Prime Trade Ideas: Prepare for a Hawkish Battle

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

• Long 2Y German government bonds and 6M US Treasuries (2 March, Richard Jones).

Equities and Credit

• Bullish small-cap oil stocks (1 March, Josh Young).
• Maintain defensive equity positions (24 February, John Tierney).
• Grim earnings outlook for H2 (20 February, John Tierney).

Cryptocurrency

• Bullish bitcoin despite weak macro backdrop (28 February, Dalvir Mandara).
• Ethereum to outperform bitcoin (24 February, Robin Wilkin).

Momentum Models

• Bearish US equities, bullish Japan, German and UK equities (2 March, Ben Ford).
• Bearish US, UK, German and Japan rates (2 March, Ben Ford).
• Bullish USD/JPY and EUR/CHF, bearish $-bloc(2 March, Ben Ford).

And if you missed it, Bilal appeared on Bloomberg TV last week! He shared his thoughts on the global inflation picture and what happens if the ECB raises rates to 4%! He also shared Macro Hive’s outlook on the markets and some of his top trade ideas. You can watch the recording here.

Bilal’s Asset Allocation

Find Bilal’s latest asset allocation biases here.

Bilal’s asset allocation will be updated in March. For now, the themes remain:

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.

FX, Rates and Commodities

G10 FX

Play the ranges in GBP with a bearish bias. You can read the entire piece here.

UK economic fundamentals look challenging, especially relative to developed market peers. Richard Jones expects this economic underperformance to weigh on the pound in 2023, leading it to lag its G10 counterparts.

Specifically, he favours selling any GBP/USD strength within the ~1.19/1.25 year-to-date range. He also thinks EUR/GBP will head lower, and that any increase in geopolitical risk (here are three possible geopolitical crises for 2023) and/or broader market volatility will increase haven demand for CHF, with CHF particularly vulnerable.

G10 Rates

The ECB and Fed give investors opportunities. You can read the entire piece here.

The European Central Bank (ECB) and Fed have tightened policy materially in the past year. As a result, bond yields across the German and US interest curve have risen considerably, providing opportunities for investors.

Turning to specifics, investors do not want to take on much duration risk, as even short-dated securities offer appealing yields. With inverted yield curves pointing to a strong probability of a recession in the euro area and US, this will make fixed income even more attractive. We would buy 2Y German government bonds and 6M US Treasuries.

EM FX

China reopening, Adani Group fallout and TWD and SGD neutrality. You can read the entire piece here.

The January rally in Asia FX has stalled with a stronger USD and pullback in risk appetite. Earlier bumper equity inflows to the region have receded. And higher US yields, as Asian central banks near the end of easing cycles, is unsupportive for debt flows. Slow disinflation in the US and a still-strong jobs market leave the market pricing in a higher-for-longer scenario on US rates, particularly compared with the dovish tone after the January FOMC meeting. Nevertheless, the overall backdrop of continued growth momentum in the US and a better-than-feared performance in Europe still supports Asia’s trade-orientated economies.

We analysed the impact of BOJ tightening in our February SGX special focus, and risks around elevated JPY volatility have continued to play out with the nomination of the new governor Kazuo Ueda. While Ueda will not start until April, we still think further tightening may come before then, given the extent of market dislocation. For now, Ueda has stated support for Japan’s ultra-accommodative policy. But the choice of an academic, rather than an incumbent at MoF or BOJ, could signal new policy choices ahead.      

With China’s reopening ongoing and the domestic recovery taking hold, we retain our bullish stance on CNH, KRW and THB, despite the pullback MTD. We remain neutral on INR amid the ongoing fallout from the Adani Group fraud allegations. We are also neutral TWD and SGD.

Commodities

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.

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.

Equities and Credit

Equities

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

Two changes to John’s ETF model portfolioin his latest update: he reverses his Communication and Consumer Staples biases to be short Communication (vs S&P 500) and long Consumer Staples (vs S&P 500).

We do not trust this rally. You can read the entire piece here.

Whatever Chair Jerome Powell meant to say, equity markets heard one simple message: inflation is dropping, and the Fed will cut rates. Hence, a remarkable two-day rally in the NASDAQ 100. If the Fed cuts rates, it will be because of a sharp recession, a jump in unemployment and falling inflation. None of this augers well for equities.

Small-Cap Oil Stocks Are Compelling. You can read the entire piece here.

Guest author Josh Young, the CIO and Founder of Bison Interests, believes that small-cap oil and gas equities are trading at a discount compared to large-cap peers. Now, with share price underperformance and rapid fundamental improvement, there is a more compelling case for their valuations. Indeed, PTSD from 2014-2020 bear market likely explains the valuation discount, creating an opportunity for investors.

Credit

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

Was the Fed Right About the Bitcoin-Macro Disconnect? Find our latest bitcoin signals here.

• We are bullish bitcoinover the next two to four weeks. On-chain/flow signals are very bullish while the macro backdrop remains bearish.

How Will the SEC Crackdown on Staking Affect Ethereum? Find our latest ethereum signals here.

• We are neutral-bearish ethereumover the next two to four weeks. In short, the previously strong on-chain/flow signals have calmed. It means the bearish macro backdrop is now weighing on the cryptocurrency.

The Short-Term Crypto Correction Will Continue! You can find Robin’s latest technical signals here.

On a shorter term than the above, Robin Wilkin, global market veteran with over 30 years of experience as a sell- and buy-side strategist and trader, believes ethereum and bitcoin are set to correct lower, leaning for a sharper retracement in the latter.

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 point towards US equities underperforming their peers, while rates are expected to sell off further. In FX, the USD remains top of the pack.

• Equity momentum models expect US equities to diverge from Asian and European equivalents with signals turning net-bullish on the Nikkei and remaining likewise on the DAX and FTSE-100.
• Momentum models are bearish on US, UK, German and Japan rates without a bullish signal in sight. 
• FX momentum models upped their USD/JPY bullishness while they flipped net-long on EUR/CHF and scaled back $-bloc bearishness (vs USD).

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.

Photo Credit: depositphotos.com

(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.)