April 2020 Macro Markets Blog Post
Intro
Hi all,
And thank you for tuning back into the April series of MarcoSquawk. I apologize for my recent delinquency in updating the blog. Due to the coronavirus, I now no longer have Bloomberg access either from NYU or from EIA as I am away from the office. It has therefore taken me a bit more time to come up with a confident macro view that I am proud of publishing. I will therefore be using a mix of charting from barcharts.com and the ThinkorSwim platform.
Recap
In the last blog posted before the virus crisis began, I found myself flat-footed, having recommended a risk-on view of long stocks and commodities. The redeeming quality of the last post was the opportunistic FX trades and general short EM view I had.
Macro Thesis
I think over the next few weeks and perhaps months, the dominant theme will be negotiations between OPEC+ to strengthen prices, Federal Reserve action, and the effect of the virus on economic growth. I think at this point we might be able to safely say that a v-shape recovery in real economic growth might be an improbable outcome. This is because US unemployment has gotten to record levels since 08', and the longer that the economy is closed, the longer it will take to get back to normal levels. This is on top of the fact that other nations around the world are already on Wave 2 and Wave 3 of the pandemic (Japan and Singapore respectively), while the US is just now possibly coming off of the peak of wave 1. This is along with the fact that banks and other large firms are either being pressured to, or are having to cut dividends and stock buybacks could lead to a large rush of funds out of financial markets.
This leads to the second interesting point in watching the action of the Federal Reserve. Whatever your moral and political leaning on its recent action, I think it is fair to say that it has done an excellent job in containing the deflationary pressures and volatility spike we had seen in March, and that it is ready to step in and do 'whatever it takes.' It is here that I would argue the Fed's commitment can reliably continue without inflationary worries brought on by increasing the size of its balance sheet. This is because of the fact that as long as dollars are the reserve currency, the US will not face this dire consequence. The reason I think USDs might stay the reserve currency has more to do with the fact that it is the world's biggest consumer and trading partner. As long as this continues, people will have dollars in their hand and it will remain a ubiquitous form of trade, even for transactions American commerce is not involved in. This of course might be threatened by the rise of China and it dethroning this consumption and trading status.
Short USD - GBP/USD, USD/JPY, USD/CAD, USD/CNH
In spite of my disagreement with the rampant inflation hypothesis described above, I still think that USDs get weaker from here. This is because the Federal Reserve's swap lines have effectively mitigated the need for firms to dash to cash as we had seen a few weeks ago. With the lack of this catalyst, I think what starts to happen now is that the dollar unwind is due primarily because of ZIRP, and secondarily to the poor handling of the virus leading to funds flowing out of the US to other, higher-yielding parts of the world. This is why I have added a mix of funders and quasi-funders, along with growth and commodity currencies.
I have added GBP and JPY as they are where large pools of financial capital exist, which the unwinding of the carry trade would greatly benefit their strengthening. I chose GBP over EUR because in the previous dollars strengthening move, it moved farther, faster and I think it will do so again. I think this is because EUR is made a bit more risky due to the vigorous debate over the mutualization of debt and the political consequence it would have on the Eurozone's solvency (speculation).
I have added CAD and CNH because of the opportunity to benefit from real economic growth. I have added CAD because I have a fundamentally positive view on OPEC+ action, and that they will keep WTI above $20/bbl. Since this is the case, I think that the strengthening we have seen in CAD over the past few weeks will continue. I think the addition of CNH is interesting. This is because if you look back to October - December of 2018, what you'll find is that as US markets fell, CNH vs USD was strengthening. I think this might be due to China's increasing global stature, it might be acting as a secondary safe-haven. This time, it seems that US risk assets will continue to fall, while at the same time China is opening up. There is of course the risk of a second wave, but those fears should be monitored closely - for now it seems like there might be a good opportunity to get long CNH as US markets continue to fall.
Here, what I am seeing is as the virus broke out, USDCAD broke above the downtrending channel it was in. What we are also seeing now is that it has put in what seems like a top, a bearish pennant, and has now traversed below the 50% fib level. I think the expected move in oil will be the fundamental reason that carries it lower and that it can go all the way to around 1.33. If we set a stop at 1.46, that gives a risk/reward of around 3.5:1
What I find so interesting about the setup in JPY is that over the past year, the 112 level has been held 4 times, making it a strong resistance. This is along with the fact that it seems to have put in a head and shoulders over the past few weeks, and now a bearish pennant which is now breaking down. The fact the head and shoulders developed over a longer time frame is indicative of this being a longer term move. This might mean that it will get to the previous low of 102 and maybe below as well. If we set a stop at 108.6, we can possibly get 5.6:1 on this trade.
