February 2020 Macro Markets Blog Post
Recap
Hello all, and welcome back to the February rendition of MacroSquawk. If you've been able to read the previous blog coming into 2020, all I have to say is, "wow, what a trip." It seems that the macro view on lower inflation expectations has been validated, and much quicker than I had initially expected leading to this month's and the first half of this year's views.
Macro View
Coming into the next few weeks however, I think the dominant theme is going to be a commodities rebound (more below). More importantly, I think the events of this January/February period with the virus have fundamentally shifted the macro landscape in a meaningful way. Chief among these is the prolonged nature of the manufacturing rebound that we are likely to see in China, and by extension perhaps the rest of the world. It seems now that for 1Q and maybe even 1H, the US will be the bastion of (moderate) global growth leading markets higher. This is as a result of lukewarm retail sales and inflation data, while at the same time payrolls continues to keep the economy afoot along with consumer confidence and the housing market grinding higher. Secondarily, it seems that we might start to see a meaningful recovery in European industry over the next few months, along with Germany's continued roll-out of easy fiscal policy. This is because even though industry in 4Q had printed a marked slump, business expectations since then have started to turn up, indicating that the worst might be over. This is along with the fact that European industry is relatively isolated from the negative demand shock from China making it less susceptible to growth slowdowns. It would in this case seem that capital that would have otherwise flown to East/Southeast Asia after the trade detente will have to find a new home while China recovers from the outbreak, making the US and perhaps Europe likely areas of out performance in 1Q/1H.
Long Commodities - Brent, Copper, Silver, Soybeans, Coffee
As mentioned previously, it would seem that over the next few weeks a reversal of fortune in the commodities complex seems like the out performer. This is because over the course of the Coronavirus news cycle, US 10 yr breakevens had broken out of their uptrend in large part because of the commodities complex showing its effects through the inflation channel. The view here therefore is that since we are starting to see breakevens turn up, it might be able to be captured through the commodities markets. Note however, this is not an endorsement of higher commodities prices this year, as the view still remains that growth will remain tepid. Rather, this is a trade on a possible explosive reversal that might be played out over the next few weeks. Thus, I have created a basket of commodities to gain exposure to this trade as well as for their unique "micro" characteristics.
May20' Brent
Not much fancy chart work to be done here. We see that it held around 55 at the same time that US 10yr breakevens held 1.6. Given that this is a more tactical trade, I would look for a target of 62.5 with an initial stop of 54.4
May20' Copper
Another very simply understood chart. This one held 250 and made its reversal around the same time breakevens did. However what makes this a potentially more profitable one is that it rests heavily so on manufacturing which, though might be a slower turnaround, could still show a turnaround. As a matter of trading , it does imply higher risk meaning that you would only want to add to it after it closes past the 50% retracement at ~270. Thus, you could look for an initial target at 280 and an initial stop at 257.9.
May20' Silver
A potentially very interesting trade. This trade would benefit off of the rebound in manufacturing that we have been seeing, but would not turn down as violently due to its properties as a market risk hedge - already implying good risk/rewards. It seems that there could be some rounding bottom in place and if there is a close above 18, one could expect it to turn into a meaningful uptrend to at least 19 and perhaps 20.
May20' Soybeans
What's interesting about this is not just the potential to play the commodities rebound, but also to have a view on trade. This is because soybeans purchases are a big part of the trade deal struck in December and though there are talks that China might not be able to hold its end of the bargain on purchases, it would seem that is an improbable event. This is because along with the virus, getting back to trade tensions with the US would be the last of their worries and would thus be a diplomatic priority to fulfill. As a result, I think this would be an opportunity to trade the range all the way up to 960 with an initial stop at 884.
May20' Coffee
This is an extremely interesting trade. I had written about this in the December blog post as well. The story here continues to be a lack of supply given deliberate production cuts by Vietnamese coffee growers as a result of margins having dipped so low. It seems as if this is the same factor driving the market right now. This coupled with the commodities rebound here described gives ample reasoning to believe that coffee is set to run up. We could set our stop here at 104.9 and have our initial target at 145.
