2023.06.19 Weekly Notes

Shits getting ‘real’

Summary review for the week

• Newsflow for UK has been dire and similarly for Sweden as well. Softening of inflation is welcomed, but core is sticky and Economic growth data has been very weak; Market is calling the Fed’s bluff on raising another 50bps by year-end while BOJ is taking it’s sweet time to make ‘absolutely’ sure that they need to tweak YCC, RBA has turned hawkish after the BOC surprised the week before; China relations looks to be thawing slightly.
• Equity markets showing hints of buyer exhaustion, Agricultural Commodities soar, European Gas futures rebound ahead of Winter season; higher-for-longer Rates but recession coming as a result, meanwhile 2yr real yields are pushing to new all-time(?) highs; and Currencies in and around significant pivot levels.

Buy the last hike?

It’s a popular narrative but while the yield curve inversion continues to go deeper, the above shows stocks do not perform well when terminal rates has been reached while we have an inverted yield curve.

AI bubble done?

During the dot-com bubble the Nasdaq Composite rose 400% reaching a P/E ratio of 200. NVDA now trades at 222 on trailing twelve month basis — some food for thought.

2nd wave of inflation?

Inflation is rolling over, but is it good? Markets are attempting to get ahead of the data and the Fed and risk assets are performing well as a result of those expectations, but Commodity prices are rebounding and that could be a big headache for central bankers into year-end as well as the adverse weather patterns on our grocery bill. Sure it’s the core that matters, but if inflation of volatile but important goods items comes back, we could see inflation expectations ramp again. As I’ve long theorized, its the second wave that kills off risk assets and that scenario might just play out!

NEWSFLOW

MARKETS

• Fear of missing out on stocks’ rally drives bullish options trading (RTS). US stocks notch best week since March despite global central bank moves — S&P 500 and Nasdaq retreat in Friday trading after recent winning streaks (FT). US equity funds register biggest weekly inflow in 28 months — most substantial weekly net purchases since early 2021 during the seven days leading up to June 14 (RTS). Investors brace for higher rates after hawkish signals from central banks — warn battle against inflation is not yet won (FT). ETF investors snap up tech, gold and Japan (FT). AI Rally Knocks Down Asia Stocks’ Correlation to Bond Yields (BBG). US corporate profits look a bit shaky — Does this mean AI isn’t going to save us after all? (FT). The Case for Selling Tech Stocks Like Nvidia, Microsoft — Strategists at Citi argue that the shares look more like sells (Barrons). Nvidia Buyback Freeze Follows Perfectly Timed Binge — Nvidia repurchased $10 billion in stock ahead of record surge, Recent halt in spending spree viewed by some as a warning sign (BBG). Rate rises erode investors’ incentive to hold US companies’ shares — 3month Treasuries to yield as much as bonds and equities over the next year, analysts predict (FT). US small-cap stock rally outpaces larger peers — Analysts warn Russell2000 may not sustain its momentum as effects of interest rate rises start to be felt (FT).
• Federal Reserve skips rate rise but signals two more increases on the way — Powell defends move to pause tightening campaign in face of persistently high inflation (FT). The market isn’t buying the Fed’s tough talk on interest rates — As investors had time to digest the Federal Open Market Committee’s post-meeting message , they appeared to come to two conclusions: There is at most only one increase on the horizon, and the state of monetary policy going forward should be good for the market (CNBC). The Fed Doesn’t Like Dissent. That Could Be a Problem (Barrons). The IPO market may be heating up, and that will put pressure on the Fed, Cramer says (CNBC). Bond Traders Step Up Bets the Fed Will Steer US Economy Into Recession — Yield curve approaching recent inversion peak reached in March, Bloomberg survey shows 61% see Fed hikes leading to recession (BBG).
• European gas prices double in 10 days as traders remain on the edge — TTF futures climb as high as €49 on renewed supply concerns (FT). China Natural Gas Traders Pause Spot Purchases as Prices Surge (BBG). Oil Posts Weekly Gain as China, Fed Pause Lift Demand Outlook (BBG). China stored massive volume of crude oil in May, giving it options (RTS).China stored massive volume of crude oil in May, giving it options (RTS). El Niño’s arrival spells out the stark choices on climate — Governments’ plans to tackle the escalating cost of living will need to factor in crop failures and spiralling commodity prices (FT).

