Weekly Note 2022.09.19

Re-initiating launch sequence…

A very interesting week, particularly for me where I did surprisingly ‘okay’ given how wrong I thought the week would play out this time last week, captioning last week’s note with “to the moon”. My initial view was centered on seeing numerous observations of retail BTD sentiment, and later, fading the -4% SPX move and 100bps hike the market was beginning to price ahead of the FOMC meeting this week. Market continued to reprice terminal rate expectations higher sending yields higher souring any prospect of a relief rally in risk assets.

I was long Equities from the previous week and luckily I had flipped short ahead of the CPI as I felt the higher core expectation could rock the rally and produce a pullback. Core inflation surpassed expectations and my decision to flip short turned out to be the right one. I did not think that we would have such an extended run lower however and gave back some of the early Sep gains trying to reestablish longs.

Returning to the point about sentiment [in Shitcos] I noted last week, GS confirms Retail sentiment has continued to remain strong even after the CPI print rocked markets and have been buying into that dip:

Institutional buying flows were also strong in previous weeks but saw a ‘dramatic’ reversal after the CPI print:

US equity floor had one of the more dramatic sell tilts we’ve seen: Total sell skew -20.93% vs 30d avg of -151bps (97th percentile vs last 52 weeks). Asset Manager Sell Skew -18.28% is 90th percentile. HF sell skew -6.82% is 76th percentile. Info tech -28% is 96th percentile. HC -13.45% is 91st percentile –ty Flood. Reminder our Asset Manager skews were significantly tilted to buy heading into this week’s CPI print.

which makes it look we are around flat on month-to-date flows/positioning.

Overall, I continue to like playing for a short-term tactical bounce into FOMC this week.

LAST WEEK’S ACTION

Bearish engulfing action in US equity futures extending the lows of prior weeks while DAX and UK FTSE held respective lows and UST futures continued to trade lower; Commodities was mixed with big reversals seen in Energy futures and Silver continued extended the bounce off the 18 handle while Gold extended lows towards mid 1600’s; FX funders higher, high-betas mostly lower.

NEWS HEADLINES

US

• U.S. Inflation Remained High in August — Consumer prices excluding food, energy rose sharply, showing broad price pressures strengthened (WSJ). Inflation for U.S. Suppliers Remained Elevated in August — Producer-price index fell, but stayed much higher than a year earlier (WSJ). Mortgage Rates Top 6% for the First Time Since the 2008 Financial Crisis — Already, higher rates are forcing some would-be buyers to continue renting or to skimp elsewhere (WSJ),
• U.S. Retail Sales Rose 0.3% in August, Showing Resilience in Face of Inflation — Shoppers spent more on vehicles, groceries and clothing as gasoline prices eased (WSJ). Consumers Show Signs of Uncertainty Amid High Inflation — consumer sentiment ticked up in early September from historically low levels as Americans felt slightly better about the economy while expressing uncertainty about the future (WSJ).
• U.S. Jobless Claims Fell Last Week — Applications for unemployment benefits have declined since August as the labor market remains strong (WSJ). U.S. Railroad Strike Averted as Tentative Deal Is Reached, Biden Says — Unions, companies reach deal to avoid first nationwide rail strike in 20 years (WSJ). Strikes Becoming More Common Amid Inflation, Tight Labor Market — There were 180 strikes in the first six months of 2022, according to Cornell University researchers (WSJ).
• Spike in Treasury yields pauses as investors look ahead to Fed meeting — U.S. Treasury yields were mostly lower on Friday after a wild week that saw a dramatic spike across different time maturities (CNBC). Fed meeting ahead will decide whether stocks can stabilize or fall back to bear market lows (CNBC). Fedspeak Cheat Sheet: What Fed Officials Said Before Their September Meeting — Powell: “we need to keep at it until the job is done”. Brainard: “we are in this as long as it takes to get inflation down”. Barr: “could bring some pain in the economy but it’s far worse to let inflation continue to be too high”. Bowman: “similarly sized increases should be on the table until we see inflation declining in a consistent, meaningful, and lasting way”. Waller: “I support another significant increase”; Collins: restoring price stability is job one”. Williams: “we’re going to have restrictive policy for some time; not something we’re going to do for a short period of time and then change course”. Harker: “I think we get up to a restrictive stance, sit for a little while, let things play out”. Mester: “I don’t see us cutting rates next year; going a little bit above 4% by early next year and then holding it there”. Barkin: “we’re committed to returning inflation to our 2% target and we’ll do what it takes to get there; I don’t expect inflation to come down immediately or suddenly or even predictably”.
• The Midterms Are Now Even Harder to Predict — Subpar GOP candidates, abundant campaign financing and the mobilization of voters over abortion complicate the outlook (Bloomberg). ‘The threat is real’: Dems press big donors to target state races — Increasingly worried that big donors are failing to recognize the scale of the threat to democratic norms, Democratic strategists and party officials are rallying behind an effort to persuade them to redirect their cash to key state and local elections (Poltico). Ron DeSantis breaks fundraising record for US governor’s campaign — Florida Republican has raised $175.8mn as he eyes possible 2024 White House run (FT). Republicans try to regain midterm momentum with immigration stunts — Focus on issues such as abortion rather than the economy risks backfiring, according to strategists (FT).

