2024.03.18 Weekly

Testing in progress

A tonne of event risks on the calendar this week (BoJ, FOMC, BoE, RBA, flash PMI’s etc.) where I will put the views expressed over prior weeks to the test.

I will be looking for further confirmation equities are in the “process of ‘setting up’ a top” that I noted last weak. We are seeing early signs of that being the case with price action failing at a key inflection area, momentum turning, and breadth going substantially weaker over the past week. US rates have also seen a huge weekly advance and IMO, at a point where risk assets and USD gets increasingly sensitive to a move higher in yields.

Meanwhile we are seeing some there is some upside risks to inflation materialising from the rebound in commodities. Investors (according to last month’s BofA’s FMS) see higher inflation as the biggest tail risk and a hotter than expected CPI and big PPI beat last week, as well as Global PMIs showing the strongest sentiment for higher prices across sub-components, could weigh on overall risk appetite.

NEWSFLOW

MARKETS

• 10-year Treasury yield sees biggest weekly advance since October after hot U.S. data (MW). U.S. stocks end lower as tech weighs on S&P 500 ahead of Fed meeting (MW). US equity funds draw record inflow as investors bet on soft landing (FT). Stock market to face reality check when Fed updates its interest-rate forecasts (MW). US stocks may not be in a bubble, but a pullback could be near (RTS). S&P 500’s breadth ‘stunk’ as stocks rose to all-time high after February inflation report (MW). European shares ease from record high on rate cut uncertainty (RTS). Profit-booking continues in Indian markets; Adani stocks, small-, mid-caps decline — logging their worst week in five months on Friday, while small- and mid-caps extended losses on valuation concerns (RTS). India Adani Group’s dollar bonds, shares tumble on US probe report (RTS).
• Volatile bitcoin falls from record high as crypto frenzy hits pause (RTS). MicroStrategy plans second convertible debt offering this month to buy more bitcoin (RTS). US dollar poised for biggest weekly gain since mid-January; yen falls ahead of BOJ (RTS). Sterling on track for weekly fall versus dollar ahead of BoE meeting (RTS). Gold faces first weekly loss in four as rate cut bets dwindle (RTS). Gold’s mystery rally baffles analysts — Hopes of US rate cuts alone are unlikely to have driven latest leg higher, say strategists (FT). Oil prices build on last week’s gains as supply risks rise (RTS). IEA raises oil demand outlook again but still lags OPEC (RTS). Cocoa prices hit another record, sweetening a broad rally for commodities (MW). Container rates drop to unsustainable levels, Maersk CEO says (RTS).
• US inflation rise to 3.2% highlights ‘last mile’ challenge for Federal Reserve (FT). Sticky Feb US CPI inflation raises questions about June Fed cut (RTS). Fed seen on hold until June, with rate-cut pace in focus (RTS). Traders stick to bets on June Fed rate cut after economic data (RTS). Wells Fargo pushes back Fed rate-cut expectation to June from May (RTS). Fed’s new neutral may be one FOMC takeaway (RTS). Fed will have to keep rates high for longer than markets anticipate, say economists — FT-Chicago Booth poll suggests bank will make two or fewer cuts this year, with the first between July and September (FT). Yellen says expects rents, biggest contributor to inflation, to move down this year (RTS).