US

• US consumers’ near-term inflation expectations hit two-year low; sentiment rises (RTS). Inflation rose at a 4% annual rate in May, the lowest in 2 years — CPI increased just 0.1% for the month and 4% from a year ago, the latter being the lowest level in about two years. Core CPI rose 0.4% and 5.3%, respectively. All numbers were in line with consensus estimates. Following the release, markets priced in a nearly 100% chance that the Federal Reserve will not raise interest rates this week (CNBC). Goldman Says Markets Too Optimistic on Pace of US Inflation Drop — “Although we expect further declines in inflation going forward, markets appear considerably more optimistic than we are about the pace of cooling” (BBG).
• Why Americans Are Still Splurging Even as Inflation Bites — “Travel is one of those luxuries that I’m not really willing to pull back on”, majority of Americans are cutting back on everyday purchases to afford the occasional splurge; higher spending on luxury goods and experiences is welcome news for many industries hurt by pandemic-related closures, including travel, events, and hospitality. But it also makes the Federal Reserve’s job of bringing inflation down to its 2% target more challenging (Barrons). Wall St bank job cuts set to surpass 11,000 as CEOs unwind hiring binge — Executives try to reverse pandemic recruitment spree that propelled headcounts to record highs (FT).

EUROPE

• Britain Faces Recession and Flood of Job Losses If Rates Hit 6% — Investors are betting on rates peaking near a two-decade high, Borrowing costs now a bigger drain for households than energy (BBG). Britain’s economic malaise — UK economy is suffering a nasty bout of stagflation and the prospects appear poor; no growth in output since last July and inflationary pressures intensifying as wage growth increases; Bailey launched a review into its own performance after accepting inflation was “taking a lot longer than we expected” to fall away (FT). Bank of England set to raise rates to 4.75% as inflation slow to fall (RTS). Public confidence in Bank of England’s efforts to curb inflation hits record low (FT). UK short-term borrowing costs shoot past ‘mini-budget’ crisis levels on strong labor data — wage growth excluding bonuses accelerated from 6.7% to 7.2% (vs 6.9% expected) in Feb-Apr quarter, the fastest rate on record. Real pay showed pay growth was down by 2% including bonuses and by 1.3% excluding them (CNBC). UK households remortgaging in 2024 face £2,900 rise in annual payments (FT). Surging mortgage rates bring early summer slowdown for UK housing market: Rightmove (RTS). Direct support for UK households ruled out as mortgage rates soar — Chancellor will instead work with banks to help under-pressure borrowers, say his allies (FT). England and Wales report 40% rise in company insolvencies — highest level since monthly records began in January 2019 and after insolvencies remained near 13-year high in Q1; 2552 companies declared insolvent in May overwhelmingly through creditors’ voluntary liquidations while compulsory liquidations increased by 34% (BBG). Manufacturing faces decline unless UK adopts ‘defensive strategy’ — UK’s advanced manufacturing sectors, starting with cars and chemicals, are facing structural decline because of their reliance on highly integrated EU supply chains from which they are being squeezed out over time. This matters because while UK is a services-oriented economy, nearly half UK exports are from manufacturing and nearly half of those to the EU (FT). UK manufacturing trade body lifts 2023 outlook, boosted by aircraft and electronics — still expects production to fall over the year as a whole (RTS).
• ECB increases interest rates to highest level since 2001 — Central bank warns inflation will be ‘too high for too long’ and signals similar move in July. Lagarde: “still have ground to cover” and “very likely” to tighten again at the next meeting on July 27 unless there was a “material change” to economic data. Dirk Schumacher, a former ECB economist now at French lender Natixis, said the central bank’s higher inflation forecasts raised the possibility of it continuing to raise rates in September. “We’ll need to see core inflation coming down in June and July to avoid this now” (FT). ECB policymakers line up behind rate hike plans — Nagel: “We still have more ground to cover, We may need to keep raising rates after the summer break.” Wunsch: need to see a “substantial” drop in underlying inflation, which filters out volatile energy and food prices, not to raise rates in September. need to see a “substantial” drop in underlying inflation, which filters out volatile energy and food prices, not to raise rates in September. Holzmann: too soon to say whether further hikes beyond July are needed. Simkus: pushed back on market expectations for early 2024 rate cuts saying that such a rapid reversal would be puzzling. Muller: “Euro zone interest rates have not yet peaked” (RTS). Euro zone needs still higher ECB rates, tighter fiscal policy, IMF says (RTS).
• Sweden’s Property Crunch Worsens as Another Firm Cut to Junk — FastPartner down to Ba1, ratings may be cut further at Moody’s, Follows similiar moves for SBB, Balder and Finland’s Citycon (BBG). Sweden braces for fallout from property slump — SBB, landlord with public property, at centre of fallout, Minister says ready to act if more ‘accidents’, Swedish house prices drop by a fifth (RTS). Norway’s GDP Misses Estimates With Biggest Drop in 15 Months — Nordic economy shrank 0.4% on month in April, led by spending, Data may reduce bets of a half-point key rate hike next week (BBG). Norway gas output lower than planned due to Shell outage (RTS). More than 900 Norway oil drilling workers may strike from June 29 (RTS).

