Commodities | Equities | FX | Portfolio Updates | Rates
Prime Trade Ideas: Positioning for a US Debt Ceiling Debacle
- By Ben Ford
- 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
- Turning bullish JPY (11 May, Richard Jones).
- KRW most vulnerable to US debt ceiling debacle (11 May, Macro Hive and SGX).
- Bullish BRL until credibility fears set in (11 May, John H. Welch).
- CHF can outperform in 2023 (4 May, Richard Jones).
- Short NOK or CAD vs USD to hedge oil exposure (4 May, Macro Hive and CME)
Cryptocurrency
- Turning neutral-bearish on ethereum (11 May, Dalvir Mandara).
Momentum Models
- Pared EUR and GBP Bullishness (11 May, Ben Ford).
Heavyweights of the investment arena continue to join Bilal on the podcast. Gene Ma, Head of China Research at the IIF, discussed the US-China decoupling and China’s growth outlook. Meanwhile, Zar Amrolia, former co-Chief of XTX Markets, delved into how he reinvented trading.
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
Trades for a JPY Revival. You can read the entire piece here.
JPY, long seen as a haven, is the second-worst-performing G10 currency this year, down about 2.5% against the USD. The yen has suffered mostly from the maintenance of an ultra-stimulative monetary policy stance of the Bank of Japan (BoJ). Against the bulk of other G10 currencies, expect the yen to reverse a portion of its 2023 losses, driven by haven demand and an end to tightening cycles elsewhere. Specifically, Richard favours:
- Bullish JPY trade-weighted index,
- Bearish USD, EUR, and GBP vs JPY.
Swiss Franc Can Stay Top of the Charts in 2023. You can read the entire piece here.
CHF is the best-performing G10 currency in 2023, rising almost 5% against USD. It has done so without fanfare, benefitting from the US banking crisis and lingering geopolitical challenges while shrugging off domestic banking challenges. The Swiss National Bank (SNB) has, and will continue, to buoy the currency through tighter monetary policy and verbal support. Importantly, it will keep matching European Central Bank (ECB) moves. As a result, Richard believes CHF dips will be buying opportunities, especially if geopolitical tensions ratchet higher and/or a US-led global economic slowdown emerges. This is best served by being:
- Bullish CHF trade-weighted index,
- Bearish EUR, GBP, and JPY vs CHF.
EM FX
Our latest Asia currencies insights, in partnership with SGX. You can read the entire piece here.
The US Treasury has almost run out of cash to fund its current spending obligations. Typically, the Treasury can issue debt to raise cash, but it is nearing its debt ceiling limit. Only a bipartisan agreement to lift the ceiling can avert a default crisis. Current estimates suggest that the Treasury has until June to do this.
Huge economic and market uncertainties over the possible impact of a debt ceiling breach caused significant market turbulence in 2011 and 2013. In 2011, the US lost its AAA rating from S&P. With the 2023 X date potentially now just one month away, we review the 2011 and 2013 episodes and find that KRW is the most vulnerable and INR least.
Outside this, we maintain a favourable view on Asia FX based on the China recovery and Fed pause. Bullish CNH, KRW, THB; neutral INR.
Brazil – Spend, Tax, and Lend. You can read the entire piece here.
The new Lula administration finally outlined a new fiscal rule to replace the spending cap after months of negotiations and speculation. The rule confirms what I considered the administration’s main objective: increase spending and taxes.
The economic team was initially considering the net debt-GDP target outlined in a December 2022 contribution but opted for this alternative. The team is now working to releverage state banks to finance quasi-fiscal expenditures. The rule limits spending to 70% of tax revenue but does not penalize or outline adjustment policies if the government violates the rule. This follows a huge primary spending increase established by the transition bill of December 2022. With no real fiscal restrictions, Brazil seems on a path to repeat the 2013-2015 disaster.
With fiscal expansion, we have expected a lower USD/BRL until credibility fears set in.
Commodities
How commodity investors can hedge their exposure with FX futures, in partnership with the CME Group. You can read the entire piece here.
Broad commodity prices have been falling since the middle of summer 2022. We find certain currencies, such as NOK and CAD, are most correlated to commodities, in particular with Brent Crude. The correlations suggest commodity investors could hedge downside commodity price risk, including lower oil prices, by being short CME Group NOK/USD or CAD/USD futures.
Our latest update on oil. You can read the entire piece here.
The oil price has fallen sharply over the last week and is outside our forecasted range of $75-85 on Brent. With fundamentals remaining firm, we see the recent dip in oil below our expected range as an opportunity. We therefore turn from neutral to bullish.
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
How has Ethereum performed since the Shapella upgrade? You can read the entire piece here.
The macro backdrop remains poor. The April CPI release showed high and stable inflation while April’s non-farm payrolls added to labour market overheating with nominal wage growth accelerating further from the Fed’s inflation target. Meanwhile, on-chain/flow signals are neutral for ethereum, less supportive than they had been in the previous report.
Overall, we are neutral-bearish on ethereum 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.
Momentum models returns were poor over the past week, on average, despite a positive outing in rates (+0.3% WoW). Performance is poor over a three-month horizon, too. The models we track have lost 1.4%, on average. Equity momentum models (-4.5%) have fared worst.
Since our last update, momentum models have become more supportive of the S&P 500 and Bunds, while they have pared EUR and GBP (vs USD) bullishness, and AUD bearishness.