Bilal’s Themes And Trade Idea Update – Positioned for Unstable Markets

I rotated my short GBP/NOK trade to short GBP/JPY last week. I think the bullish commodity theme may be crowded and I think we are in unstable markets, so I like to be long yen. Here are the details:

1. China slowdown: long China rates (10y futures, FX unhedged), short KOSPI. This theme has performed well over the past week, with small additional gains in the China rates trade and larger gains in short KOSPI.
   • Premise: China property weakness, new regulations on private sector, continued lockdowns around COVID and poor energy management all contribute to growth weakness.
2. Struggling UK: short GBP/JPY. I’ve re-oriented this trade to be more UK focused than Europe-focused. We’ll see whether BoE hikes this week (I think they will). The short GBP/NOK trade made 2.5%, while the new short  GBP/JPY is small upl.
   • Premise: Hawkish BoE into Brexit supply issues is bearish for GBP
3. Defensive equities: long SPX/short RTY. This trade gained 1% on the week thanks to solid earnings from large caps.
   • Premise: US growth deceleration, excessive US fiscal optimism.
4. Lo-flation/Europe catch-up: long EUR-USD 2s10s box trade (US flattener). This trade has been performing well as the US curve has out-flattened the euro curve.
   • Premise for box trade: On the US side, beyond base effects and supply-related shocks, there is little evidence of structurally higher inflation. Meanwhile, there is more scope for inflation upside in the Euro-area.

In terms of performance, our portfolio gained 0.5% on the week. It is up 9.6% year-to-date. It is up 16% since inception with a Sharpe ratio of 2.2 (Chart 1, Table 2). My biggest risk position is in equities (Chart 2). The P&L are paper returns, so are likely overstated compared to a real invested portfolio.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)