Long Equities - US Housing, tech, consumer discretionary, Eurostoxx
As described above in the macro view, it seems that in the moderate growth environment that we find ourselves in lends itself to the dominance of US equities. Here, it seems that the growth premium continue to go to US tech. We also see that on the back of low 30 year yields that are currently unlikely to make meaningful run ups, along with a moderately strong consumer, and strong housing demand as a result of warmer winter weather lends itself to the strength of the US housing and consumer discretionary sectors. Secondarily European equities could be an area of out performance as the industrial turnaround starts to materialize not only in sentiment, but also in the data which is expected to happen sometime in 1Q, along with Germany opening up the fiscal policy levers in December.
March20' Qs
Here we see the weekly chart of March Qs. Nothing fancy. Notice on this one that since it is a longer term trade that we would hold for most of 1H, we would set stops on the weekly not the daily. Thus we'd set the stop at 9240.
March Eurostoxx 50'
Here we see the chart of March Eurostoxx50. What tipped me off to the trade was that it broke out of the range that it had been in since December of 2019. This leads me to believe that we are starting to see a repricing of growth expectations in Europe and that we might be able to get in early here and benefit from the outperformance. We would set a stop at 3690, below the previous week's weekly candle.
$NAIL/$WANT
Here we see the Direxion 3x levered home builders and Consumer Discretionary ETF. This seems to be an easy way to get exposure to the housing market and consumer spending based on the above described macro view. We would again set the stop below the previous week's candle at 88.4 and at 36.9 respectively.
Commodity Currencies - Short USDCAD, Long Dec20' Canadian Bankers, Short AUDUSD
Currently it seems that Canada is providing good trading opportunities due to the commodity rebound that we have here described. It seems that the uptrend we've seen in USDCAD over the past month has been in large part due to the slump in commodities which the reversal of would lead to CAD strength. However, and more importantly, Canada seems to be in the midst of a shift in monetary policy. What we've seen over the past few months is that the BoC has had a marked shift in phraseology - going from hawkish to now a more tenuous path that could indicate possible rate cuts this year. This is due to the slow grind upwards and now weakening seen in consumer and housing market data. Thus, it would seem that any major weakness in CAD would be as a result of a shift in monetary policy - otherwise it will continue to hold the broadening triangle that it is currently in and possibly break to the downside. This is why it might be prudent to hold Dec20' Canadian Bankers futures as a hedge to CAD weakness.
The other interesting currency trade out there seems to be getting short AUDUSD. Note that this is a complete reversal of the view posited in the previous month. In January, things looked up with the trade deal and positive retail sales data indicating a reversal in the domestic economy. Now, however, it seems that the bullishness may have been a bit too early. As we've seen since the last blog the virus worries as well as the delay in the domestic turnaround have shifted the view. Instead, it seems that AUDUSD is likely to continue its downtrend as the RBA puts more cuts and possibly QE back on the table. Prudence would call for skepticism of Australian QE as they don't have as many bonds with which to do so, but the possibility of rate cuts would definitely be a factor that leads AUD down over the next few weeks. Note that as a matter of trading goes, I would start very small on this trade as it's a complete reversal of my view last month. Once the trade starts to work out it would make sense to add.
USDCAD
Here we see the broadening bottom on USDCAD. It seems that over the next few weeks this commodities rebound would provide the reasoning for CAD strength as it gets to the bottom boundary. It seems that an initial stop can be set at 1.3360.
Dec20' Canadian Bankers Futures
Here we see the chart of Dec20' BAX. We see that it was holding the downtrend the entire time that the BoC was sounding hawkish policy but has reversed course after the January meeting where the BoC has shifted its stance and is holding the 200 day moving averagte. It would seem that if consumer and housing data were to weaken, this is where its effects would be felt. Therefore, it would act as an excellent hedge to the short USDCAD as any meaningful turn up would most likely be due to a shift in monetary policy. We could set a stop here at 98.19 and look to ride it to at least around 98.6.
AUDUSD
In a complete reversal from the last blog, I am now thinking about getting short AUDUSD. We see that the break from the years long downtrend was actually a false break due to a shift in the macro fundamentals due to the virus as well as with the delay in the domestic turnaround. For these reasons I think it can get to the 64 handle over the next few weeks with an initial stop at .681.
