2024.11.25 Weekly
As to re-acclimatise to markets and gather my thoughts (after a joyful yet evidently painful week off), I quickly reflect on the narratives that has taken the market from swing to swing in in recent months to start with — that is…
Q3 has been all about the Fed-put and widening US fundamentals vs rest of World, and then the Trump trade coming into fruition for the first half of Q4. Now that those big themes have played out, it therefore stands to reason that an extended run would be challenging on those themes and an unwind to be the most natural course for markets in the absence of new catalysts.
Bigger picture view of heading towards ‘tightening’ remains unchanged.
TRADING VIEWS
NDX short
Trailed out of my breakeven average today which is disappointing given it had gone ~500pts in profit. It’s very tempting to start building a position around the 21k and up levels, but strong Thursday and Friday bars along with weekend news of Bessant as the new Treasurer is keeping me back from rushing back in. Will see how the week goes but I can’t see myself attempting shorts before going well into the NY session on Wednesday.
USD longs
I still retain some USDJPY USDCHF EURUSD GBPUSD longs from the end of September. Though they are nothing more than trophy positions at this stage, I still think it is highly probable that USD does not see those September dip levels for quite some time, and that DXY has a reasonable possibility of making new 2-year highs.
Gold short
This bias comes from the bigger picture view that we will drift towards a tightening regime that exerts upward pressure on real yields and on higher rate-beta assets. The bounce in Gold looked purely a MM short-squeeze, and with narratives behind the rally has running its course, I don’t see what drives Gold prices higher as geopol resescalation looks less likely with the US undergoing a transfer of Power, Ukraine/Russia approaching Winter, and Iran keeping quiet of late.
DATA REVIEW
Latest round of flash PMIs has put the Composite index of major economies except US had gone below 50 for the first time in 13-months, in fact US expansion hit its fastest pace in 2.5-years.
Services PMIs of non-US countries missed expectations (France 49.4 vs 51.8 expected, Germany 49.4 vs 51.8), while the US put in a large beat (57.0 vs 55.2) to put Services growth at the fastest pace in Apr’2022 — “Employment fell for a consecutive 4th-month, output price inflation cooled to the lowest since prices began rising in June 2020... Growth was again driven solely by the service sector, but rising optimism and renewed hiring in manufacturing hinted at the upturn becoming more broad-based in the coming months”.
Initial claims is the lowest since April at 213k, below the 2-year median at 220.5k.
UoM was revised down across the board while 5-year inflation expectations beat not only the 3.0% initially expected but also the 3.1% preliminary beat at 3.2%. Interestingly, the last time the 5-year expectation hit 3.2% was a year ago when hawkish risks was very-underappreciated by the market. Policy expectations were much fairer at the end of 2024, but inflation expectations becoming less anchored could start to weigh in again going forward.
LOOKING AHEAD
Busy couple of days before the US Thanksgiving weekend:
Elsewhere:
- Wed: AUD CPI, RBNZ
- Thu: German/Spain Prelim CPI
- Fri: Tokyo Core CPI, Euro Area CPI Flash, BOE Bailey, CAD GDP
- Sat: China PMIs
EQUITIES
Starting with the ACWI (all countries index) and ACWX (all countries ex-US), both have marked out meaningful support last week with the ex-US index attempting to shift towards a bullish technical bias as it’s on the verge of breaking out of the downtrend line eyeing levels that saw a failed breakout attempt and another breakdown at the beginning of the month.
Developed markets already showing early signs for a recovery though less convincing of an imminent break to the upside in Emerging market charts. Regional chart are suggesting strong US performance while Emerging ex-China markets appear to be setting up a recovery leg.
SPX recovered to the bottom of the last ATH range earlier in the month and while momentum is clearly bullish, short-lived rallies could quickly change the picture graphically especially if we start to reverse the Thursday and Friday bars of which SPX is only +0.88% since Wednesday close. 5970-6010 a big area of resistance for and 5940–50 as support — not too interested in doing anything right now after trailing out of NDX at breakeven average but I would consider 5970 as the bull/bear level for shorter-term trade ideas.
Volatility perspectives show little signs of worry — VIX remains low but well protected on the downside via the elevated Skew (White) and implied correlation (Orange) back to lower levels of the yearly range.
Factor/sector perspectives also entirely positive for broad risk but some interesting short-term trends could be surfacing:
- Value and equal-weighted SPX beginning to outperform as broadening on breadth attempts to gather momentum.