EUROPE

• Bank of England delays interest rate decision after Queen’s death (BBC). Pound hits new 37-year low as retail sales slide (BBC). Detail on promised energy help for firms delayed — Last week Prime Minister Liz Truss said firms would get “equivalent support” to the help that was announced for households. “We will confirm further details of the business support scheme next week. The scheme will support businesses with their October energy bills, including through backdating if necessary” (BBC).
• Germany Tightens Control Over Industry With Russian Oil Grab — Takeover of Rosneft’s German unit, including stakes in three oil refineries. The move also affects holdings in France, Italy and Austria, highlighting how interconnected Europe’s energy system is (Bloomberg). Germany in Talks for Historic Rescue of Gas Firms — working on a historic takeover of Uniper SE and two other large gas importers as it seeks to prevent a collapse of its energy (Bloomberg). EU Seeks to Raise $140 Billion Clawing Back Energy Profits — Bloc’s executive arm publishes proposals, but blueprint still needs approval from member countries (WSJ). Hungary to submit new laws to unlock EU funds next week — EU lawmakers voted to condemn damage to democracy in Hungary under Orban, in power since 2010, stepping up pressure to cut funding for the ex-communist country. Budapest announced it would create an anti-corruption authority and a working group with non-government groups to oversee the spending of EU funds (Reuters).
• Putin tells Europe: if you want gas then open Nord Stream 2 — “The bottom line is, if you have an urge, if it’s so hard for you, just lift the sanctions on Nord Stream 2, which is 55 billion cubic metres of gas per year, just push the button and everything will get going,” (Reuters). With a grin, Putin warns Ukraine: the war can get more serious — “The Kiev authorities announced that they have launched and are conducting an active counter-offensive operation. Well, let’s see how it develops, how it ends up,” Putin said with a grin (Reuters). Vladimir Putin acknowledges Chinese ‘concerns’ over Ukraine — Russian president’s comments are first public admission of differences between Beijing and Moscow (FT). A stunning counter-offensive by Ukraine’s armed forces — Russian troops flee in disarray (Economist). Ukraine counter-offensive won’t change Russia’s plans — Putin (BBC). Ukraine’s Gains Expose Splits in the West on Supplying Longer-Range Weapons — U.S. and some European allies are divided over whether they would deter Russia or lead to a wider conflict (WSJ).