Opportunistic EM Trades - Brazil, Thailand, Chile
A bit of recap to last month's EM trades: the virus certainly caused problems for the USDMXN and EM Equities trades but were more than balanced out by the performance of the BRL and THB shorts. I think the best course of action here is to continue holding the BRL and THB shorts and perhaps looking for spots to add size to them as the macro has not yet changed. The stops can be moved up to 4.24 and 30.89 on BRL and THB respectively. Perhaps on USDBRL you might add as it has a solid close above the previous high of 4.3822, and same for USDTHB above 31.298.
Looking ahead, it seems that the story for EMs is dicey in that growth prospects which were heavily tied to China now seem to be in doubt. This would lead to EM for the time being more of a micro story based on individual countries' happenings.
Short Brazilian DIs(ODF27)
I think the story here is very interesting in that there is a divergence between the macro and micro picture. The macro continues to be that BRL weakens as demand slumps, political instability continues, and the Bank of Brasil attempts to stem weakness through asset purchases. The micro however, shows a better picture. What we see now is a turnaround in the domestic economy. Credit spreads have tightened, the Bank of Brasil is indicating an end to the cutting cycle that they have been in, meaningful pension reform has been put in place which has diverted a lot of credit growth towards consumers rather than to public debt, and there is much more room for credit to grow (currently sitting at 47% of GDP). Thus, it seems a good idea to get short Brazilian DIs as a hedge to getting long USDBRL. This is a method to have hedged exposure to both the micro and macro stories in Brazil. We would set the stop here at 6.56.
Short USDCLP
Continuing with the commodities theme, it seems that getting short would be a good way to express a view on copper prices strengthening. This could potentially be a tactical trade as the upcoming vote on the constitution which could lead to political instability in an extremely conservative political environment. For this reason, it seems that the stop can be set at 810 and having an initial target at 750.
Hello all, and welcome back to the February rendition of MacroSquawk. If you've been able to read the previous blog coming into 2020, all I have to say is, "wow, what a trip." It seems that the macro view on lower inflation expectations has been validated, and much quicker than I had initially expected leading to this month's and the first half of this year's views.
Macro View
Coming into the next few weeks however, I think the dominant theme is going to be a commodities rebound (more below). More importantly, I think the events of this January/February period with the virus have fundamentally shifted the macro landscape in a meaningful way. Chief among these is the prolonged nature of the manufacturing rebound that we are likely to see in China, and by extension perhaps the rest of the world. It seems now that for 1Q and maybe even 1H, the US will be the bastion of (moderate) global growth leading markets higher. This is as a result of lukewarm retail sales and inflation data, while at the same time payrolls continues to keep the economy afoot along with consumer confidence and the housing market grinding higher. Secondarily, it seems that we might start to see a meaningful recovery in European industry over the next few months, along with Germany's continued roll-out of easy fiscal policy. This is because even though industry in 4Q had printed a marked slump, business expectations since then have started to turn up, indicating that the worst might be over. This is along with the fact that European industry is relatively isolated from the negative demand shock from China making it less susceptible to growth slowdowns. It would in this case seem that capital that would have otherwise flown to East/Southeast Asia after the trade detente will have to find a new home while China recovers from the outbreak, making the US and perhaps Europe likely areas of out performance in 1Q/1H.
Long Commodities - Brent, Copper, Silver, Soybeans, Coffee
As mentioned previously, it would seem that over the next few weeks a reversal of fortune in the commodities complex seems like the out performer. This is because over the course of the Coronavirus news cycle, US 10 yr breakevens had broken out of their uptrend in large part because of the commodities complex showing its effects through the inflation channel. The view here therefore is that since we are starting to see breakevens turn up, it might be able to be captured through the commodities markets. Note however, this is not an endorsement of higher commodities prices this year, as the view still remains that growth will remain tepid. Rather, this is a trade on a possible explosive reversal that might be played out over the next few weeks. Thus, I have created a basket of commodities to gain exposure to this trade as well as for their unique "micro" characteristics.
