Maybe enjoying life a little too much and lazy with the work missing last week’s weekly journal entry. Plan to chill out a little bit as I’m now a few lbs heavier and had an excruitating gout attack over the weekend.
This week I’m very concerned about the cyclical narrative as some of the charts below will suggest. I will be focused on these signals and may look to adjust the book for a more defensive/short-risk exposure…
MARKET AT A GLANCE
USD was midly offered on lower real yields and nominal curve smoothening out. Momentum towards USD selling developing but I suspect this could be challenged this week while market awaits for some potential hawkish messages out of the JH Symposium.
YM led gains in US equity futures and no love for small-caps presumably from concerns of reemerging covid cases and vaccine progress in some areas.
Crude and Copper was well supported after consolidating lower in prior weeks and Precious metals seeing good demand below. Didn’t get myself in after the avalanche of stops went off at last week’s open, regrettably, but bounce in Gold is proving strong and breaks of further highs with real yields lower looks good to chase into the week. Silver equally interesting to play for more interesting themes.
World Equity markets has interesting relative performance patterns:
- Heightened demand for quality large-caps — EuroStoxx50 and European indices being the strongest performers while S&P500 also led the Nasdaq100 index by 50bp, month-on-month basis.
- Completely different story in Asian stocks reversing a lot of the years gains. Insterestingly Australia’s ASX performed reasonably well against the China slow down story, drop in Iron Ore prices and renewed lockdowns; AUD has also been notably resilient.
Emerging markets slumped last week but with China stocks looking to lick their wounds and pick themselves back up, this isn’t looking to bad for cyclical sentiment. I am however cautious of tapering news to cause a dip which I think will be brief and should be used to buy the dips for the longer term.
Volatility indices showing some strong activity in OTM options with Skew and Taildex turning up after retreating from elevated July levels. US data is showing progress and the timing of the increase in OTM premiums vs the decreasing 30 day implied volatility seems to make sense as we head closer to “substantial progress”. More reason to be concerned with the cyclical thesis and to possibly shelve the idea and favour defensive positioning for the near-term. Plus it is OPEX week and I’ve got a slight tingle for fading risk towards the end of this week.
US yields slid back down after steepening so far this month. It appears we are seeing a smoothing out of the hump in the yield curve with flattening in 5–10year area of durations. This doesn’t paint a good picture for the cyclical story and is one of the concerns for my thesis but does imo appear a natural response to the tapering narrative. I think apart from the taper, there will be a lack of further hawkish triggers to current market pricing but on the other hand, we seem to be getting to close the time we are about to find out how transitory some effects of inflation will be and the latest wave of cases in the US and plunge in consumer confidence will not help alleviate inflation as we have seen in the recent past...
Bounce in CRB Commodities index ran out of the steam into the weekend at a key pivot level marking a potential right shoulder. Daily MACD has normalized and the ranges contracting suggests a possible expansion in price action. This is also a concern to my thesis with Energy futures making up the majority of global commodities trade which is still looking vulnerable after the recent sell-off.
CURRENT VIEWS/TRADES
Built a position on re-reflation theme since the week of July 19–23 which has been chopping in the red. Bear in mind, I’m position trading a big picture view these days being back in Hong Kong and being in front of screens much less, and should be needless to say — with slow and modest position sizing.
Long Russell2k, Short Nasdaq100
I’ve been inaccurate with my Value/Growth outperformance with the bounce in the IWD/IWF ratio owing to rotations into higher-quality large-cap names rather than a full-blown cyclical rally.
However, whenever there has been increases in relative demand for higher quality large-cap, it has been seen around these levels…
Also the on-going narratives continues to favour defensive/high-quality positioning which have lower policy-beta, or more resilience to tantrums and rates vol. Spread is slightly in red and considering substituting some or all of the Russell2k for the Dow30.
Long AUD vs JPY USD
I’ve been nibbling into a somewhat contrarian AUD long position and it’s looking particularly heavy despite some reslience against brief moments of risk-off in recent weeks. Loose stop in below the lows and still being a small exposure I may look to add on further lows over the next couple of weeks or just exit the position entirely anticipating a brief tantrum.
Long NOK vs EUR USD
One of the positions I wasn’t afraid to introduce slightly more size when I’ve initially begun to sell into late July. Happy to hold this on the carry and see how it goes with Oil being less sensitive to Fed policy.
NEW TRADE IDEAS
Short Nasdaq, Long Dow (tactically on dips)
Due to the concerns mentioned above, I’m looking to adjust my positioning by dropping the Russell exposure altogether and maintain the Nasdaq short, while still ready to enter Dow longs on dips. I’ve mentioned the dovish taper at times here and there, I think we ‘might’ have a more muted impact to the taperning announcement ‘might’ be much more muted than 2013 suggests. As mentioned above, I have a preference for fading broad risk towards the end of this week as we get through OPEX and price being more free to move thereafter.
Long USD vs EUR JPY and EM
In FX, I like the idea of laying into USD longs vs EUR and JPY. CHF is interesting for mean reversion room but seems to have a mind of its own and probably best to look at EM’s due to their sensitivity to sudden moves in shorter US rates and to risk-off. I generally tend to stick with ZAR and MXN for EM exposure.
Feel free to leave comments below — do you have different ideas about how the taper announcement will impact markets and the month after?
Wishing you a good week trading!
