2024.02.26 Weekly

Turning tactically bearish

After easing my bullish view last week in the note I captioned as “fomo momo (uh oh?)”, I am beginning to lean towards a tactically bearish view as I see risk/reward to the downside being much clearer now that earnings season is ending, and during which equity markets have completely ignored macro risks emerging — including the substantial repricing in policy rate expectations, the big rebound in bond yields, and potential stagflation from the pullback in consumer spending as suggested by the last Retail sales report.

I took profit on my long NDX positions and have begin to nibble on the shortside as well on Gold shorts. I’m keen on Crude on dips and NatGas at current price levels with seasonality for Energy improving into March and April months. In FX, flipped long on EURNZD last week and continuing to hold USDJPY long runners intended to hold into March. For new trades this week, I have long USD EUR and short NZD CAD CHF ideas on mind.

EARNINGS REVIEW

I think it will be difficult for markets to ignore the risks highlighted above as it can no longer hide behind the facade of what has been a very positive earnings season with 77.5% of earnings results beating expectations.

Pre-season downgrade is normal but as noted a couple weeks ago, the negative revisions was much larger relative to history (~2% greater than pre-pandemic average over the 3 months leading into Qend).

INFLATION REACCELERATION

We’ve seen big beats across the board in prices data and even consumer expectations on inflation have ticked higher.

We’ve also seen big beats in ISM prices paid components — Services 64.0 (57.4 previous and 56.5 expected) and Manufacturing 52.9 (45.2 previous and 46.9 expected).

ISM Prices paid in White (weighted 80% services, 20% Manufacturing) tends to lead MoM gyrations in PCE prints.

Aside inflation, we’ve had some strong economic data so far this year, ISM’s beat expectations, NFP was a blowout almost doubling the amount of job gains expected (353k vs 180k expected), Unemployment claims continued to ease every week so far this month. STIR and bond markets repriced significantly as result, but equities have not taken note whatsoever.

Waller’s pivot was a big boost for markets late last year, but FFM24 is now ~7bps higher since then at 5.18%, and he’s been hawking up his tone last week in response to recent data:

DATA RECEIVED SINCE LAST SPEECH ON JAN 16 HAS REINFORCED MY VIEW WE NEED TO VERIFY INFLATION PROGRESS FROM LAST HALF OF 2023 WILL CONTINUE. THIS MEANS THERE IS NO RUSH TO BEGIN CUTTING INTEREST RATES. CPI REPORT LAST WEEK IS A REMINDER THAT ONGOING PROGRESS ON INFLATION IS NOT ASSURED. STRENGTH OF OUTPUT, EMPLOYMENT GROWTH MEANS THERE ‘IS NO GREAT URGENCY’ TO EASE POLICY. RECENT HOTTER-THAN-EXPECTED DATA VALIDATES CHAIR POWELL’S ‘CAREFUL RISK MANAGEMENT APPROACH’. RISK OF WAITING A LITTLE LONGER TO EASE IS LOWER THAN RISK OF ACTING TOO SOON.

LATEST DATA ON JOB OPENINGS AND QUITS MAY INDICATE LABOR MARKET MODERATION MAY HAVE STALLED. STILL SEE WAGE GROWTH ‘SOMEWHAT ELEVATED’ TO ACHIEVE 2% INFLATION GOAL. WATCHING TO SEE IF HOUSING COSTS CONTINUE TO RUN HIGHER THAN EXPECTED. CONSIDERING ALL INFLATION ASPECTS, ‘I SEE PREDOMINANTLY UPSIDE RISKS’ TO EXPECTATION INFLATION WILL KEEP MOVING TO 2% GOAL.

However, the fact that market pricing for fed rate expectations is looking much fairer at exactly 75bps by year-end (December contract rate at 4.58% and effective fed funds rate at 5.33%), does present a risk to my tactically bearish risk view, as the trigger for a further sell off in rates and equities could be lacking from this point onwards…

and leaves me to wonder whether or not Equities will catch up to reality.

Overall data surprises could be leveling off here as inflation surprises ticks higher. As I wrote last week:

… I do have some concerns brewing about the trend in macro data emerging — that is, some softening in activity while inflation is picking up). Potentially a reversal of the goldilocks narrative (strong growth and disinflation) that the risk rally was built on. Still too early to be concerned about it, but something that’s on the back of my mind as we continue to assess the incoming data.

That continues to be on the back of my mind and will be looking closely to see if stagflationary concerns could gain some traction for risk assets.

We have PCE this week with expectations moving higher after the last CPI report. While this may imply a higher bar for a beat, an in-line print might not be so welcomed by equities as it could cement concerns about reaccelerating inflation, …

of which the market considers to be the biggest tail risk.