I think GBP is interesting because it has broken up out of the previous liquidity point of 1.24. This is a trade where I would be a bit more cautious, however. This is because the fundamental reasoning might only yield a temporary move, along with the fact that it has many such liquidity points to pass making it a bit riskier. However, I think that if we set a stop at 1.239 and expect a play to 1.28, we can get around 2.5:1 on this trade.
I think CNH is really interesting in that this risk-off move could bring about a move all the way down to the yearslong uptrend line which could turn into a huge move. What's also interesting is that this uptrend converges at 6.9, the same area where over the past few years there's been many supports and resistances that have taken place. I think if a stop is set at 7.086 with a target of 6.9, you could earn about 3.5:1.
Short US Equities, Short Vols - Short Spoos, Short VIX front month vs long VIX second month
I think this is an interesting trade as these two trades don't normally work together - I think in this environment they do however. If you refer back to the GFC, you'll remember that after the first leg down and the pullback, vols came down dramatically and the next 12 - 15 months were a slow grind down before there was a recovery. This I think is because of the Federal Reserve's asset purchases at the time that helped to suppress volatility. They didn't however, stop the inevitable from happening. I think this time, it is the same reasoning. This is because, as mentioned previously, there is still significant economic fallout that will have to be dealt with once the shelters in place are over. This is along with the fact that there could even be second and third waves, along with the limitation of buybacks and dividend disbursements. This I think diminishes the economic reason to invest in stocks and we will see a flow out of them as a result. This is along with the fact that forward earnings yields expectations might come down with the release of earnings guidance this week - this will be an important catalyst to watch. The reason I think that this doesn't correlate with high volatility is because the Fed has ramped its asset purchases relative to the GFC, and much earlier, which I think has the effect of limiting vols.
This trade especially requires prudence due to the risk in being short vol, and the momentous consequences of being right in shorting stocks. For this reason I suggest getting short vols by getting short the front month of VIX futures, while getting long the second month, and rolling this trade over until the spread becomes negative.
In getting short stocks, I think spoos will fall the most as Qs are being buffetted by increased online demand. This means that it might be prudent to get short spoos at 2800 with an initial target of 2400 with a stop at 2860. If it turns out the initial short is stopped out and spoos close above 2800, then we might think about getting long until 3000 and then trying for another short at 3000 with a stop at 3060. If spoos then close above 3000, we might declare that stocks will then get to new highs.
I think what's interesting about cotton technically is that it now seems very early in the process of making higher highs. This is because it has had a close above its previous local high and is now taking the 23.6 fib level as a possible resistance. I think as a matter of trading, there are two ways to play it: the first is to put in small position at 50 with a stop below the local low at 47.9, or waiting for a clean break above 55 and playing an uptrend initially to 60, then 65 and then 70. My preference is to wait for the break above 55, but to buy at 50 might give you a better risk/reward.
Thank you for reading. I apologize for the delay once again, and hope to be back to a more regular schedule from here on out. 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
Hi all,
And thank you for tuning back into the April series of MarcoSquawk. I apologize for my recent delinquency in updating the blog. Due to the coronavirus, I now no longer have Bloomberg access either from NYU or from EIA as I am away from the office. It has therefore taken me a bit more time to come up with a confident macro view that I am proud of publishing. I will therefore be using a mix of charting from barcharts.com and the ThinkorSwim platform.
Recap
In the last blog posted before the virus crisis began, I found myself flat-footed, having recommended a risk-on view of long stocks and commodities. The redeeming quality of the last post was the opportunistic FX trades and general short EM view I had.
Macro Thesis
I think over the next few weeks and perhaps months, the dominant theme will be negotiations between OPEC+ to strengthen prices, Federal Reserve action, and the effect of the virus on economic growth. I think at this point we might be able to safely say that a v-shape recovery in real economic growth might be an improbable outcome. This is because US unemployment has gotten to record levels since 08', and the longer that the economy is closed, the longer it will take to get back to normal levels. This is on top of the fact that other nations around the world are already on Wave 2 and Wave 3 of the pandemic (Japan and Singapore respectively), while the US is just now possibly coming off of the peak of wave 1. This is along with the fact that banks and other large firms are either being pressured to, or are having to cut dividends and stock buybacks could lead to a large rush of funds out of financial markets.
