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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:
- Beware MoF intervention when selling JPY (9 November, Richard Jones)
- US growth to outperform bearish consensus in Q4 (9 November, Dominique Dwor-Frecaut)
- Buy USD and sell equities in 2024 (3 November, Vasileios Gkionakis)
- Go long regional banks and homebuilders (2 November, John Tierney)
- Momentum models turn max long Nikkei (9 November, Ben Ford)
Bilal’s Asset Allocation
Find Bilal’s latest asset allocation biases here.
- Our views on the major asset classes remain the same. Despite the short squeeze in US rates following the lower-than-expected treasury issuance, we remain overweight the FTSE 100. Agency MBS also looks interesting at current valuation.
FX, Rates, and Commodities
USD/JPY Heading Into the Danger Zone. You can read the entire piece here.
After rallying hard post-Bank of Japan (BoJ) last week, verbal intervention from the Japanese Ministry of Finance (MoF) and a slide in US yields saw USD/JPY sell off sharply.
We think that this week’s rally moves the pair back into the MoF’s intervention crosshairs and see material risk of official Japanese yen buying.
As a result, Richard is wary of long USD/JPY and does not take a position, convinced the market will test the MoF’s resolve and trigger intervention.
USD/JPY Upside Remains Compelling, But Beware Intervention. You can read the entire piece here.
The Bank of Japan (BoJ) enacted small alterations to its monetary policy this week. This led to a big drop in the Japanese yen (JPY) and a rise in the 10-year Japanese government bond (JGB) yield.
Although fundamentals suggest that USD/JPY can continue rallying, the threat of official Japanese intervention in the FX market to oppose JPY weakness means we are neutral USD/JPY at this elevated level.
Brent has fallen sharply over the last two weeks, momentarily trading below $80 on Tuesday. The oil market is now flashing amber, given the weak crack spreads and lack of backwardation in prompt spreads. However, we think $80 on Brent is probably too cheap given where fundamentals are. The oil market remains tight and, as long as the European economy does not see unemployment rise rapidly, demand should be supported.
We are bullish on Brent at $80/ bbl. However, $90/ bbl is now a ceiling.
Macro Hive Collaborations
Guest Article: US Fiscal Policy Is Still on a Slippery Slope. You can read the entire piece here.
US fiscal policy is extremely loose and the most misaligned with underlying economic dynamics since 1980. This risks even higher bond risk premia, keeping yields higher than cyclical growth can justify, which could prevent the US government from effectively managing the next recession.
Equity indices and volatility continue to pay little attention to growth, geopolitical and debt risks; Vasileios fears 2024 will be a very bad year for global equities.
He is also constructive on the dollar but acknowledges that failure to control the budget balance could result in recession gains being offset by investors requiring a higher risk premium for USD-denominated assets.
Equities and Credit
Go Long Regional Banks and Homebuilders. You can read the entire piece here.
With the Fed on hold, and perhaps indefinitely if inflation does not pop again, we see opportunity to go long interest-sensitive sectors that were beaten down by the prospect of 10-year Treasury rates rising above 5%.
Recent earnings reports show regional banks and homebuilders continue to exhibit strong underlying fundamentals. With rate pressure relenting for now, we expect those fundamentals to reassert themselves.
We like holding the regional bank ETF KRE and the homebuilder ETF (XHB).
We like to be tactically overweight in the consumer staples ETF XLP.
There are no changes to our credit view since last 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.
Momentum models (-0.5% WoW) added to last week’s losses, with rates (-1.2% WoW) leading. FX momentum models (-0.1% WoW) registered smaller losses. Rates momentum models are the best-performing models over a three-month timeframe (+2.1%). FX (-0.1%) and equity (-1.4%) struggled.
Momentum models flipped bullish on Gilts, in line with Henry’s view to receive near-term SONIA futures. They also flipped bearish on GBP/USD; Ben and Richard expect GBP to underperform EUR.
Central Bank Monitors and Previews
No Sign of October Air Pocket. You can read the entire piece here.
In late September, Dominique was concerned that the US economy could be about to hit an air pocket. In reality, there were limited headwinds in October as a government shutdown did not happen, tax payments increased only moderately, and student debt service resumed but likely with limited compliance.
High frequency indicators of consumption and the labour market suggest mediocre rather than contracting October economic activity.
In sum, expect one more hike in December!
(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.)