AMERICAS

• Inflation Picks Up to 3.2%, Slightly Hotter Than Expected — A focus at the next Fed meeting will be whether most officials continue to expect three cuts this year — or fewer (RTS). CPI Doesn’t Capture What’s Really Hurting Consumer Confidence — If personal interest payments and the higher cost of homeownership were captured by official data, inflation would have been 9% in November, not 3% (Barrons). Gasoline, food boost US producer prices in February (RTS); U.S. Small Business Optimism Weakens on Inflation Worries — falls to lowest in 9 months, NFIB says (WSJ). US factory production rebounds from weather-induced slump (RTS). U.S. Consumers Still Aren’t Feeling Sunnier — University of Michigan’s confidence survey slipped in mid-March (WSJ).
• Retail Sales Less than Expected — Rose 0.6% in February against 0.8% expected (WSJ). ‘Stretched’ US consumers start to pull back on spending (FT). Dollar Stores Get Devalued as Low-Income Consumers Struggle — Two rival discount chains report seeing similar problems in their customer base (WSJ). Owner of Family Dollar to Close 1,000 Stores — Inflation, store theft and merger indigestion are sapping results at the discount retailer (WSJ).
• Nvidia offers developers a peek at new AI chip next week (RTS). Adobe shares fall as downbeat forecast fans worries about competition, AI efforts (RTS). US office market is world’s most oversupplied, Brookfield tells MIPIM (RTS). NYCB sells some loans for gains, aims to add Signature into financial reporting (RTS). Fitch cuts Boeing’s rating outlook to ‘stable’, sees lower MAX deliveries (RTS). If TikTok Is Banned, Free-Speech Litigation Could Follow (WSJ).
• Canada Unemployment Rate Edges Back Up to 5.8% in February — Another month of relatively solid hiring was again outpaced by the country’s booming population (WSJ).

EUROPE

• UK wage growth continues to slow — Data confirms inflationary pressures are easing (FT). UK public inflation expectations fall to lowest in over 2 years (FT). Asking prices for UK homes rise by most in 10 months, survey shows (RTS). UK economy returns to modest growth at start of 2024 (RTS). UK economy may be turning from headwind into tailwind for sterling (RTS). Bank of England set to play for time before first rate cut (RTS). BoE’s Mann: long way for inflation pressures to be consistent with 2% target (RTS).
• ECB could cut rates at least three times from June, Knot says (RTS). ECB started discussing rate cut, Rehn says (RTS). De Cos says could start rate cuts in June (RTS). Villeroy: spring interest rate cut remains probable (RTS). Lane sees easing labour market stress (RTS). Makhlouf backs June interest rate cut (RTS). No recovery in sight for Germany economy, ministry says (RTS). Investment in Germany by foreign firms drops to decade low, study finds (RTS).

ASIA

• Japan union group announces biggest wage hikes in 33 years, presaging shift at central bank (RTS). Japan no longer in deflation, wage hike trend strong, says finance minister (RTS). Japan on cusp of ending negative interest rates, chance of March BOJ exit heightens (RTS), debate ending negative rates in March if wage survey strong (RTS), Japan’s Feb inflation likely quickened (RTS). Japanese bank trains staff for a novel scenario: positive interest rates (RTS). Japan core machinery orders fall more than expected, fuel economic uncertainty (RTS).
• Australia’s RBA to hold rates on March 19, cut later in year (RTS). Taiwan set to hold rates steady amid inflation concerns (RTS). Most Bank of Korea board members said too early for policy pivot -minutes (RTS). South Korea will look at bolstering corporate reform after criticism (RTS).
• China Jan-Feb industrial output rises 7%, beats expectations (RTS). China January-February New Home Sales Slumped; Other Property Data Signal Continued WeaknessChina January-February New Home Sales Slumped; Other Property Data Signal Continued Weakness (MW). S&P puts property giant China Vanke on downgrade warning (RTS). China eases tourist visa restrictions to boost economy (FT). China Turns on the Charm for Foreigners but Its Allure Has Faded (WSJ). India’s February retail inflation rises at faster than expected pace (RTS). India’s February wholesale prices rise 0.20% on year, pace slows (RTS).

EQUITIES

Topping out? I noted last week that equities are in the “process of ‘setting up’ a top over recent weeks and nearing technical confirmation”. Looking at the Global equities index ACWI — Weekly printed an inside reversal bar after failing to match/better the prior week’s high, and Friday’s trading saw it slip below the trendline with a Demark sequential count flip to the downside. More signs below…

Inflection point in US equities. SPX and NDX is at a huge inflection point from a technical perspective between 5110–5180 and the 17805–18485 levels which is marked out by the measured move and 127.2fib extension of 2022 cycle Jan’22 high to Oct’22-low. Price action over the last two-weeks has been failing in this area, and another weekly close lower would, in my view, provide “complete” technical confirmation of the down-leg.

