MACD overbought extremes. Daily action trending above the 1sd-band within a rising channel but has been in a negatively divergent ytd trend. Daily closes below the 1sd band should provide some confirmation.

EAFE Developed markets weekly has been flirting in RSI MFI overbought extemes since the beginning of the year and venturing into an area of distribution that took place at the height of the covid policy easing period. 127.2–161.8 fib is also a highly probable pivot region from technical pov. Daily action within touching distance of the 2sd-band with RSI overbought again. Applying the same channel points here as ACWI above, a close below the trendline and 1sd-band should provide some confirmation.

EMXC Emerging ex-China is supporting the fact that broad risk sentiment remains very firm. It’s at an interesting juncture here however closing just above the 127.2 and trendline. Daily RSI has been on a negatively divergent trend over the past month as new highs have been shallow and price action is getting is getting scrunched up, so while the action looks strong, a failure at these levels would be suggestive of a pullback for broad risk.

SPX continues to push record highs while being extremely overbought. Particularly of note is the Demark Weekly 9 and Daily 13 countup, together of which typically does a good job of marking trend changes.

US cyclical sectors is stomping higher but the Cyclicals-Defensive spread has finished the week with a lower high which is resembling a HnS top which, like many of the charts above, is also forming in the distribution region seen at the peak of the QE-fueled rally.

NYFANG+ rally has turned into a slow grind with the action getting increasingly ‘wedged’ with shallower highs. This is reflected by the RSI downtrend off the Jan peak. Some early signs of trend exhaustion. We’ve also seen weekly Demark countups — 13 in the first week of Feb and a 9 printed last week.

PFRZ Small/Mid-caps has surprised me rallying to a higher ytd high. Like the EAFE developed market index it is venturing in the region that has seen distribution at the height of covid easing. While it has put in a strong weekly close, it’s close to completing its measured breakout objective.

Most-shorted stocks index is attempting a breakout which is looking slightly lacklustre. As a colleague once said to me, this index is a great indicator of sentiment and I couldn’t agree more. For now, it’s holding just above the important pivot level where a failure would indicate some weakness in the broadening breadth we have been seeing.

SDEX put premiums is back to extreme lows along with TDEX 3sd premiums. Shouldn’t be surprising that the market is showing very little fear given the charts above.

VIX is back to ~13 handle and granted TA’ing the VIX is an odd thing to do, its back to the bottom of a rising trend that has seen bigger swings coming into the year and, front month spread is showing a very slight hint of turning higher — peak complacency, perhaps…

STOXX600 also looking rather interesting as it just marginally pushed ATH’s on Friday. RSI is rolling off and similar to some of the above charts, the Cylicals-Defensive spread has reached the peak covid easing pivot base.

NIKKEI225 continues to push ATH’s today and interestingly has a monthly Demark 13 countup with RSI reaching historical extremes where it has usually seen corrections. It’s due a breather and we’re finally seeing some technical signs that we may soon see one.

COMMODITIES

Bloomberg commodities index has shown a bit of life last week with RSI turning increasingly bullish as it sagged lower so far this year.

Most of the heavy lifting was from Precious metals and Energy, while Industrial metals continues to grind off the lows and Agriculturals may be in the process of bottoming out.

Gold move is looking like a short squeeze and over-extended. Real yields lower has helped to support the move but looking at the ytd range of 5yr TIPs, Gold would seem fairer closer to the 2050 handle. I do like fading this move while treading carefully as there could be a possibility that the market is pricing in recession risks on the back of Central banks having to do more to kill inflation pressures by killing demand, particularly if economic data turns weaker. On the other hand, strong data this week should seal in a short-term high.

Crude continues to be bolstered by better than expected economic data. No view on Crude at this point, though slightly positive, I have little confidence in chasing the move at these levels.

More of interest is NatGas which I covered last week along with the seasonal heatmap of Henry Hub NG. Above heatmap is of the BBG Commodities Energy sub-index which reflects favourable seasonals in the period coming out of Winter and ahead of the Summer months, particularly in March-April.

On a side note, RB Gasoline prices is gaining some upward momentum and should it break higher this month in tune with Energy seasonals, risk assets could be under pressure like we saw in Q3 last year.

RATES

Yields finished lower last week (Purple to Orange, change in Red) as PCE confirmed inflation is proving sticky. I suspect it was shorts and downside hedges squaring up that helped bonds to rebound. Yields are still up from a month earlier (Green and Yellow) however.

If policy is to stay restrictive for longer (or the Fed is looking increasingly like it has to induce a mild recession), I would expect the gap between inflation breakevens and real yields to narrow and should we see that this month, risk rally would be under pressure again like we saw in Q3 (chart shows the breakeven minus real yield spread).

The lift in yields has reflected the positive growth (soft-landing) sentiment coming into the new year. Going forward, I think the path could turn downwards if it looks more likely the Fed will be on hold for longer i.e. late Q3 or later. Should be interesting to see how this looks after the next set of data and big chunk of supply coming in this month.

Before going on to currencies, I want to note the change in the yield curve differentials between the US, Japan, Europe, and the UK over the past month. Yellow being the spread as of Feb-1st, Red as of Mar-1st.

US vs Japan widened in USDs favour over the past month.

US vs Europe front end narrowed in favour of EUR.

US vs UK widened in favour of USD.

Europe vs UK narrowed in favour of EUR.

CURRENCIES

Stickier US and European inflation and change in rate differentials noted above is why I remain broadly positive on both USD and EUR, and negative on higher-betas.

Looking at G8FX indices, EUR and GBP looking particularly strong while the USD is holding up. Commodity dollars are looking weaker despite the strong risk sentiment, while CHF and JPY maintain a bearish bias.

My FX biases remains unchanged (higher conviction in bold):
- bullish USD EUR, mildly bullish GBP
- bearish NZD AUD CAD CHF, turning more cautiously bearish on JPY.

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