This month we took a deeper look into private markets, where we have been bearish for most of this year.
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We consolidate our favourite biases into one, easy-to-read, weekly report! Please find the original pieces linked throughout and a summary table at the end of the document. Reach out to us on Slack or email the author with any questions about the content.
FX, Rates, and Commodities:
- Bullish EUR/USD after Jackson Hole (31 August, Richard Jones)
- Market underestimates 2024 hikes (31 August, Dominique Dwor-Frecaut)
- Oil is supported at $80 (23 August, Viresh Kanabar)
- NOK/SEK to continue higher (24 August, Richard Jones)
- HFs are extremely long BRL and MXN (August, Macro Hive, CME)
Equities and Credit:
- An equity sell-off is unlikely (31 August, John Tierney)
- US Rates to Underperform JGBs (31 August, Bilal Hafeez)
Bilal’s Asset Allocation
- This month we took a deeper look into private markets, where we have been bearish for most of this year.
- We found that private market activity fell in H1, with total vehicles closed down over 50%.
- Investment trusts exposed to the private market are currently trading at wide discounts to their NAV as low liquidity and fears over asset valuations hurt investor sentiment.
- Private credit currently looks attractive versus high yield given the floating rate exposure, especially in the US where balance sheets remain strong and recession fears have calmed. Meanwhile, high-yield spreads have narrowed materially.
FX, Rates, and Commodities
Three Key Trades Following Jackson Hole. You can read the entire piece here.
The annual gathering in Jackson Hole is over, with senior central bankers including Fed Chairman Jerome Powell and ECB President Christine Lagarde having spoken at the event. Although no game-changing messaging emerged from Jackson Hole, price action in reaction to subsequent data releases leave key markets at interesting levels heading into a busy September.
For US 2-year treasuries, the yield has this week challenged, and pulled back decisively, from the year-to-date (YTD) high at ~5.12%. We like fading this elevated yield, as any level near 5% will prove attractive to investors, especially with market pricing suggesting the Fed tightening cycle is nearly complete.
Richard also likes going long EUR/USD which has bounced of support at 1.08. He thinks this price action and the dynamics driving it bodes well for additional upside in the pair.
Antipodean and Scandi Trends to Accelerate Next Month. You can read the entire piece here.
As with the rest of the G10 FX and rates space, Antipodean and Scandi markets have been rangebound in July-August as investors await a decisive September and Q4 for developed market central banks.
Richard expects Australian and New Zealand 2-year yields to continue their downward march, after both peaked year-to-date (YTD) last month.
He also thinks the Norwegian krone (NOK) to outperform the Swedish krona (SEK), with NOK/SEK to rise back to the top of its one-year range by yearend.
Macro Hive Collaborations
FX Position Watch: A Look at LATAM. You can read the entire piece here.
In our latest collaboration with CME, we look at the hedge fund positioning among EM currencies in Latin America. We find that:
- Hedge funds and asset managers are extremely net-long on the Mexican peso and the Brazilian real, in line with ultra-attractive yield differentials and solid underlying economic fundamentals.
- However, caution is necessary. Emerging market (EM) central banks have begun their cutting cycles, though this is expected to be moderate in Mexico and Brazil versus other EM economies.
- The FX volatility curve using CME options data suggests investors are no longer in “fear” mode, which is beneficial for the Mexican peso and Brazilian real.
Iranian Oil Gushes, Chinese Demand to Slow in 2024. You can read the entire piece here.
Iranian oil production is set to exceed 3mn b/d this year, with exports to rise beyond 2mn b/d. Most Iranian oil exports go to China: the latest estimates suggest around 1.5mn b/d. Iran alone could add 1% to global oil supply by yearend.
Estimates suggest China has drawn down its oil inventories in July by 13-40mn barrels. Finding the actual value will help reveal how long China can continue to reduce its net imports.
China’s economic slowdown is unlikely to cause a crash in oil demand this year. Much of the rebound in Chinese demand this year is from the reopening, driven by a bounce-back in jet fuel consumption. However, without significant stimulus, we should expect slower growth next year. Viresh believes Brent is well supported at $80, but recent inventory draws mean there are upside risks to $95.
Equities and Credit
What Is the Better Indicator, Headline or Core Inflation? You can read the entire piece here.
In his latest earnings outlook, John looks at the recent inflation data and concludes that the Fed may need to raise the fed funds rate above 6% to cool the economy down. This will allow the real fed funds rate to rise above 2%.
Barring a major shock, John believes that equities are unlikely to sell off significantly unless a recession seems likely. That will probably require the Fed to raise the real Fed Funds rate well above 2% – an unlikely development in our view.
There are no changes to our credit view since last month.
There were no updates to our crypto views this month.
Our momentum models cover FX, equities and rates. The basic strategy is to use returns (lookback windows) to give buy/sell signals. You can find the latest report here. Find out how to enhance your portfolio using momentum models here.
Equity momentum models (+0.3% WoW) outperformed FX (-0.3% WoW) and rates momentum models (-0.6% WoW) over the past week. Equity and rate momentum models are the best-performing models over a three-month time frame (+2.2%). Meanwhile, FX momentum models (-0.9%) struggled.
Momentum models continue to signal FTSE-100 underperformance, higher global yields, for USD/JPY and EUR/SEK to trade higher, and for AUD/USD and NZD/USD to trade lower.
Central Bank Monitors and Previews
Dominique’s current Fed view is that the SEP end-2023 inflation and unemployment forecasts shows the Fed is much more focused on the employment than on the inflation leg of its mandate.
Importantly, FOMC members have been surprised by the resiliency of GDP growth (see the minutes of the 26 July meeting). The Atlanta Fed nowcast for Q3 is nearly 6% saar. While this is likely to get revised down, it is still three times the trend!
Her base case is one more 2023 hike in November and three hikes in 2024, starting around mid-year. This compares with market pricing of four cuts in 2024.
July national Eurozone inflation outturns confirmed that headline rates are returning towards a trajectory typical of the pre-COVID period. Much of this is due to energy and transport inflation falling out. The question is whether this will continue ahead with gas and oil prices rising. More importantly, the trajectory for core inflation should be more concerning for the ECB – it has deviated back from typical levels recently.
Henry continues to see value positioning for ECB hawkishness, particularly versus the BoE via 2s10s GBP/EUR box (GBP steepener vs EUR flattener).