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Prime Trade Ideas: Defensive Positioning Into May Central Bank Meetings
- By Ben Ford
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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
Asset Allocation
- Sticking by the ‘everything breaks’ portfolio (18 April, Bilal Hafeez).
FX, Rates and Commodities
- Fade USD and US 2Y yield rallies (20 April, Richard Jones).
- Remaining broadly constructive on Asia currencies (19 April, Macro Hive & SGX).
- Staying neutral to bullish on oil (14 April, Viresh Kanabar).
Equities and Credit
- Stay long the financials and maintain defensive positions (21 April, John Tierney).
- Time to short the semiconductor sector (19 April, John Tierney).
Cryptocurrency
- Turning neutral-bearish on bitcoin (25 April, Dalvir Mandara).
Momentum Models
- Turning net-bearish on the S&P 500 (27 April, Ben Ford).
Central Bank Views
- 25bp May Fed Hike, no 2023 cuts! (27 April, Dominique Dwor-Frecaut).
- Two more BoE 25bp hikes in May and June (19 April, Henry Occleston).
- ECB to deliver another 50bp with 4% terminal in sight (24 April, Henry Occleston).
And if you missed it, Mustafa recently appeared on Bloomberg TV giving his thoughts on the possibility of a US recession, his view on the Federal Reserve (Fed), and the market with continued inflationary pressures and following a banking crisis.
On top of this, investment heavyweights joined Bilal on the podcast. Ken Tropin, Chairman and Founder of Graham Capital Management, discussed all things macro trading while Robert Koenigsberger, Founder, CIO and Managing Partner of $5bn EM fund Gramercy, explained how to find value in EM!
Bilal’s Asset Allocation
Find Bilal’s latest asset allocation biases here.
While many were panicking about a 2008-style bank crisis, we cautioned against such predictions. So far, our view has been right. US equities have bounced back from the declines following Silicon Valley Bank’s failure, credit spreads have started to narrow, and US banks are using less of the Fed support facilities than a few weeks ago.
But it is not all smooth sailing! As a result, we leave our ‘everything breaks’ portfolio unchanged; we are underweight equities and bonds, neutral commodities and crypto, and overweight cash!
FX, Rates and Commodities
G10 FX
Trading the Fed pivot theme. You can read the entire piece here.
US short-term interest rate traders (STIR) are pricing a Fed reversal this year, with a lower policy expected by year-end. Indeed, traders see inflation already falling from its peak, wage growth decelerating, tougher credit conditions and the Fed’s cautious economic prognosis as evidence the tightening cycle is ending. Accordingly, traders view a US recession this year as nailed on, with the Fed to react decisively and cut rates by yearend in response.
Richard Jones believes this presents three opportunities:
- Bullish US 2Y: the US rates market is now firmly in a ‘buy price dips’ paradigm, with jumps in yields opportunities to initiate (or add to) long positions.
- Bearish DXY, bullish EUR/USD: the USD is now a ‘sell on rallies’, with the USD looking especially vulnerable against the EUR.
EM FX
Our latest Asia currencies insights, in partnership with SGX. You can read the entire piece here.
Resilience in global equities alongside market expectations for Fed rate cuts by yearend have left Asia FX rangebound over the past month. Cautious optimism over the ongoing reopening in China is offsetting US recession risks, even though China’s recovery has yet to broaden past domestic services and infrastructure. Asian currencies have held up through the March banking sector stress and recent rise in oil prices. But the rangebound performance has nevertheless lagged much of higher-yielding Latam and EMEA.
Asian central banks have now largely finished tightening, with the RBI, BOK, BI and MAS all on hold in recent weeks. CBC surprised with a rate hike in March but, with total tightening at just 75bps, TWD remains one of the lowest-yielding currencies in EM. BOT is the only major central bank in Asia expected to hike rates further. But with the policy rate at 1.75% and expected to peak at 2%, Thailand will maintain one of the lowest policy rates globally.
In our earlier thematic reports, we showed how KRW and TWD have the most to gain from lower US rates and the China reopening. As these themes are still in play, we retain our broadly constructive stance on Asia currencies. And with the positive surprise on China’s Q1 GDP data, we remain bullish CNH. We remain neutral INR with ongoing RBI intervention and neutral SGD with MAS now on hold. For KRW and TWD, we remain bullish given some improvement in growth momentum and expected US rate cuts. We also remain constructive THB.
Commodities
Our latest update on oil. You can read the entire piece here.
