Prime Trade Ideas: Outperform the S&P 500 as the Fed Slows

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.

New Trades

The Federal Reserve (Fed), European Central Bank (ECB) and Bank of England (BoE) have all hiked in February. Here are our latest views to survive in what follows:

• The February Fed meeting proved bullish for US risk assets. Bullish for MBS, high grade credit and equities.
• How to outperform the S&P 500. Short industrials (XLI) and materials (XLB; vs long S&P 500).
• Outlook brightens for crypto. Bullish bitcoin.
• ECB plays catch-up with BoE. Bullish EUR/GBP.
• Crude awakening for oil analysts. Bullish Brent oil.

And if you missed it, Bilal appeared on Bloomberg TV last week! He shared his thoughts on the current market movements, earnings results, and whether a recession is coming. You can watch the recording here.

Bilal’s Views

Oil Could Surge to $120

You can read the entire piece here.

No one is expecting much of oil markets in 2023. Consensus is for (Brent) oil prices to end the year unchanged from current levels of c.$85/bbl. However, we note that investors are reducing their net long oil positions to multi-year lows while limited production gains, rising demand, and historic trading ranges are all likely to spur it higher.

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 beating the S&P 500, up 2% against the index since inception and up 11% excluding the difficult clean energy sector. In his latest update, he unwound long positions in industrials (XLI) and materials (XLB), both have outperformed the S&P 500 since inception on April 2022.

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

Bitcoin

Find our latest bitcoin signals here.

We are bullish bitcoin over the next two to four weeks. On-chain/flow signals are very bullish while the macro backdrop has

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

The Fed and the ECB

You can lead our latest views on the Federal Reserve here, on the European Central Bank here, and on the BoE here.

As widely expected, the Federal Reserve (Fed) hiked 25bps at the policy meeting on Wednesday. The meeting provided limited new information on the policy path of the Fed’s economic view. They remain focused on core services excluding shelter inflation, which it does not think has turned yet. As a result, the market remains far apart from the Fed on inflation and the Fed Funds Rate, which is bullish for US risk assets such as MBS, high grade credit and equities.

Across the pond, the European Central Bank (ECB) hiked the policy rate by 50bp to 3% at their February meeting. Back in January, Henry suggested the ECB would keep hiking, with another 50bp hike to be delivered in March. This likely happens, with President Christine Lagarde saying the ECB intend to do such then. This adds to Henry’s expectations for a higher EUR/GBP.

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 SGX. 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.

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.

The models point towards further positive equity performance, with Europe top of the pack, while JGBs and bunds are forecast to underperform USTs and gilts. Elsewhere, they remain net-bearish USD and net-bullish EUR – agreeing with our discretionary views.

Equity momentum turned heavily bullish on the DAX, joining those for the FTSE-100. Meanwhile, they remain net bullish on the S&P 500 and Nikkei.

Rates momentum models are unchanged. They remain net-bullish on US rates and long gilts, and net-bearish on JGBs and bunds.

Within FX, momentum models are unchanged. As it stands, they remain net-bearish USD, net-bullish EUR, with bearish SEK and NOK signals proving strongest.

Ben Ford is a Researcher at Macro Hive. Benjamin 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.)