This leads to the second interesting point in watching the action of the Federal Reserve. Whatever your moral and political leaning on its recent action, I think it is fair to say that it has done an excellent job in containing the deflationary pressures and volatility spike we had seen in March, and that it is ready to step in and do 'whatever it takes.' It is here that I would argue the Fed's commitment can reliably continue without inflationary worries brought on by increasing the size of its balance sheet. This is because of the fact that as long as dollars are the reserve currency, the US will not face this dire consequence. The reason I think USDs might stay the reserve currency has more to do with the fact that it is the world's biggest consumer and trading partner. As long as this continues, people will have dollars in their hand and it will remain a ubiquitous form of trade, even for transactions American commerce is not involved in. This of course might be threatened by the rise of China and it dethroning this consumption and trading status.
Short USD - GBP/USD, USD/JPY, USD/CAD, USD/CNH
In spite of my disagreement with the rampant inflation hypothesis described above, I still think that USDs get weaker from here. This is because the Federal Reserve's swap lines have effectively mitigated the need for firms to dash to cash as we had seen a few weeks ago. With the lack of this catalyst, I think what starts to happen now is that the dollar unwind is due primarily because of ZIRP, and secondarily to the poor handling of the virus leading to funds flowing out of the US to other, higher-yielding parts of the world. This is why I have added a mix of funders and quasi-funders, along with growth and commodity currencies.
I have added GBP and JPY as they are where large pools of financial capital exist, which the unwinding of the carry trade would greatly benefit their strengthening. I chose GBP over EUR because in the previous dollars strengthening move, it moved farther, faster and I think it will do so again. I think this is because EUR is made a bit more risky due to the vigorous debate over the mutualization of debt and the political consequence it would have on the Eurozone's solvency (speculation).
I have added CAD and CNH because of the opportunity to benefit from real economic growth. I have added CAD because I have a fundamentally positive view on OPEC+ action, and that they will keep WTI above $20/bbl. Since this is the case, I think that the strengthening we have seen in CAD over the past few weeks will continue. I think the addition of CNH is interesting. This is because if you look back to October - December of 2018, what you'll find is that as US markets fell, CNH vs USD was strengthening. I think this might be due to China's increasing global stature, it might be acting as a secondary safe-haven. This time, it seems that US risk assets will continue to fall, while at the same time China is opening up. There is of course the risk of a second wave, but those fears should be monitored closely - for now it seems like there might be a good opportunity to get long CNH as US markets continue to fall.

What I find so interesting about the setup in JPY is that over the past year, the 112 level has been held 4 times, making it a strong resistance. This is along with the fact that it seems to have put in a head and shoulders over the past few weeks, and now a bearish pennant which is now breaking down. The fact the head and shoulders developed over a longer time frame is indicative of this being a longer term move. This might mean that it will get to the previous low of 102 and maybe below as well. If we set a stop at 108.6, we can possibly get 5.6:1 on this trade.
I think GBP is interesting because it has broken up out of the previous liquidity point of 1.24. This is a trade where I would be a bit more cautious, however. This is because the fundamental reasoning might only yield a temporary move, along with the fact that it has many such liquidity points to pass making it a bit riskier. However, I think that if we set a stop at 1.239 and expect a play to 1.28, we can get around 2.5:1 on this trade.
I think CNH is really interesting in that this risk-off move could bring about a move all the way down to the yearslong uptrend line which could turn into a huge move. What's also interesting is that this uptrend converges at 6.9, the same area where over the past few years there's been many supports and resistances that have taken place. I think if a stop is set at 7.086 with a target of 6.9, you could earn about 3.5:1.
Short US Equities, Short Vols - Short Spoos, Short VIX front month vs long VIX second month
I think this is an interesting trade as these two trades don't normally work together - I think in this environment they do however. If you refer back to the GFC, you'll remember that after the first leg down and the pullback, vols came down dramatically and the next 12 - 15 months were a slow grind down before there was a recovery. This I think is because of the Federal Reserve's asset purchases at the time that helped to suppress volatility. They didn't however, stop the inevitable from happening. I think this time, it is the same reasoning. This is because, as mentioned previously, there is still significant economic fallout that will have to be dealt with once the shelters in place are over. This is along with the fact that there could even be second and third waves, along with the limitation of buybacks and dividend disbursements. This I think diminishes the economic reason to invest in stocks and we will see a flow out of them as a result. This is along with the fact that forward earnings yields expectations might come down with the release of earnings guidance this week - this will be an important catalyst to watch. The reason I think that this doesn't correlate with high volatility is because the Fed has ramped its asset purchases relative to the GFC, and much earlier, which I think has the effect of limiting vols.