US EQUITIES

I’ve mentioned the 5100 handle (specifically 5110.36) as the upper breakout target for SPX at the beginning of the month on twitter and among peers. We took out 5100 on Friday with ATH printing at 5111.06 and closed the week at 5088.79. There is one more technical level at 5179.57 being the 127.2 fib extension from the 2022 high-low range.

NDX closed above the 17805.76 breakout target level and coincidentally served as the post-NVDA earnings support on Thursday. If NDX trades below that level this week, I would become more confident of a down leg in US equities.

Given those significant technical levels and ‘ignored risks’ I’ve highlighted, I see further gains as being difficult to come by for the near-term. I therefore see good risk-reward in this 100pt range in SPX (~500pts in NDX) from here upwards to the 127.2 fib extension should the market become genuinely concerned about inflation/stagflation again.

NEWSFLOW

MARKETS

• Nvidia Shares Electrify Markets Around the Globe — The S&P 500, Stoxx Europe 600 and Nikkei all notched new highs (WSJ). Nvidia flirts with $2 trillion valuation, but fails to finish there (MW). Nvidia is now worth more than the GDP of every country except 11 — greater value than the economies of countries including Russia, South Korea and Australia (MW).
• Stock Rally Wanes After S&P 500 Touches 5,100 Mark (BBG). Goldman Lifts S&P 500 Target With Profit Optimism to Drive Rally — raises S&P 500 target to 5,200 by end of year (BBG). UBS Ratchets Up S&P 500 Outlook to Most Bullish on Wall Street — New 5,400 call is same as view from Yardeni Research (BBG). JPMorgan’s Kolanovic Bucks Consensus by Seeing Stagflation Risks — Hotter CPI, PPI cast a shadow over economic optimism (BBG). Nasdaq 100 rose 3% for the first time since the dot-com bubble era. Why it brings up old memories of this ‘scary’ period — History and seasonal weakness may lead to a pullback in U.S. stocks over the next few weeks, say Bespoke analysts (MW).
• Nikkei parties like it’s 1989; hits record high (RTS). As Nikkei eclipses 34-year record, derivatives signal stall ahead (RTS). Market Veteran in Tokyo Greets Nikkei’s Record With Wariness (BBG). Europe’s Stoxx 600 Hits Record High to Join US, Japan Equities (BBG). Europe’s ‘Granolas’ fuel record stock market surge — Group of 11 pharma, tech and luxury shares echoes US dominance of ‘Magnificent Seven’ (FT).
• China Recovery Bets Grow on Beijing’s Moves to Stem Stock Rout (BBG). China’s Stock-Sale Ban Eases Path to Propping Up Reeling Markets (WSJ). China Stocks Cap Best Winning Run Since 2020 as Rally Extends (BBG). China Stock Futures Premium Points to Market Calm Seeping in (BBG). China Stock Traders’ New Mantra Is Enjoy the Rally While It Lasts (BBG). China ‘Quant Quake’ Resembles 2007 US Meltdown: Man Group (BBG). China Yield Curve Nears Inversion in Sign More Stimulus Needed — Curve will flatten further, or even invert: Standard Chartered (BBG).
• Fed cautious on a rate cut case that has yet to be made (RTS). Goldman Pushes Back Bet on First Fed Interest-Rate Cut to June (BBG). Bond Traders Brace for Another US Selloff, Unwind Bullish Bets — Brisk demand for options targeting 10-year yield over 4.5% (BBG). Treasury Yields Retreat From 2024 Highs With Month-End in View — Long-dated tenors outperform, anticipating demand next week (BBG). ‘Bubbly’ Corporate Bond Market Risks Getting Ahead of Itself: BofA — Yield premiums keep tightening despite heavy bond issuance, Strong seasonal supply is expected into March (BBG). Bond Markets Are Flooded With Deals to Fund M&A (BBG). Junk-Bond Market Gets Riskier With Erosion in Credit Quality (BBG).
• Global Growth and Nvidia Spur Dollar’s First Weekly Loss in 2024 — UBS sees dollar upside capped as growth outside US stabilizes (BBG). Bullish Dollar Bets Against EM Currencies Drop to 16-Year Low — Greenback’s risk reversals fall along with implied volatility, Improving emerging-market exports may weigh on dollar: OCBC (BBG). Bearish Yen Positions Increase as Japan Stocks Near Record High (BBG).
• US hopeful of Gaza ceasefire and hostage deal in ‘coming days’ — National security adviser Jake Sullivan says negotiators in Paris reached ‘understanding’ on basics of agreement (FT). US and UK launch fresh air strikes against Houthis in Yemen (FT). UK Petrol Prices Jump Amid Houthi Attacks in Red Sea (BBG). Shortage of Oil Tankers at Hand as Red Sea Attacks Divert Trade (BBG). Oil Dips as Lack of New Catalysts Halts Rally at Technical Level — Timespreads for Brent, WTI remain in backwardated structure, Prices caught between China demand concerns, lower OPEC output (BBG). Russia’s Crude-Export Data Show Compliance with OPEC+ Cuts ledge (BBG). Russia Ships Urals Oil to Venezuela, Expanding Pool of Buyers (BBG). Shipping Giant CMA CGM Posts a Loss as Red Sea Conflict Rages (BBG). European gas price falls to pre-energy crisis level (FT).
• Rio Tinto’s Profit Drops 12% as Weaker Commodity Prices Bite (BBG). Aluminum, Nickel Climb as Biden Plans Fresh Sanctions on Russia (BBG). Aluminum Falls, Nickel Eases After Russian Metals Escape Curbs (BBG). Mining Giant BHP Sees Nickel Pain Lingering as Net Income Slumps (BBG). China’s Tin Supply for Food Cans and Chips Steadily Tightens — Tin is the only main metal on the LME to advance this year, Sectors from food processing to chip-making face higher costs (BBG). The old empires of cocoa, coffee and tea are fragile — Climate change and attacks on ships in the Red Sea are disrupting supplies of drinks from the global south (FT).

