Macro Markets Recap Post Thanksgiving 2019

Hi all,

It's been a busy week of news and data this Thanksgiving holiday. Most notably, we saw the signing of the Hong Kong Human Rights and Democracy Act almost unanimously in Congress. The worry here is that it'll lead to retaliation ahead of the critical December 15th deadline for some resolution to the Phase 1 deal on trade. As a result, we've seen a broad selloff in risk assets across the world.

But what exactly are the intermediate term implications of this act? Upon further examination, it would seem that it is not as biting as it would first appear which could afford an opportunity to fade a lot of the moves we have seen over the past week. This is because what it specifically accomplishes is that it requires

• Require the Secretary of State to issue an annual certification of Hong Kong’s autonomy to justify special treatment afforded to Hong Kong by the U.S. Hong Kong Policy Act of 1992
• Require the President to identify, and impose sanctions against, persons responsible for the abductions of Hong Kong booksellers and journalists and those complicit in suppressing basic freedoms in Hong Kong, including those complicit in the rendition of individuals, in connection to their exercise of internationally recognized rights, to mainland China for detention or trial
• Require the President to issue a strategy to protect U.S. citizens and businesses from the risks posed by a revised Fugitive Offenders Ordinance, including by determining whether to revise the U.S.–Hong Kong extradition agreement and the State Department's travel advisory for Hong Kong.
• Require the Secretary of Commerce to issue an annual report assessing whether the government of Hong Kong is adequately enforcing both U.S. export regulations regarding sensitive dual-use items and U.S. and U.N. sanctions, particularly regarding Iran and North Korea.
• Make clear that visa applicants shall not be denied visas on the basis of the applicant’s arrest, detention or other adverse government action taken as a result of their participation in the protest activities related to pro-democracy advocacy, human rights, or the rule of law in Hong Kong.

It would seem as if outside of the giving the President the responsibility of imposing sanctions, it is altogether a toothless bill. It doesn't seem as if requiring a report be made or for certifications to be given to Hong Kong would derail any progress in the trade talks as they fundamentally do not harm China's two systems one state plan for Hong Kong. What's also interesting is that as far as sanctions go, this bill would seem redundant as the ability to dole out sanctions was already in the President's power. In this case it would seem that this bill is less an attack and more a message that any trade relations will rest on the fact that Hong Kong gets to maintain its Democracy and in the short term, is allowed to vote on legislative candidates outside of those that are pre-selected by the ruling party. Given the fact that this months-long snafu has led to Xi Jinping looking weak in the eyes of his mainlanders, it would seem plausible that he would look for some swift and silent end to end the turmoil. This might be exactly what he might get as it seems the most violent parts of the revolt have ended, with the withdrawal of the extradition bill, and with the election for the legislative council having happened late November. Therefore, we can say with reasonable certainty that the moves we have seen in risk assets are not as indicative as one might believe.

This could lead to several trades

We can look to start fading the move on December Nasdaq futures at around 8350 with a stop at 8150 and move the stop up as a new bottom is found

This might also be an opportunity to fade the move on Dec20' Brent. Brent is an interesting trade here as it has had both macro and micro factors that lead to a long bias. Apart from the macro factors here described, we see that OPEC has also had a cutting bias. This comes on the backs of the potential Saudi Aramco IPO as well as the fact that the OPEC countries need a higher price of oil due to the deficits that they have been running up - example Saudi Arabia needs around a $85/bbl, and Iran needs $140 - $160/bbl. This allows for a potential long opportunity on the back months as the longer term supply picture remains supportive of high prices. A possible stop could be set at $55

We might even be able to opportunistically become UST 10 year payers. This is because along with the fading bias described above, the US is also coming into a holiday season that is expected to be stronger than last year which could be indicative of strength in the US economy. We might be able to set our stop at around 1.65%

Note: The risk here is that we are coming up on the all-important trade deadline of December 15 and unless we have a view here on how that event will play out, it would be prudent to hold these as tactical trades and sell out before then - or as new information comes in that would lead us to believe that it definitely won't happen. Currently, my bias is to say that it won't happen in December, but will happen sometime in 1H 2020. This is because it would behoove Trump to hold off on a deal until the election draws nearer. In the wake of his possible impeachment, it would seem to be a political miscalculation to use one of his most potent tools of improving his public approval rating a little bit ahead of when it'll have it's maximal effect. In this vein, it would make sense that he would be haggling over having the meeting in the US and not China, and specifically in Iowa as it can very much help him with his re-election bid to announce a phase one deal just as his constituents head to the voting booth. Given this is the case, we would want to plan on holding these as shorter-term tactical trades and potentially re-entering after or hedging through the event. 

Given this is the case, there might be a potential short opportunity on March20' Cotton. This is because cotton is very heavily dependent on demand from China and supply from the US and trade has proven over the course of 2019 to be a disruption of normal market conditions. It is also the most heavily affected by any news on trade and would act as a seamless hedge to the above positions. What also makes this a technically interesting trade is that we are now starting to see a breakdown from the 65 level that has been held since the beginning of October - that combined with the view on trade would allow for a possible short with a stop at 68.

Transitioning over to Europe 

Things finally seem to be taking a turn for the better in Eurozone. We are seeing that German IFO expectations have finally shown a potential bottom and are in general following what we see in the manufacturing PMIs of both the US and China which might have an interesting potential correlation there, along with a potential for clarity in Britain with the Parliamentary election, as well as the ECB signaling the end to indefinite QE. All of this has led to ideas that have a relative isolation from trade.