ASIA

• China’s Economy Shows Signs of Recovery as Stimulus Ramps Up — Industrial output, retail sales expand faster than expected, Property slump, Covid continue to weigh on growth outlook (Bloomberg). China’s state banks cut deposit rates for first time since 2015 — Move comes after the world’s second-largest economy slashed benchmark lending rates in August (FT). JPMorgan reduces credit to China’s Tsingshan and metal clients globally — JPMorgan is one of the biggest banks in metals and its paring back of finance is sending a chill throughout the sector; JPMorgan has curtailed credit to several customers in Asia and Europe or given them notice that it will do so by the end of the year (Reuters). Top Banks Pull Back From China Metal Financing After Crises — Key lenders to China’s commodities sector JPMorgan, ICBC Standard Bank cut credit lines to traders (Bloomberg).
• Australia economy buoyed by consumer spending, exports in Q2 (Reuters). Australia Seen Dodging Recession Even as China Economy Slows — Rare duo of high export prices, weaker currency aiding economy, Property market downturn and high household debt remain risks (Bloomberg).
• Japan’s Kishida Orders Fresh Stimulus Package in October — Government to consider extra budget after compiling stimulus, Kishida announces separate spending steps to manage inflation (Bloomberg). Japan’s Record Trade Deficit Shows Growing Pain of Feeble Yen — Crude oil, coal, and LNG inflate imports as yen weakens 23%, Soaring import costs put pressure on Japan’s recovery (Bloomberg).
• U.S., Asia-Pacific Partners Take Early Step on Trade — Officials kicked off meetings under the Indo-Pacific Economic Framework, a platform advanced by the Biden administration to counter China’s influence (WSJ). South Korea complains of growing friction with US over high-tech trade — Biden administration’s abrupt withdrawal of subsidies for South Korean electric vehicles is threatening to undermine trust in the US, Seoul’s trade minister has warned, as trade tensions grow between the allies. (FT).

EQUITIES

MSCI World maintaining the downtrend with a weekly bearish engulfing print and eyeing a retest of the 50 fib about -4% lower, while the ex-US index eyes the 61.8 about -1% lower. Broadly, this in my view puts us in tactical BTD territory with a lot of the bad China Europe news in the price (for now) and US hard-landing not being so clear (yet).

China noticeably the main drag on the overall Emerging markets index but ex-China holding up reasonably well (all things considered) and this 50% line should be a decent indicator of how risk appetite fears over the next and coming weeks.

Both SPX and NDX is back to an area that has been a critical pivot point for most of the action since May and this week is likely to offer a good signal on how the market could trade til the end-of-month.

Despite getting crushed on the hot core CPI print last Tuesday, GEX and DIX is still above levels seen earlier this month (arrows) and the June lows (middle of chart) which mildly supports the higher lows from June in SPX — another chart to keep an eye on this week.

COMMODITIES

Bloomberg Commodities Index finished -1.5% lower last week and flat since the FOMC July meeting. Energy led the broad index lower along with Precious and Industrial metals, while Agricultural stayed elevated and will probably stay that way with Triple-dip El Nina causing severe weather and drought globally.

RATES

Yields were higher across the board with deeper inversions between front and long-end rates.

Higher long-end yields is also being driven by the move in real yields

as inflation expectations continues to moderate lower.

Eurodollar sold off with a big move down on the core CPI upside surprise data as markets repriced the terminal rate higher driving the sell off in rates.

I suspect beyond FOMC we could see volatility begin to ease up, which would ease the volatility in other asset classes. QT ramping up is the wild card, and I will continue to keep a close eye on Credit.

CURRENCIES

• USD gained against nearly all other currencies and likely to stay supported ahead of FOMC. Beyond that however, I think USD could soften up assuming a 75bps hike and FOMC outcomes is in-line with expectations.

• JPY got a boost from some BOJ jawboning but it is unlikely to be anything other than an unwind of extreme short positioning. As colleagues around me have heard me talk about for a while, JPY will continue to stay out of favour well into next year as BOJ stays hellbent on easy policy (they ramped up their schedule YCC purchase amount) and FED continues to keep rates higher for longer. I’m quite sure the BOJ knows any actual invention in FX markets is still much too soon to be impactful.
• CHF starting to looking particularly strong. Should risk appetite in Europe improve, of which we are seeing hints of, I think EURCHF and GBPCHF longs could be attractive ideas especially with weekly SNB sight deposits showing some slight increases — i.e. buying USD and EUR. Also if rate volatility starts to ease up again, I think CHFJPY short could be an interesting alternative to USDJPY or EURJPY.
• EUR and GBP, the cross is starting to look a little overbought though I struggle to take weigh up the RV of both sides. I continue to favour EUR shorts via the crosses such as EURAUD EURCAD and EURMXN.
• Higher-beta FX: I like MXN is looking resilient (to contrast with ZAR which is looking particularly weak), AUD which have seen resilient economic data and could benefit from the small but incremental improvements in Chinese data, and CAD the reason of which is essentially fading the long run of negative data surprises and slump in Oil. For the risk-off side, though short ZAR and NZD would be my preference, it is not a theme I’m interested in for FX given how stretched the moves already already.

Have a good week trading.

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