The Brent futures curve moved further into backwardation, signaling increased tightness in the physical market. This is due to a combination of factors, including the recent announcement from OPEC+ to voluntarily cut oil production from May to the end of the year, as well as the EIA’s STEO update, which signals supply concerns later this year.
The EIA’s STEO update revised global oil production lower to 101.3mn b/d from 101.5mn b/d and reduced their forecast of OPEC 13’s energy production by 0.5mn b/d. However, they also increased their forecast of Russian crude production (again) to 10.6mn b/d. This means the crude and liquids market is forecast to move into under-supply during the second half of this year.
The EIA also estimated the impact of the Inflation Reduction Act (IRA), which was adopted in August 2022. Under the IRA, qualifying clean energy projects can receive additional credits on top of a base credit value if they satisfy certain requirements. Solar and wind power are set to be the biggest winners from the IRA, with net electricity generation expected to be 60% and 70% higher respectively in 2030. Battery storage capacity is another big beneficiary and is forecast to increase rapidly – almost 3x by 2030.
Equities and Credit
Equities
Stay long financials and maintain defensive positions. You can read the entire piece here.
Our model equity portfolio is down 2.9% since inception, largely due to poor performance of financials following the Silicon Valley Bank collapse. We remain bearish on equities because we think inflation will prove sticky and the Fed will not deliver the rate cut markets are pricing. As a result, John stayed long financials and maintained an overall defensive position.
John also unwound his short position in homebuilders given the strong earnings homebuilders have posted recently.
Time to short the semiconductor sector. You can read the entire piece here.
The strong equity rally in the S&P 500 (SPX) and particularly the NASDAQ 100 (NDX) has come amid declining earnings forecasts, and analysts have recently downgraded forecasts further. The semiconductor sector has been particularly robust even as earnings forecasts have fallen by 15% since the year began.
John expects semiconductor companies to face strong headwinds in 2023. The drought in consumer electronics is expected to continue into 2024; the 2021-22 boom in corporate CAPEX is over; at best, 2023 CAPEX may increase in line with inflation.
Cryptocurrency
Will inflation worries doom the bitcoin rally? You can read the entire piece here.
The macro backdrop remains poor. Despite a higher-than-expected April PMI, March US CPI showed no incremental progress on disinflation, and should mean the Fed have to keep policy rates tighter than markets currently price. Meanwhile, our on-chain/flow signals are neutral for bitcoin, less supportive than they had been in the previous report.
Overall, we are neutral-bearish on bitcoin from bullish previously.
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.
Positive momentum model returns were short-lived, with negative performance across 16 of 19 of the models we track. Returns have typically been far better in the FX carry strategies we follow YTD. As it stands, equity momentum models are net-bearish on the S&P 500, but bullish elsewhere. They have turned net-bullish JGBs and intensified their GBP bullishness and AUD and CAD bearishness.
Central Bank Views
The next round of Fed, ECB and BoE meetings are just around the corner, so we have pulled all our thoughts into one easy place!
Federal Reserve
No credit crunch, yet. You can read the entire piece here.
The banking system has been stable since the March FOMC meeting, as the Federal Reserve (Fed) expected. Meanwhile, contrary to Fed expectations, a credit crunch has yet to occur. Inflation and growth data remain strong, too.
As a result, Dominique agrees with the market pricing an 80% chance of a 25bp May hike but disagrees with the 70bp rate cuts priced in for the remainder of 2023.
Bank of England
UK data suggests June and May BoE hikes. You can read the entire piece here.
Latest data showed that the labour market is continuing to loosen. The inactivity rate and vacancies are falling, while employment growth is driven by part-time and self-employment. However, current wage growth remains a strong risk, though. And while it remains high, the BoE will struggle to take comfort from the loosening labour market.
Elsewhere, inflation pressures remain persistent, particularly in the core reading. So, while services inflation remains below MPR forecasts, its recent trajectory and high wage growth limit positive takeaways.
As a result, Henry expects the BoE will hike again in May and June by 25bp.
European Central Bank
Stubborn core inflation suggests 50bp in May and a 4% terminal. You can read the entire piece here.
Recently, ECB speakers have toned down their hawkishness, rallying instead behind buzz-phrases such as ‘most hiking being behind us’ and ‘data dependence’. However, the fundamental inflation picture has not improved. Recent data releases suggest that the ECB will need to come to terms with far higher core inflation this year than they currently assume. As markets continue to normalise following the banking volatility, I expect the hawkish pricing to resume.
Henry expects core inflation will remain stubbornly high in the coming months (staying above 5.5%). This will outweigh the rapid decline in headline inflation. Consequently, he sees a strong risk for another 50bp hike in May and a terminal rate above 4%.