ASIA

• BOJ Governor Ueda’s comments — Inflation: “We expect trend inflation to heighten as economic activity heightens and the labour market tightens. But there’s very high uncertainty on next year’s wage negotiations and the sustainability of wage growth. We expect Japan’s consumer inflation to slow as cost-push factors dissipate. But we also see notable changes in corporate price-setting behaviour. I would add that there’s very high uncertainty on the economic and price outlook. We expect inflation to moderate, but it’s true the pace of decline is somewhat slow. But we’re still in the early stages of the moderation. There’s uncertainty on whether the future slowdown will be a gradual one, or a quite sharp one.” YCC tweak in July: “We decide policy by carefully weighing the benefits of costs of each measure. We will communicate our view on the economy and prices, as well as side-effects such as our policy’s impact on market functions. As for what we will do will depend on how we see the balance between the merits of maintaining YCC, and the demerits. At present, inflation has exceeded 2% for 13 straight months but could fall below that level ahead. That’s why we are not normalising monetary policy. But if that view changes sharply, we will have to change policy” (RTS).
• China cuts a key policy rate for first time in 10 months as economic rebound cools — PBOC lowered the rate on 237 billion Chinese yuan ($33 billion) of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points. Hong Kong’s Hang Seng index rose 1.3% and the Hang Seng Tech index jumped by more than 2% (CNBC). China seen cutting key lending benchmarks as economy slows — Citi: “We are expecting an asymmetric cut with five basis points in one-year LPR and 15 bps in five-year LPR, as the property sector is clearly warranting more policy support; “We continue to see the July Politburo meeting as a window to watch if more significant moves are following” (RTS). China opens a new era of ‘proactive easing’ as the economic recovery turns sour — Citi: latest moves by China’s central bank “confirms further that policymakers have switched to proactive easing from wait-and-see”, Barclays predict China will deliver a rate cut for every quarter until early 2024, “entering a rate cut cycle” (CNBC). China Needs Consumers to Spend More. They Probably Won’t — The problem for China is that older consumers aren’t spending because they lack confidence in the economic rebound, and the younger generation is facing joblessness (Barrons).
• Blinken Has ‘Candid’ Talks With China’s Qin on Trip to Mend Ties (BBG). Hong Kong-headquartered Protium Capital Ltd, a long-short equity fund, will begin trading in July. Its relatively robust start comes at a time when many funds have been slashing their exposure to the world’s second-largest economy — Hong Kong-headquartered Protium Capital Ltd, a long-short equity fund, will begin trading in July. Its relatively robust start comes at a time when many funds have been slashing their exposure to the world’s second-largest economy (RTS). Micron to invest $600mn in Chinese factory despite Beijing chip ban — Memory-chip maker cites ‘unwavering commitment’ to China with new production line (FT). Siemens unveils big investments in China and Singapore factories — German conglomerate says it needs to diversify to serve more markets in Asia and tackle supply chain issues (FT). AstraZeneca drafts plan to spin off China business amid tensions (FT). Taiwan seeks closer EU ties in return for chip investment (RTS).
• Australian PM pledges $1.4 billion for affordable homes (RTS). Westpac raises Australia cash rate peak forecast to 4.6% — tipping quarter-point hikes in July and August (RTS). New Zealand enters technical recession after economy shrank 0.1% in the first quarter (CNBC). New Zealand PM Hipkins to visit China, meet President Xi Jinping (RTS).
• Blinken supports efforts toward ‘mature’ China-South Korea ties, South Korea’s foreign ministry says (RTS). Bank of Korea flags upward risks to core inflation (RTS).

EQUITIES

Global equities rally stopped short of the 3sd band. Sitting beyond the 61.8 retracement and between the 2nd and 3rd standard deviation band on both the weekly and daily timeframe would warrant some consolidation at the least, and closes below would point to exhaustion for this bull leg.

It’s no secret this has been an AI driven rally with NDX up +18.5% off the April low. The index is very overbought with a DeMark sequential 13 sell count printed on Friday as it reversed from the YTD fib 1.618 extension ahead of the 78.6 retracement.

SPX is the most overbought we’ve seen this year coming within 1% reach of the Weekly 3rd sd band.

The simple average of the Top-7 stocks (70% of SPX market cap) rallied back to the support range that last marked the top in late-2022 and Jan-2023 and has never been this overbought on this volatility based MACD-V indicator.

