Last week’s action at a glance

Risk-off week — higher beta FX hit hardest, Nasdaq and Crude resilient.

World Equities excluding US (ACWX), World Equities (AWCI)

Global equities looking very vulnerable while US markets notably more resilient. ACWX has the hallmarks of a classic reversal pattern — a rally of weakening momentum that finishes with one final push and false breakout.

Emerging markets (EEM), Developed markets (EFA)

Both EEM and EFA showing similar patterns which look set for another 2% move lower.

Russell1000 Value (IWD) and Growth (IWF)

US equities resilience is down to the Growth-centric Nasdaq which continues to trade like a duration asset and appears to be the only major indices that closed positive for the week.

SPY options suggesting sentiment is edgy.

Curve flattening, Fed’s hawkish shift looks to have nailed in the change from the bear steepening regime coming into the new year. Good summary of the market reaction to last week’s FOMC 👇 in case you haven’t seen it.

10year Real (Blue) and Nominal (Green) yields, Gold and USD

Real yields rising as inflation expectations sink on Fed’s tightening outlook is driving USD strength and Gold weakness.

Whether or not the Fed delivers a taper signal in September, this is the probably the theme to focus on in 2H2021.

CRB commodities index rolled over and the bull run looks like it will take a pause while more hawkish commentary is likely to drive it lower.

Crude, typically has strong correlation to risk but much less anchored to rates and inflation expectations, benefiting from strengthening demand and tighter short-term supply as a result of the huge inventory draws.

Big move in the USD looking to confirm a trend a change this week and so far, early signs are very convincing.

Roughly wk/wk change in IV

Prayers have been answered and volatility is back with USDMX showing the greatest implied/realized vol premium.

I have been looking for entry point to enter long MXN but my timing appears to be early and wrong… The view was on Fed’s hawkish pivot being gradual and well expected by market, equities would boringly grind sideways, strong oil outlook, and the historically positive impact of higher UST rates on EM rates. This carry trade could be a good one to come back to at a later stage but for now, higher real rates and steepening front end is driving the USD higher and I will be focused on trading around this theme.

EMFX and CHF deserve attention as a result of the steepening front-end.

  • USD ~ Fed policy normalization path and rising real rates likely to keep USD supported…
  • EUR ~ as mentioned in previous notes, EUR will be pressured by widening differentials in rates and fiscal stimulus though there are more positive developments in the latter. Little interest in EUR pairs atm but if a rally and good levels presents itself, could be tempted into shorts…
  • JPY ~ could be considered as an Equities proxy, but probably inferior to USD…
  • CHF ~ shorts favoured being overbought, too strong for the SNB while, and sensitive to the rising US short-end rates. For reasons mentioned below, I will be looking at GBPCHF as well as USDCHF longs…
  • GBP ~ still like GBP to get the support of reopening data, some covid concerns coming back but think there is a good chance the market will look past it since vaccines are said to be effective against the Delta variant. Will be interested in long GBP crosses e.g. vs CHF EUR AUD MXN depending on my exposures…
  • CAD ~ would be interested in relative value plays against AUD and NZD — most hawkish CB of the commodity-bloc, tends to outperform during periods of USD strength, resilience in Oil price…
  • AUD ~ China factors and high sensitivity to global risk assets makes this the most bearish of commodity-dollars…
  • NZD ~ little interest being between AUD and CAD, selling rallies in AUDNZD probably the most appealing if anything...
  • EMFX ~ will be looking to sell rallies with the reflation trade under threat.

Have a good week trading!

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