Short-term momo has turned. Majority of S&P500 stocks are now trading below their 5-day moving average from 72.23% last Tuesday to 33.66% on Friday — a sharp turn in just 3 sessions. Zooming out, it is on a divergent trend against SPX making new record highs. Sharp turn in short-term momentum while stocks above the 20-day is at 60.39% and 50-day at 69.30% suggests to me, that market is now in mean reversion mode.

Weak to weaker breadth exhbitied by Hi-Lo’s rolling over from the late-Feb to early-Mar period. Latest readings flipped sharlpy negative on the 5-day and neutralising on the 1-month.

NYFANG+ struggled to hold gains above the 20dema which is beginning to point south. I’ve flagged the RSI bearish flip and the structural weakness that is typically indicative of buyer exhaustion last week — that is looking more the case as it breaks lower to close the week leaning heavy on the last remaining trendline marker.

Small/Mid-caps index downside momentum beginning gain traction as indicated by the RSI break while price action has broken down from the Orange area I’ve marked out as being key levels for a potential inflection — being the highs of the consolidation that came after the 4Q2021 peaks; this area is analogous to Russell2k chart 2021 range support levels before breaking down into 2022 and going sideways through 2023.

US cyclical sector stocks momentum slowed over the past month while the Cyclicals-Defensive spread is topping out at the inflection point I’ve marked out using the same methodolgy with others. It’s heavy and looking increasingly likely to resolve lower.

Most-shorted stocks index has printed a bearish RSI break and flip below the 50 level. As I frequently point out, this is often a good indicator of sentiment and closely resembles what we have observed in the 5 day hi-los spread and %stocks above the 5dma.

Put premiums via SDEX and TDEX remain at low levels and hardly signalling alarm. But there are small signs of fear looking at the slow and gradual pick up (as we are also seeing in the VIX). To be fair, it would be natural to see this slow rising trend emerge as the market pushes record high, but volatility can spike suddenly and I would not be surprised to see such a move in the coming weeks.

Seasonals shows March to be one of the weaker months of the year for Equities which is also visible in the Q1-Q2 11-year seasonality chart for SDEX above. Energy seasonality which I covered in the 2024.03.04 note is playing out in Crude and Gasoline prices and given the risks that poses to the current macro environment, perhaps that increases the propensity of weaker Equities seasonals playing out too.

NVDA hosts the GCT GPU Technology Conference this week running from Monday to Thursday where they are expected to preview their new chip launch. Technically, its been consolidating after failing short of taking out the $1k mark as the trading range narrows between the 461.8–427.2 fib. It’s a tough read on what kind of technical picture could ensue, but do think it’s important to observe given that there is still a buzz around the stock and AI which has been helping to keep the market in bullish spirits. BofA did upgrade their price target to 1,100 from 925 last week too.

COMMODITIES

Commodities are on the upswing putting in 3 continuous weeks of gains that was reflected by the stronger than expected PPI print last week coming in at 1.6% y/y vs 1% prior and the 1.1% expected.

Wk/wk gains came via Energy and Agriculturals, while metals eased off as the USD rebounded. Although Energy and Agricultural items are stripped out of core inflation measures observed by the Fed, I think their relevance cannot be understated for inflation reaccelerating.

Shorting the Gold/Silver ratio is a theme I mentioned trading dynamically. I continue to stay short Gold while I traded Silver long off the 24 handle to 25 last week. I still like trading around that theme provided we see a pullback in Silver towards the mid-low 24s, otherwise, I remain core short Gold on the back of the bounceback in yields and USD.

