Weekly Notes 2021/07/26

If there was anything I’ve learned from last week — don’t trade like a pig, and don’t be married to your ideas and be prepared for conditions to change quickly…

OVERVIEW

Last week I was developing a strong view of a potential near-term top and stayed long USD and short on reflation from the previous week. This soon changed after the massive Tuesday recovery in US equities, to which I held on to my view much too long and left a tonne of profits on the table. Nonetheless I hit the reset, banked off what remained, and initiated short $EURNOK $USDMXN on Wednesday and long Russell AUDUSD AUDJPY upon seeing 5y breakeven inflation continuing to move back up on Friday.

Big reversals across the board from the risk-off start. Price action is indicative of more continuation of which I expect for the early part of the week but I’m cautious for the latter half with event and month-end risks where I plan look short tactically.

EQUITIES

US equities led the recovery along with a strong bounce in Sweden’s OMX to new ATH’s.

Global equities signaling resilience and more neutral sentiment — ACWX (Global ex-US) backing up to the 20wma and Developed markets (EFA, which excludes US and Canada) back to levels it has broken down from. Emerging markets (EEM) being left behind as reflation trades pull back and slower vaccination progress factoring in.

Quite the recovery in US large-caps to new ATH’s in SPX NDX and only just in DJI. Looking tactically short on the next blow-off top looks an irresistibly attractive idea… Small caps at an interesting juncture, and I think more positive fiscal news could help it higher as well as a patient Fed.

Big name techs driving the rally since breaking the pattern of lower highs and lows in June. Some slowing in relative outperformance in recent weeks however…

Think there may have been some front running ahead of the mega-tech earnings this week while inflation assets have been selling off. I’m interested in seeing how Energy reacts to the strong reversal in Oil last week.

Putting the above together with the view that there has been an overreaction to policy tightening and peak growth concerns, I see the Value/Growth ratio making a pivot soon with Biden’s fiscal package for next year to give Value a boost. Bear in mind the pivot could also come in the form of a correctiton in Tech’s as well as Value playing catchup…

US volatility premiums is still on a rising trend and heading to a point where volatility could get too expensive to protect against downside. This could therefore be reason to see some profit-taking in the primary market...

COMMODITIES

Momentum is strong after the bounce — CRB index reversed all of the last two week’s move and the ex-Energy index (bottom) has broken out.

In terms of shipping costs however, the CRB rally could be slightly suspect — turn in CRB and BDI (Baltic Dry Index) as a ratio coincides with the rising shipping costs since mid-2020. Last week, BDI started to ramp back up after coming off in the prior week and with reflation sentiment having been dead in the water while some sell-side research has started calling for a cyclical peak, this could be whats adding to last weeks price pressures in commodities.

RATES

Global long-end yields have been coming down and curves flattening last week. Long USD, duration, and techs would be the prevailing theme but we are see potential signs of a turn from the wk/wk price action while 5yr breakeven inflation continuing to move back up.

I’m still focused on the 5s10s to support the rotation back to value idea.

Eurodollars suggests market is less hawkish than it was the past month — a sign of overreaction to a potentially earlier hiking timeline?

FOREX

Views are generally centred around yields to start picking up this week, but I would be cautious later as I do expect Nasdaq (looking to be tactically short) to pullback after tech earnings which could potentially upset broader sentiment when it does.

USD ~ I’ve turned mildly bearish expecting inflation expectations to move back up as future growth concerns and hawkish bets recede. My conviction will grow if long-end bonds look increasingly bearish and inflation breakevens continues to point upwards.

EUR ~ I continue to like EUR as a funder expect it to underperform USD on similar views held for many weeks…

GBP ~ still looking cheap and attractive on dips. EURGBP and GBPJPY if yields are to start picking would be pairs to look at.

CHF & JPY ~ I am bearish on JPY to start with on the constructive yields view. Will have to see how market unfolds on tech earnings.

CAD & NOK ~ Contrary to my bearish Oil last week, the swift recovery gives me confidence that price will stay relatively supported. Equity market and oil rebound prompted me to go short EURNOK last Wednesday and though the chart is looking encouraging for a longer hold, I will scale-out/protect positions with CPI and FOMC in mind.

AUD & NZD ~ I’ve slowly taken a liking to AUD over the past month or so and continue to like the idea of building a position for the long-term core book. RBA could soon be following RBNZ and BOC, and while there is plenty of narratives holding AUD back, there is a big pricing gap to exploit once the smoke clears while NZD and CAD has had a lot of time to price in the more hawkish CB’s. AUDNZD imo would be a closed-eyes buy with size if it breaks the 1.05 handle.

EMFX ~ Turning bullish on EMFX on the re-reflation narrative and cyclicals to come alive again, but again, will be light and nimble with event risks and month-end in mind.

Can’t wait to get out of my 21-day hotel quarantine this Friday.

Have a great week trading!

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