AMERICAS

• US Manufacturing Activity Expands at Fastest Pace Since 2022 — S&P Global flash February gauge advanced to 51.5 from 50.7, Factory orders index increased to highest since May 2022 (BBG). US weekly jobless claims fall as labor market remains tight — Weekly jobless claims fall 12,000 to 201,000, Continuing claims decline 27,000 to 1.862 million, Existing home sales increase 3.1% in January, Median house price rises 5.1% to $379,100 from year ago (RTS). Home Buyers Are Back in the Market. They’re Shrugging Off Higher Prices and Mortgage Rates (Barrons). Home foreclosures are rising in these states, but aren’t at a worrying level yet (MW). Walmart says inflation was stickier than expected in latest quarter — Prices of some items did not fall as much as anticipated, claims world’s largest retailer (FT).
• Haley’s 2024 Hopes Fade as Trump Wins Big on Her Home Turf — Most demographic groups in state Haley once led pick Trump, Haley has one week to woo GOP voters before Super Tuesday (BBG). Candidates Turn to Michigan as Haley Vows to Fight On (Barrons).

EUROPE

• UK consumer confidence falls amid concern over persistent inflation — GfK index declines by two points in February after three months of improvements (FT). UK business activity beats expectations in February — Survey fuels hopes that recession could already be over despite renewed price pressures (FT). Car Loan Review Entangles Banks and the Wider UK Economy — Motor finance market could shrink as FCA probes loan deals, Higher rates may also lead to slower lending, fewer car sales (BBG).
• Eurozone downturn eases despite German factory decline — S&P Global’s flash eurozone composite purchasing managers’ index rises to 8-month high (FT). Eurozone collective wage growth slows for first time since 2022 — Decline unlikely to assuage inflation concerns and speed up rate cuts, say economists (FT). Euro zone inflation expectations edge up for the year ahead: ECB (RTS). ECB’s Makhlouf in No Rush to Cut as Vigilance on Wages Needed — Data available by middle of year will offer much more clarity (BBG). Germany’s economic gloom deepens with cut to growth forecast (RTS).

ASIA

• China slashes mortgage reference rates to revive property market (RTS). China’s new home prices extend declines despite policy support (RTS). China Home Prices Fall at Slower Pace as Support Mounts (BBG). China’s Property Foreclosures Surge as Growth Slows (BBG). China expected to take gradual approach to prop up economy further, say analysts (RTS).
• South Korea holds rates steady, talks down early rate cut chance (RTS). Korean Stocks Have a New Driver: The Government — Shares in Hyundai and Kia have accelerated in response to a regulatory clampdown on low valuations (WSJ). Korean Banks Face $749 Million of Losses in Overseas Properties (BBG).
• Australia central bank needed “some time” to be certain on inflation decline (RTS). Australia’s Wage Growth Quickens Past RBA’s Forecast Peak (BBG). Mortgage stress increased in January following RBA’s November rate rise to record high above 1.6 million (RoyMorgan). New Zealand Retail Sales [Volumes] Drop for Eighth Straight Quarter (BBG).

EQUITIES

Global equities put in another strong week but weekly RSI (using Cutlers smoothing) continues to be elevated while flagging overbought and beginning to roll-off.

