Prime Trade Ideas: Our Favourite Trades to Start 2023

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.

An Update on Our Latest Trade Ideas

We are over halfway through January and our trades continue to hold up. You can find out more about our changes here:

• The dollar endgame has begun. Bearish USD and CAD; bullish AUD and JPY; neutral EUR.
• Equity bulls to return (momentarily) – Neutral equities and crypto, overweight commodities and cash, underweight bonds – but will remain rangebound.
• Higher rates and a recession will see 2023 out. Marketweight investment grade and high yield corporate bonds.
• Ethereum to outperform bitcoin. Neutral-bearish bitcoin and bullish ethereum.
• China re-opening to buoy Asia FX. Bullish CNH, INR, KRW and THB.
• Iron ore complexities. Neutral iron ore.

Bilal’s Latest Update

The Dollar Endgame Has Begun!

You can read the entire piece here.

The current US dollar uptrend has lasted three years longer than the average – seven! Now, foreign investors are selling US equities while the market thinks the Fed is near the end of its hiking cycle. We think the dollar is in its endgame and could weaken 5% for three reasons:

1. US recession fears shifts the dynamic rest-of-the-world growth outpacing US growth.
2. Other more hawkish G10 central banks are yet to approach the end of the hiking cycle.
3. Our momentum models are signalling to sell the dollar against both the euro and the yen. Hedge funds are coming round to the idea, too. These trends could continue, supporting a weak dollar phase.

Asset Allocation

Find Bilal’s latest asset allocation biases here.

2023 has started with a positive tone. Most risk markets, from equities to crypto, are up. Four themes are driving this:

1. Investors expect the Federal Reserve (Fed) to end its hiking cycle soon.
2. China has abandoned its zero-Covid strategy and is doubling down on growth.
3. Europe has stabilised thanks, in part, to a milder winter and falling natural gas prices.
4. The Bank of Japan (BoJ) has started to widen its yield curve control (YCC) bands.

The near-term downshift in inflation means we turn neutral on equities, until it turns out stickier than investors believe. On bonds, we are more cautious and remain underweight. Meanwhile, we turn overweight commodities partly due to risk-on and partly to gain tail-risk exposure in the right direction (that is, it hedges against the possibility of inflation returning). Lastly, we stay neutral on crypto and overweight on cash.

John Tierney’s ETF Biases

ETF Model Portfolio

Find John’s full list of ETF biases here. Alternatively, they are in the table below.

John’s ETF model portfolio is up +0.4% since inception. His last update saw him unwind short positions in three European equity indices – Euro Stoxx 600 (SXXP), Euro Stoxx 50 (SX5E) and the FTSE 100 (UKX).

2023 Equity Outlook

You can read the entire piece here.

John has released his 2023 equity outlook. He expects equities to trade in the range of the past six months for now, although the robust labour market and upcoming earnings season may provide a tailwind in the coming weeks. Further afield, he believes equities will exit that range – whether up or down – as it becomes clear whether the Fed has done enough to quell inflation. In short, he sees risks tilted to the downside.

2023 Corporate Bond Outlook

You can read the entire piece here.

Before joining us at Macro Hive, John spent 30 years as a sell-side analyst covering structured finance and credit markets. He put his credit hat back on and produced his 2023 corporate bond outlook.

He thinks corporate bond spreads will widen significantly if, as we anticipate, persistent inflation leads to higher rates and a recession later this year. However, US companies are going into this likely scenario with exceptionally strong balance sheets. The surprise for many will be that default rates rise less than in previous recessions, and how quickly credit spreads recover. He thinks, for investors who can live with some volatility to be marketweight in investment grade and high yield corporate bonds.

Cryptocurrency Models

Find our latest bitcoin signals here and our latest ethereum signals here.

Bitcoin

Find our latest bitcoin signals here.

We are neutral-bearish bitcoin over the next two to four weeks. On-chain/flow signals are neutral while macro signals remain bearish.

Ethereum

Find our latest ethereum signals here.

We are bullish ethereum over the next two to four weeks. In short, a poor macro backdrop is unable to offset the very bullish on-chain/flow signals.

Discretionary Macro

G10 FX

You can find our latest views on G10 FX here, in collaboration with CME. We also published a piece on CAD, in collaboration with TMX. You can read it here.

We are bearish USD. However, this does not mean it is an easy trade. It is prudent to find the best currency to pair it with. We expect commodity currencies, such as AUD, to perform well on the China re-opening, disagreeing with investors’ shorts in these currencies. Meanwhile, we are more neutral on the euro as the market could be premature in pricing Fed cuts. On the yen, we think there is a risk the BoJ could adjust its YCC policy again, so we lean ore positively on the currency.

There is one currency we believe that will underperform USD, however: the Canadian dollar. Before the December Bank of Canada meeting, we set our sights on USD/CAD returning to 1.45. For now, we remain bullish USD/CAD.

Asia FX

You can read our latest Asia FX biases, in collaboration with SGX, here.

Asia FX has had a strong start to the year with the rapid China re-opening and related policy support buoying risk appetite. A weaker dollar, alongside lower yields, but US equities broadly holding up, has also been a key support. We warn, the global backdrop is weakening, leaving risks ahead.

For now, we are bullish CNH, INR, KRW and THB.

Iron Ore

John presents his view on iron ore to start the year. You can read it here.

The iron ore rally continued through the Christmas holidays as steel mills rebuilt stocks in anticipation of renewed building activity in the new year. John believes the rally faces several challenges, including China’s new iron ore buying consortium, rising Covid infections, and higher imports.

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.

(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.)