Commodities | Equities | FX | Portfolio Updates | Rates
Prime Trade Ideas: CHF, JPY Key to Profiting From an Ugly Debt Ceiling Negotiation
- By Viresh Kanabar
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- 3 min read
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.
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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.
Latest Updates
FX, Rates and Commodities
- Why we like CHF and JPY into the US debt ceiling debacle (22 May, Richard Jones).
- How China’s disappointing recovery changes our favoured Asian FX trades (18 May, Macro Hive and SGX).
- US rates continue to drive the G10 (18 May, Richard Jones).
- We continue to be bullish on Brent to $85 as global demand estimates keep going up (19 May, Viresh Kanabar)
Cryptocurrency
- Turning neutral-bearish on Ethereum (11 May, Dalvir Mandara).
Momentum Models
- Flipping Net-Bearish on EUR/USD (18 May, Bilal Hafeez).
Podcasts
Founder and Chairman of Fulcrum Asset Management, Gavyn Davies joins Bilal to discuss the main learnings from his career, his thoughts on asset allocation and ChatGTP as well as his thoughts on the energy market.
Carrying on our focus on AI and ChatGPT, Bilal also spoke with Stefan Jansen. Stefan is the author of the widely read ‘Machine Learning For Algorithmic Trading’. He is the founder and Lead Data Scientist at Applied AI. On the podcast they discuss some of the main benefits of using machine learning that can’t be found elsewhere as well as some of the key challenges.
Bilal’s Asset Allocation
Find Bilal’s latest asset allocation biases here.
This month, we expanded the coverage of our asset class views and provide further granularity in each component.
- We stay fully overweight cash for the optionality and yield.
- We shift marginally underweight in EAFE equities, due to already large gains since October last year and our hawkish ECB view.
- While we position for curve steepening in the US (overweight short bonds and underweight long bonds), we find value in Gilts as the BoE could be cutting by year end.
FX, Rates and Commodities
G10 FX
Four Trades for a Debt Ceiling Impasse. You can read the entire piece here.
Negotiations between Democrats and Republicans have so far produced no agreement on the debt ceiling or US federal budget. Market concerns are mounting that the US will run out of cash to meet its obligations, after the US Treasury warned that this could happen as early as 1 June. Specifically, Richard favours:
- Short USD/CHF
- Short USD/JPY
- Long USTs
- Long German government bonds
Where the Fed Goes, Its Peers Will Follow. You can read the entire piece here.
After a wild end to the first quarter for short-end rates markets globally, the second quarter has been comparatively subdued so far. Outsized volatility in February, and especially in March, has given way to rangebound, choppy trading in the 2-year segment of developed rates markets. Richard looks closely at what’s priced in for the Fed, ECB, BoE and SNB. He finds that where the Fed goes, other developed market central banks will follow. A dovish Fed will lead to lower US yields, and lower US yields will feed through to Germany, the UK, and Switzerland.
- Long 2Y USTs
- Bullish 2Y Bunds, Gilts and Swiss GBs
EM FX
Our latest Asia currencies insights, in partnership with SGX. You can read the entire piece here.
Continued disappointment over the pace of China’s recovery is weighing on Asia FX. Where momentum in China has increased, it has been focused on domestic sectors with little spillover to the rest of North Asia. And other than a small gain for THB, all other Asian currencies are weaker over the past month, with USD/CNH now back above 7. Also hindering performance is the recent USD strength, with robust US data leaving potential for another Fed rate hike, and Asia’s lower carry environment compared with Latam and EMEA.
THB is now the only currency where we remain constructive in the near term. The C/A upswing is underway, domestic momentum is rising, and valuation is favourable. However, the uncertain outcome of the mid-May election leaves some near-term risks.
Oil
Oil Demand on the Rise. You can read the entire piece here.
Global demand growth for 2023 continues to be revised higher. The EIA, OPEC and IEA all revised their outlook for global demand higher versus last month. The IEA revised their estimates of global oil demand growth up by 0.2mn b/d to 2.2mn b/d. This brings their estimate of total demand this year to 102mn b/d versus just 101mn barrels for the EIA, whose estimates remain the most conservative.
We continue to be bullish on oil to $85 given the likelihood of a supply deficit later this year. However, we are significantly less bullish compared to both OPEC and the IEA as we don’t have any evidence of a recovery in China’s industrial sector.
Equities and Credit
Equities
Our broader equities view remains the same, but given the downshift in earnings guidance for Home Depot (HD), John sees it as a buy.
Retailer Smoke Signals: Food Is Where the Action Is, But Do Not Forget Housing. You can read the entire piece here.
Home Depot and Target both managed to report earnings beats but also slowing sales. Maybe no surprise there – people have been turning away from ‘stuff’ for nearly a year. Walmart, meanwhile, reported solid sales and earnings beats, largely because of its grocery business.
Notably, none of these companies mentioned concerns about recession risks. But they see consumer preferences changing, which presents other challenges. Both HD and TGT say consumers are buying fewer large-ticket and discretionary items. This appears to be largely because people do not need these items after bingeing on them during the stay-at-home pandemic period, although falling real incomes have been a factor too.
John believes HD is managing expectations downward based on softer consumer demand for big ticket items and is not factoring in California’s recovery or stronger housing activity. Barring a collapse in housing or the economy, HD may surprise on the upside later this year.
Regional Banks Are Morphing Into Zombies. You can read the entire piece here.
The regional bank ETF KRE is down 26%, reflecting expectations that rising deposit rates will squeeze net interest margins and higher capital requirements will erode returns on equity.
John expects to see consolidation in the regional banking sector over the coming years. However, there is no obvious way to position for this consolidation today. It is difficult if not impossible to identify the banks that will emerge as winners so does not see regional banks as a buy currently.
Cryptocurrency
Should I Buy Bitcoin Now? You can read the entire piece here.
The macro backdrop remains poor. Our recession probability indicator remains over 70%. Bitcoin is yet to experience a serious global recession, but we expect one would limit any potential upside in price action. This is because during times of economic uncertainty and weak growth, investors may be more inclined to sell risky assets like bitcoin and seek safer investments such as government bonds.
When looking at on-chain/flow metrics for bitcoin, things look more neutral. So, overall, we are slightly bearish.
Momentum Models
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.
Momentum models returns proved positive over the past week led by a positive outing in equities (+0.9% WoW). However, performance is poor over a three-month horizon. The models we track have lost 1.4%, on average. Equity momentum models (-4.2%) have fared worst.
Since our last update, momentum models have returned less supportive of the S&P 500 and heavily bearish on the FTSE-100. Meanwhile, they have flipped net-bearish on the EUR/USD and net-bullish on USD/CAD.