This trade especially requires prudence due to the risk in being short vol, and the momentous consequences of being right in shorting stocks. For this reason I suggest getting short vols by getting short the front month of VIX futures, while getting long the second month, and rolling this trade over until the spread becomes negative.
In getting short stocks, I think spoos will fall the most as Qs are being buffetted by increased online demand. This means that it might be prudent to get short spoos at 2800 with an initial target of 2400 with a stop at 2860. If it turns out the initial short is stopped out and spoos close above 2800, then we might think about getting long until 3000 and then trying for another short at 3000 with a stop at 3060. If spoos then close above 3000, we might declare that stocks will then get to new highs.
I think the reason a case can be made for the short side is that technically, we see that spoos are bumping right up against the 50% fib retracement. This is along with the fact that the rally over the past few weeks has happened on declining volumes. This indicates to me that this rally might be happening on weakening ground. This is along with the fact that we have the start of earnings season this week that could act as a fundamental catalyst. And a lesser important, but still worth considering, factor is that throughout this crisis, Goldman's research has been an excellent indicator of tops and bottoms - not in a good way. Their call for depression was met with the beginning of the rally and today, they declared the crash over which could be a potential reversal indicator.
Long Commodities - Gold, Silver, WTI, Sugar, Cotton
I think for the foreseeable future, USTs are not the place to be. This is because investors are being crowded out by the Federal Reserve's QE operations, along with negative real yields making them a less attractive haven. With these challenges in mind, I think the next place that capitals flow to as a store of value is gold and silver. In this environment, I think that silver has a chance of outperforming. This is because as China gets back to work, there might be a demand for industrial metals to get their manufacturing sector restarted. This of course, has the risk of the possible second wave that they might face. Therefore, gold might be a more durable, more probable bet. I think for this same reasoning, that China gets back to work, we might see cotton prices strengthen as China is the biggest demander.
As mentioned before, I think that OPEC+ will be able to work out some kind of deal that will prop up oil markets. We have seen already their willingness to come to the table with the historic cut of 10mln/bbl, though this was largely seen as ineffectual. This might indicate that they will be more likely to come back to the table to renegotiate more cuts. For this reason I think that WTI and Brent will hold their recent local lows. Because of this, I think sugar might also be an interesting trade. This is because there is a noticeable relationship between oil in sugar in that as oil prices increase, Brazilian sugar is converted to ethanol for domestic fuel use. This is important because Brazil is the second largest producer of sugar, after India which is another big oil importer.
I think gold is really interesting because along with the above fundamental reasoning, it has completed an inverse head and shoulders right at the 1700 level. I take this to be a significant happening, especially since the pattern developed over the course of a month. I think this allows for it to run to at least 2000. If we get in with a stop at 1740, we get around 5:1.
What I think is technically so interesting about silver is that it has recently broken above the 50% retracement level, indicating this could be a meaningful recovery. However, what we are seeing is a congestion in between the 15 and 16 handles. I also see potential liquidity points at 17, 19, and 20. The opportunity here might be to buy silver at 15.1 with a stop at 14.9, or wait until there is a close above the 16 handle and play a move up to either 17, 19, or 20.
Here we see that the front month of WTI is ranging in between 20 and 30, which has acted as a previous support and now as a resistance. We saw that prices increased after cuts were announced but wasn't able to break through 30. I think this is because it's a step in the right direction, but not enough. Given that they were able to make a deal, it seems likely they might be able to make another to support prices. For this reason, it might make sense to take a small position at 20, with a stop at 18.9 expecting it to break through the 30 level on any new potential cuts.
Given the bullish view on oil, and the connection between oil and sugar, it seems that sugar might be another way to take a bet on oil prices. This also has the component of consumption increasing, which is a possibility due to China's reopening. I think it might make sense to take a small position at 10, with a stop around 9.85, and expecting a play up to around perhaps 11 or more. This would yield about 6.7
Thank you for reading. I apologize for the delay once again, and hope to be back to a more regular schedule from here on out. 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
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