- Industrials vs Materials is interesting — performed well in recent months, coming off over the past week, but risk tends to be on the soft side when the ratio falls (higher costs squeezes profit margins I presume).
- Consumer Discretionary vs Staples is reinforcing US consumer strength but could be coming to a stall after the strong +4.56% election week move being only marginally up +0.1% last week and +0.25% the week before.
Russell2k is very strong graphically — prior action off major pivot areas has confirmed solid floors below and breaking higher as it attempts to outperform NDX for a 3rd time this year. This ratio is on the cusp of a major move higher IF I believed that the Fed’s policy normalisation would be a smooth sailing affair through 2025, but I don’t fully believe that will be the case for say another 6 months — Fed won’t be able to do anything about a pro-growth and potentially inflationary Trump administration, but they can adapt, and adapt via higher neutral rate I think will.
If there is a market to watch for global macro concerns about Trump’s policies, it’s probably Europe and as I write, today’s bar could be significant for the coming weeks — the bounceback since last Wednesday has taken it back to a major pivot level where it has met fresh selling pressure.
Equities are still some ways away from a broader correction while it starts the week on a very positive note, but I observe that a possible lack of continuation higher could quickly change the flavour of the charts. Also, the positivity stemming from the Fed’s labour-market-put, a resolutely dovish Powell, as well as a Red-wave, have all run of its course with those risks now even more likely to turn on itself — i.e. labour market clearly not a problem, Powell may not be able keep playing the ‘full-dove’ card, and tax cuts are great but trade wars aren’t.
COMMODITIES
Bloomberg commodities is on a breakout and potential 5th wave that sets its targets on the upper range marked by the last 2 arrows.
The breakout of which is mostly driven by Energy (Red, chart of sub-index performance against relative to the main-index) and in small part by Agriculturals (Green), while metals underperform so far this month.
Brent Crude (Top panel) shows managed money increasing longs (Green) and the highest level so far this month, while Henry Hub Natgas (Bottom) is coming off extreme net short positioning (Orange) with shorts unwinding at a quicker pace in the last reporting week.
Gold (Top) managed money longs reduced length another consecutive week to see positioning back to where it was during the Jul-Aug months; whereas Silver (Bottom) reduced length on both sides with the shortside seeing the biggest change.
Earlier in the month I noted the extreme skew on Gold’s 1-month risk reversal when it went it started to negative in October to almost -1.3sd relative to its 3 year rolling average on the 14th-Nov, and now back to positive. Given the big sell-off and rebound in spot came alongside the big swings in options skew, I’d conclude that it mostly options positioning that drove the sell and rebound leg. Now that much of that positioning has neutralised, I get the sense that precious metals have begun a medium-term consolidation phase. I therefore like reengaging on the shortside after this bounceback expecting a trend of subtly hawkish repricing.
RATES
Bear flattening so far this month — 2yr about +15bps higher last week, longer-end yields up less than +5bps, 2s10s inches closer to inverting again, now +1bps as I write.
10yr breakeven has come off slightly by -2.5bps while the 10yr real yield -20bps since the beginning of the month. At the beginning of November, I argued that market expectations will shift towards tightening with economic data suggesting the Fed may have to dial back on their strong easing bias. Of course, this is way off and still far away before inflation is any bit of a concern for short-term-interest-rates but as I have done since early October, I see hawkish risks gradually mounting.
That said, current market expectations is fairer as the market appreciates longer pauses between rate cuts and (50/50 on the next cut til March) looks somewhat reasonable but I’m skeptical the Fed can reach the 4.00–4.25% band by the end of 2025. I expect to see odds for a pause continue to increase — highlighted is how I’m seeing the cutting path for now.
CURRENCIES
Notable changes from last week shows GBP and EUR with the most notable fall in their respective economic surprises, CAD adding to the slowly improving trend, others holding relatively steady.
FX options sentiment towards USD strength has eased off with some decent price action signals for a further unwind and based on that, I think some USD weakness coming from the unwind of US expectionalisms and Trumpisms will be the main tactical theme for trading fx in the coming weeks.
- still retain a strong selling bias on the low-yielders CHF and JPY, particularly via USD while also warming up to CAD
- long EUR/high-beta crosses on the radar also if market appears concerned of Trump’s foreign policies.
- while I have a long-only preference for USD, USDCAD short, EURUSD or GBPUSD long I think are good tactical choices
That’s all for now, good luck trading!
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