I’ve been intending to buy the dip in Crude but slipped my mind last week being focused elsewhere. Rather annoyingly, I had some limit long orders the week before that would have got me long, but had them cancelled when I decided to go flat into the March8th weekend to start the following week fresh. I’ve not much interest in it at the current juncture I think it could make a consolidative move back below the 80 handle. NatGas is the more compelling trade to me at these levels buying off the shoulder level and for the potential breakout.

RATES

Big rebound in yields last week — 2s up +25bps, 5s +28bps and 10s +23bps.

The moves seems to have been driven by a higher for longer sentiment with the December Fed Funds hitting new YTD lows.

10yr is interesting spot breaking out from its recent downtrend-lines and sitting above the long running, and very-well-respected, trendline running from the Aug’22 and Apr’22 lows. While this puts the upward bias as being quite strong, it’s back to a key pivot region betwen 4.298% and 4.366% — on close watch…

Also closely watching the 10yr TIP yield where a push above the 2% handle will undoubtedly act as headwinds for risk and tailwinds for USD. For now it’s been stalling at the 2% handle the past couple of sessions.

What particularly gets my interest is this spread between Inflation breakevens less Real yields on the assumption that as real yields rises narrows the gap against inflation expectations, the more restrictive rates are for financial assets. The spread is swinging higher again and nothing good ever happens for risk when this gets going.

CURRENCIES

As there is a lot on the macro calendar this week, I’m mostly in the wait and see mode to guide my views. In order of strongest to weakest last week:

• USD +0.95% followed the bounce back in yields. Still favour USD longs thematically but conditional on risk-off eminating yields continuing to push higher. The index is back to the middle of the last high-low cycle and will have to see how the week’s events unfold to assess next moves.
• CAD +0.46% had a good week from USD crosswinds and higher Crude tailwinds. I would consider dip buying ideas on the crosses as a quieter way to express USD and Energy resilience.
• EUR +0.42% rally seems to be stemming from the unwind in major EUR-crosses. As I think the ECB will be one of the first to ease, I’m focused on EURUSD (which I’m currently short from the mid 1.09s) and EURJPY short ideas.
• CHF +0.17% maintaining a bearish bias given its tendency to correlate with Gold prices and more recently to Tech-stocks. Common pairs like EURCHF USDCHF seem tricky to trade around so CHFJPY seems the obvious theme to focus on over the medium term.
• GBP -0.14% went tactically bearish Cable expecting a softer wage report last week. With BoE meeting this week, I expect to hear a cautiously dovish tone in response to recent data but of course, they will convey they’ll want more evidence. Thinking more broadly — Consumer sentiment weak, hot Housing market comes at a cost, Growth muted, some pressure on UK government for more fiscal responsbility — overall, I don’t see much upside for GBP at the moment.
• AUD -0.18% inflation moderated substantially which could make the RBA come off dovish. But with inflation much closer to cash rates and therefore in no need to make adjustments just yet, I don’t see much impact. No hard view on AUD but I lean towards long ideas at some point down the road with a lot of bearishness seemingly in the price and asset managers being record short which could begin to cover as sentiment towards China incrementally improves.

• JPY -0.63% as MUFG points out there is a lot already in the price. I don’t see BoJ moving this week but they could be setting one up for April with headlines suggesting that is well in order. While I do think the right trade is to be looking long JPY, I have doubts about how much it can move or sustain one: 1) NIRP exit is likely to be a very slow gradual process rather than an abrupt one as it is hyped up to be, and 2) US rates (risks of 10yr pushing into the upper 4% levels for example) could dominate how JPY trades. This leads me to think that shorting the Nikkei225 instead of JPY longs is the more compelling idea as I’ve been posting about on twitter the past week.
• NZD -0.75% index was the weakest but its back to a big pivot area and I think it’s worth looking to buy into the weakness. AUDNZD for example has been ripping higher but I don’t see NZ fundamentals having gone any weaker vs OZ to warrant a continued rally. With NZ rate differentials beginning to look like its on the turn, I think NZD is a buy on dips, particularly AUDNZD around the 1.08 handle.

That’s all for now. Good luck trading!