May20' Brent
Not much fancy chart work to be done here. We see that it held around 55 at the same time that US 10yr breakevens held 1.6. Given that this is a more tactical trade, I would look for a target of 62.5 with an initial stop of 54.4
May20' Copper
May20' Silver
May20' Soybeans
May20' Coffee
Long Equities - US Housing, tech, consumer discretionary, Eurostoxx
As described above in the macro view, it seems that in the moderate growth environment that we find ourselves in lends itself to the dominance of US equities. Here, it seems that the growth premium continue to go to US tech. We also see that on the back of low 30 year yields that are currently unlikely to make meaningful run ups, along with a moderately strong consumer, and strong housing demand as a result of warmer winter weather lends itself to the strength of the US housing and consumer discretionary sectors. Secondarily European equities could be an area of out performance as the industrial turnaround starts to materialize not only in sentiment, but also in the data which is expected to happen sometime in 1Q, along with Germany opening up the fiscal policy levers in December.
March20' Qs
March Eurostoxx 50'
$NAIL/$WANT
Commodity Currencies - Short USDCAD, Long Dec20' Canadian Bankers, Short AUDUSD
Currently it seems that Canada is providing good trading opportunities due to the commodity rebound that we have here described. It seems that the uptrend we've seen in USDCAD over the past month has been in large part due to the slump in commodities which the reversal of would lead to CAD strength. However, and more importantly, Canada seems to be in the midst of a shift in monetary policy. What we've seen over the past few months is that the BoC has had a marked shift in phraseology - going from hawkish to now a more tenuous path that could indicate possible rate cuts this year. This is due to the slow grind upwards and now weakening seen in consumer and housing market data. Thus, it would seem that any major weakness in CAD would be as a result of a shift in monetary policy - otherwise it will continue to hold the broadening triangle that it is currently in and possibly break to the downside. This is why it might be prudent to hold Dec20' Canadian Bankers futures as a hedge to CAD weakness.
The other interesting currency trade out there seems to be getting short AUDUSD. Note that this is a complete reversal of the view posited in the previous month. In January, things looked up with the trade deal and positive retail sales data indicating a reversal in the domestic economy. Now, however, it seems that the bullishness may have been a bit too early. As we've seen since the last blog the virus worries as well as the delay in the domestic turnaround have shifted the view. Instead, it seems that AUDUSD is likely to continue its downtrend as the RBA puts more cuts and possibly QE back on the table. Prudence would call for skepticism of Australian QE as they don't have as many bonds with which to do so, but the possibility of rate cuts would definitely be a factor that leads AUD down over the next few weeks. Note that as a matter of trading goes, I would start very small on this trade as it's a complete reversal of my view last month. Once the trade starts to work out it would make sense to add.
USDCAD
Dec20' Canadian Bankers Futures
AUDUSD
Opportunistic EM Trades - Brazil, Thailand, Chile
A bit of recap to last month's EM trades: the virus certainly caused problems for the USDMXN and EM Equities trades but were more than balanced out by the performance of the BRL and THB shorts. I think the best course of action here is to continue holding the BRL and THB shorts and perhaps looking for spots to add size to them as the macro has not yet changed. The stops can be moved up to 4.24 and 30.89 on BRL and THB respectively. Perhaps on USDBRL you might add as it has a solid close above the previous high of 4.3822, and same for USDTHB above 31.298.
Looking ahead, it seems that the story for EMs is dicey in that growth prospects which were heavily tied to China now seem to be in doubt. This would lead to EM for the time being more of a micro story based on individual countries' happenings.
Short Brazilian DIs(ODF27)
I think the story here is very interesting in that there is a divergence between the macro and micro picture. The macro continues to be that BRL weakens as demand slumps, political instability continues, and the Bank of Brasil attempts to stem weakness through asset purchases. The micro however, shows a better picture. What we see now is a turnaround in the domestic economy. Credit spreads have tightened, the Bank of Brasil is indicating an end to the cutting cycle that they have been in, meaningful pension reform has been put in place which has diverted a lot of credit growth towards consumers rather than to public debt, and there is much more room for credit to grow (currently sitting at 47% of GDP). Thus, it seems a good idea to get short Brazilian DIs as a hedge to getting long USDBRL. This is a method to have hedged exposure to both the micro and macro stories in Brazil. We would set the stop here at 6.56.
Short USDCLP
Continuing with the commodities theme, it seems that getting short would be a good way to express a view on copper prices strengthening. This could potentially be a tactical trade as the upcoming vote on the constitution which could lead to political instability in an extremely conservative political environment. For this reason, it seems that the stop can be set at 810 and having an initial target at 750.
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