China | Emerging Markets | Equities | FX | Rates | US
MH Model Portfolio: Trading Rangebound Oil, Position Review Ahead of DM Rate Decisions
- By Bilal Hafeez
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Portfolio Changes
Since the last update, we added one trade to our portfolio. We also review our lineup ahead of key central bank meetings.
We went long a WTI call spread – read here.
We think the oil market remains rangebound around $85/ bbl for Brent and $82/ bbl for WTI. Supporting prices are an oversold oil price, a stable physical market, and declining crude exports from Saudi Arabia and Russia. Meanwhile, lower oil demand in China and weak refining margins cap upside.
To play the range, we enter a long Sep 80×85 1 by 1.75 WTI call spread.
Existing Trades
We have our key DM rates trades already locked in ahead of the FOMC and BoE meetings next week. Broadly, these position for Fed hawkishness vs the BoE and ECB. Outright, we see the Fed cutting only once this year vs increasingly dovish market pricing; we trade potential repricing via short Jan25 Fed Funds. We also see progress on wage gains and fiscal policy allowing further BoJ hikes, keeping our short 10Y JGBs.
We have two existing DM FX trades executed through options: short GBP/USD and short GBP/CAD. The former is more tactical – we want to fade the past month’s rally on a return below 1.2750. The latter should capitalize on stretched positions, rate differentials at resistance, and unsustainable data surprises.
Our focus in EM is squarely on China. We remain long Chinese equities via the A-shares ETF on limited earnings downside and potentially accelerating investment in Q3. We expect a higher USD/CNH via a long USD/CNH digital call and remain neutral CGB.
On the Radar
The Trump trade is top of mind. The initial reaction to Biden dropping out saw bonds rally, USD drop, and stocks rise. Ahead, the market faces a murkier picture: Trump has expressed willingness to do business with China, while his VP choice has criticized Wall St and big business. We are currently building a Trump beneficiary equity basket that Viresh will discuss on the webinar today.
USD/JPY to grind higher? The pair has started falling thanks to shrinking rate spreads, risk aversion and upcoming events risks (BoJ – markets price a 50% chance of a hike next meeting). Meanwhile, MoF intervention on 11 July established a ceiling at 162, and short JPY positioning has unwound dramatically. Despite this, we still like to buy on dips below 154.
Historic Performance
Our portfolio was flat on the week and is now up 0.8% YTD. The portfolio has returned +52.3% since inception (+10.0% annualised) with a 0.86 Sharpe ratio. This continues to place it above the average discretionary macro hedge fund since inception, which has gained 39% (Bloomberg: BHDMAC Index; Chart 1).
Current Trades
DM
Rates
- Long Z4 SONIA vs short Z4 SOFR (target: 75 bps, stop: 0 bps) – read here.
- 2s10s EUR steepener (entry: -45bp, target: 0bp, stop: -65bp) – read here.
- Short 10Y JGB (entry: 98bp, target: 130bp, stop: 80bp) – read here.
- Short FFF5 (entry: 95.20, target: 94.67, stop: 95.42 – read here.
FX
- Long 1.2750 2M GBP/USD put (entry: 57.7bps, target: 267bps) – read here.
- 1.73×1.70 1 by 1.25 ratio 3M GBP/CAD put spread (entry: 47.6bps) – read here.
EM
FX
- Long 3m 7.40 USD/CNH digital call – read here.
Equities
- Long CSI 300 via ETF ASHR US (entry: 23.65, target: 10%, stop: -5%) – read here.
Commodities
- Long Sep 80×85 1 by 1.75 WTI call spread (entry: 49.4bps, target: 340bps) – read here.
To see a full list of our trades since inception to the end of 2023, please see here.
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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.
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(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.)