Chinese Manufacturing PMI making a recovery after ceasefire on trade

Markit Manufacturing starting to make a meaningful turnaround

German IFO starting to catch up to general health of US and China, indicating a potential long in European assets along with rollback of ECB QE and potential resolution to Brexit. Could also be the case that it is following manufacturing PMIs as Europe is still heavily based on manufacturing.

Here we see a potential reversal of trend on EURJPY due to the above factors as it makes higher highs and lower lows. What's interesting about this is that of late, EUR pairs have been affected not only by the strengthening condition in the Eurozone, but also the improving condition in Britain. In this sense EURJPY can be a good way to gain exposure but at the same time have an implicit hedge against any untoward shocks out of Britain. Potential stop at 119

It would also seem as if there's a good short opportunity on Dec19' Euro-Bunds to get a pure exposure to German IFOs which have in the past shown to be the most accurate indicator of the business climate and future expectations. There could also be a potential stop at 172

Also currently looking at GBPJPY for pure exposure to Brexit concerns. What's really interesting about this trade is that the closer we get to the election date, the polls have shown that the conservative party getting elected is becoming more likely - if this is the case it is highly likely that they will vote in Bojo's favor as they have already indicated as such. It seems as if this is starting to get priced into the currency and offering a compelling long opportunity. Given the fact that there might be some clarity, we can reasonably expect a huge rally as we had seen before the election as Brexit concerns are one of the main worries keeping capital on the sidelines leading to the poor inflation and expenditure readings coming out of the UK presently. There could be a potential stop on this at 138.

Switching gears to EM/Commodities

The most compelling trade in EM-land seems to be getting long USDBRL. With the failure of their oil auction, the fear of local political strife contaminating the country, struggles with pension reform, and with Brazil facing lower than expected growth and having to deliver 4 rounds of cuts this year alone, Brazil leaves a lot to desire for investors. This aside, what makes USDBRL a much more compelling investment compared to any other EM pair is the fact that the Bank of Brazil has now gotten involved with FX intervention. This would seem to be an excellent opportunity because if the FX intervention were to fail, we could reasonably expect to see an absolutely massive move in our favor -  the type that would signal an epochal shift in Latin American politics and economics. And what evidence do we have that Bank of Brazil will succeed with it's FX intervention program? True as it may be that they are a large exporting country with a lot of reserves, it's not the case that they are the economic powerhouse that China is where we might respect and even fear how vast their reserves are. Fundamentally, FX intervention doesn't detract from the fact that there has been a flow out of the Brazil carry trade and their credit curve, and from Latam in general and into safer assets. What makes this interesting as well is that it is hovering right around the very significant 4.2 handle offering a tight stop but potentially a very strong reaction against the Bank of Brazil's FX intervention program. Looking at a potential stop at 4.15.

Also currently looking at MXNSEK as a short. What's interesting about this trade is that on the MXN side, we are seeing headline inflation that has been struggling to get up which has led to the present easing bias by Banxico. There also seems to be no end in sight as MXN is very heavily related to trade and as we have seen trade tensions aren't going away anytime soon. What might alleviate some of this present difficulty is some resolution to the United States, Mexico, and Canada Trade pact by stemming capital flight due to the consequent uncertainty. But alas, it seems as if this is a far way off as right now it seems that the most important item on the Trump administration's docket has been trade resolutions with China, as that is the most politically pressing issue ahead of the election. It seems as if MXN's difficulties aren't going away anytime soon and as a result looking for a short seems like a good bet. As for the logic for SEK, it would seem as if they are currently the strength in the Scandies as they are an export-based country and right now their biggest trading partner, Germany, is having a moment, as described above. We are also seeing Sweden actively indicating that they are looking to raise rates as consumer spending trudges higher as they are relatively isolated from trade tensions compared to most of the large European countries. From a trading perspective, it would seem prudent to wait on a pullback to around .4925 as getting in right now would lead to a wide stop. Otherwise, if we were to get short now a stop might be set around .5

Above is one of the more compelling commodities trade's I've seen in a while - getting long March Coffee. If you're looking for commodity exposure that is uncorrelated with market benchmarks this would be something to think about. The reasoning here is textbook supply and demand. It's that over the past two years, we have seen broad soft commodity prices decrease to new lows, affecting the livelihoods of the people growing these crops. Finally, what's happened over the past month is that Vietnamese coffee growers, one of the largest producers in the world, have banded together to cut supply citing that margins have gotten too low for profitable operation. This has led to the years long downtrend snapping, which is indicated by the volume break through the downtrend line on the daily chart (1), and the large tick up in open interest on the weekly (2). The reason that this move seems so credible is that across the board, we have seen this same pattern. Most notably in the second half of the year, we have seen this pattern happen with the price of cocoa. The story there was very similar to coffee in that Ivory Coast producers had gotten prices too low for Latin American producers to compete leading to a cut in supply that led cocoa prices skyrocketing into the end of the year - this is why this move seems so credible and something we can expect to continue, technicals notwithstanding. We could set our stop on this trade at 113.

Thank you for reading. Would love your feedback and suggestions on how to improve as I am a senior at NYU Stern studying Finance and Philosophy and interested in the Financial Services Industry. I can be contacted at snd314@stern.nyu.edu