Nikkei225 has finally made new record high and close last week, reaching the 261.8 fib extension and breakout objective while also printing a weekly 9 countup. Should be interesting to see whether it can hold onto gains this week with the NI225/HSI spread interestingly on course to print a weekly 9 countup this week.

Europes Stoxx50 continues to push ATH’s relentlessly while Stoxx600 has taken out the previous ATH set in Jan-2022 last week. The indexes continues to be overbought on multiple timeframes with negative divergence on the dailies.

NYFANG+ has printed a reversal bar on Friday while the RSI upper trendline continues to serve as a resistance and maintaining a bearishly divergent trend.

PRFZ SMids index has double toppped and not looking as robust it did coming out of the 1st half of February. Last week’s bounce rejected the 50–61.8 retracement region and could be in the process of consolidating lower especially given the big ytd and mtd rebound in bond yields.

US cyclicals-defensive spread has rolled off and below the 2 ytd peaks, and Europe’s spread is getting scrunched up as cyclical momentum slows.

Somewhat at odds with the price action signals observed above, put premiums have got crushed last week post-NVDA earnings. Will keep an eye on these this for the week ahead where I hope to see a bounce in these indicators to compliment price trading below last Thursday’s lows.

COMMODITIES

Commodity indicies isn’t showing show much positivity in cyclical sentiment. Bloomberg index is trading at the lows, while the Thomson Reuters CRB index continues to be in a stall and leaning heavy since the late-Jan rebound.

Looking at the Bloomberg sub-indexes, Agriculturals and Energy continues to be a drag while the rebound in metals are stalling out.

While I’ve squared up on Crude longs a couple weeks ago, a return below 75 would get my interest again. I’ve initiated Gold shorts last week as I think the rally could stall out in this pivot area in the 2030s and as I expect the USD to regain strength from yields probing higher.

Real yields (inverted 5yr TIP in Purple and 10yr in Green) have backed up a bit last week but the divergence remains with Gold (Orange) back to mtd highs and real yields still well off the mtd lows.

Henry Hub seasonal heatmap — further to Crude longs, I’m also interested in NG at these price levels with seasonality improving into the March and April months.

RATES

US yield curve finished flatter last week though still significantly higher since the beginning of the month. I presume there was some profit taking on bond shorts into the weekend.

US 1y1y (R) and 5y5y (L) forward inflation steadily moving higher (top panel) along with 2y (R) and 10y (L) breakevens (bottom). While higher inflation expectations could be a positive for Gold, I think the feds reaction function via a higher r* would keep Gold upside capped while economic data trends remain very strong, i.e. we are yet to have clear stagflationary signs that would likely result in yield curve flattening and a Gold rally.

CURRENCIES

G8FX Index view

• NZD +1.03% the strongest last week but has hit a key resistance and 61.8 fib level and begins the week on the back foot.
• GBP +0.36% continues to be resilient on the combination of sticky inflation and economic data still holding up.
• AUD +0.26% had a positive week but like Kiwi, begins the week on the back foot. Rallies have always seemed short lived and last week’s action being capped by the 50dma and 38.2 fib could mark the turn back lower.
• EUR +0.16% though economic data hasn’t been great, it appears to be holding up from the continual improvement from extreme pessimism. I’m currently long EURNZD though I do think its a sell on rallies at some point down the road.
• USD -0.30% consolidated lower after regaining strength from the rebound in US yields. There’s reasonably strong support underneath around last week’s low and I’m becoming interested in USD longs on dips going into month-end.
• CHF -0.30% is still structurally bearish. It’s rebounding a little bit to start the week and I would be interested in selling rallies, e.g. long USDCHF around the 20/50dma.
• CAD -0.50% printed a strong bearish candle last week and threatens to break structure lower. Don’t know what to fund CAD shorts against, but its certainly on the radar.
• JPY -0.58% continues to be the weakest in G8. I continue to maintain a bearish bias into March via my USDJPY runners from 143s.

Economic surprise index

• USD data surprises remains healthy though there was a slight miss on the flash services PMI. CAD turned negative last week, core retail sales missed as well as misses on CPI and NHPI.
• EUR maintains its ascent with some better than expected data. Flash services PMI regains the 50 mark and Euroarea sentiment continues to pick up gradually. GBP continues to ease off — services PMI held up but manufacturing deteriorated while consumer confidence weakened.
• AUD data surprise index hasn’t shown much improvement despite a pick up in services PMI. NZD saw some better data earlier in the month but could be seeing a turning point after a softer GDT auction and very weak consumer spending reports.

Good luck trading. //