We also see BOTZ AI and Robotics ETF in extreme overbought territory.

XLK % of stocks above 20 and 50 dma tends to rollover sharply from local tops, and being as stretched as tech stocks are on this parabolic rally, I expect to see the same develop going forward…

and for earlier signs, we tend to see sharp drop offs against the 5dma from significant market tops which gets my close attention for execution purposes.

Seasonally, NDX is flattish for June going back the last 24 years (the jagged White top line represents the highs, smoother White line is the seasonal average, Purple is current year).

A colleague pointed out that June tends to be weak when you don’t get the ‘Sell in May’ — notice when May has decent returns, June tends to be much weaker? Interesting…

Under the hood, GEX took a nose dive into OPEX last week while DIX had already moved lower in the previous week. If both of these stay on trend lower, we can usually expect some broader weakness in SPX.

Skew and Taildex (put option premiums) also took a nose dive, which may be an indication of puts rolling off or extreme complacency; most likely the former but perhaps more important is to see how this develops in the coming weeks — a strong rebound as the market rollsover would raise strong probabilities of a bear leg developing rather than just a consolidation phase, for instance.

Looking at EAFE developed markets index and DAX, we are seeing further compression and divergent highs in the MACD-V, pointing to broader distribution. Despite the recent bounce to news all-time-highs in DAX, I’m becoming increasingly bearish on Europe due to the war against persistent inflation pressures taking a toll on the Eurozone with signs of household strains continuing to build.

COMMODITIES

Bloomberg commodities index rallied driven by the sharp rebound in Agricultural commodity futures, a real cause for concern for overall headline inflation globally especially as we are starting to experience some adverse weather patterns.

Further, if we are to expect the usual winter demand pick up ahead of Q4 in Energy, this may lead to a rebound in 2nd round effects to inflation — the stuff that keeps central bankers up at night.

RATES

Yields were higher between the 2 to 10yr tenors for the week and still up a fair ways from the beginning of the month (Green), while the wings were lower — which seems to reflect that high rates for longer will induce a recession. TIP yields were higher across the front half of the curve — the reason I continue to be bearish on Precious metals and bullish USD against typical funders.

US yield curve has sunk further into inversion territory which looks very much like the Feb-Mar period earlier in the year where Equities got spooked by recession fears and saw a near -10% correction in SPX.

US 1 and 2yr inflation swaps finished the week slightly lower after last week’s CPI data confirmed expectations of deceleration and softening of inflation expectations. Goldman Sachs did flag that the market is too optimistic about inflation falling so quickly however…

2year real yields continue to new all-time-highs, as far back as my chart goes anyways… As inflation continues to soften as the Fed endeavours to keep policy rates high, short-real rates are unlikely to drop off anytime soon.

BNP Paribas BERT framework (which is on Monthly basis to which I’ve replotted into Weekly view) shows the move in 10yr rates are pricing increasing recession concerns.

CURRENCIES

We’ve seen some fairly large moves last week and a lot of the G8 equal weighted index charts show we are back to key technical levels which could offer a point of inflection depend on how risk sentiment unfolds this week, and should it start to listen to the rates market signalling recession concerns are back, we could soon see some trend reversals.

• most notable is the Yen index approaching pivot levels last seen at the 2007 lows
• GBP back to post-Brexit era highs where it marked the tops in Apr’2018, Dec’2019, Jul’2021 and Jan/Feb’2022.
• Antipodes are around fib retracement levels, the 61.8 in AUD and 38.2 in NZD.
• EUR rallied and stalled at the YTD pivot level, CHF held recent support, and USD look to retest the lows — will it hold?

On Daily view, we finish last week with some decent momentum behind the moves. Being around important technical levels however, I look closely for reversal action at these areas since for price action traders, location location location (levels levels levels) at where these patterns occur is what gives the signals strength.

• I’m particularly interested in Cable (GBPUSD) and Dragon (GBPJPY) for the reversal looking for a false break in GBP structure.
• I have been skiddish about long JPY ideas due to higher for longer, but as the focus is shifting towards recession induced by high rates being sustained, that timing appears much closer hence looking at GBPJPY, EURJPY and possibly NZDJPY ideas.
• Interested in long USD plays against EURUSD USDCHF, as well as USDNOK AND USDSEK to reflect my bearish Europe view.

Finally, USD DXY seasonality chart from BofA suggests dip buying in June.

That’s it for this week. Skipped last week’s note as I was off the beginning of the week and didn’t feel there was much new on the market ahead of CPI and central bank meetings. Have a good week trading!