Prime Trade Ideas: Trading the End of Hiking Cycles and Bank Fallout

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

Bilal’s Asset Allocation

• Cash is safe! (15 March, Bilal Hafeez).

FX, Rates and Commodities

• Downside forthcoming for CAD vs USD, EUR and GBP (23 March, Richard Jones).
• Upside to EUR/USD, USD/JPY rangebound, and fade GBP strength (16 March, Richard Jones).
• EUR/CHF and GBP/CHF could retest 2022 lows on further geopolitical risk (9 March, Richard Jones).
• China recovery gaining traction, short USD/CNH (17 March, Macro Hive for SGX).

Equities and Credit

• Depressed banks present an opportunity to be bullish JP Morgan and Citigroup stocks (24 March, John Tierney).
• Little upside for clean energy ETFs over the foreseeable future (7 March, John Tierney).

Cryptocurrency

• Why is ethereum rallying? (14 March, Dalvir Mandara)
• Bitcoin returning to underlying bull trend (17 March, Robin Wilkin)

Momentum Models

• Momentum models pare USD bullishness (23 March, Ben Ford)

And if you missed it, our Senior Rates Strategist Mustafa Chowdury, dubbed as the ‘godfather of hedging’, appeared on the Forward Guidance podcast. He shared how deadly further Federal Reserve (Fed) will be for the banking system. You can watch it here.

Bilal’s Asset Allocation

Find Bilal’s latest asset allocation biases here.

In 2022, Bilal outlined his ‘everything breaks’ portfolio, which meant constantly overweighting cash, above all else. We have stuck with that in 2023, and it has held us in good stead. Indeed, after the Silicon Valley Bank (SVB) failure, there was a dash for cash. This reminds us that at times of market crisis, cash is king. And remarkably, even cash at an unsafe bank like SVB was ultimately protected by the US government. Our bias though is to park cash in T-Bills.

Given the large bond rally, the market appears to have priced a very dovish Fed. We disagree so like to stay underweight bonds, especially shorter tenors (e.g., 2-year). But the bank issues show that risk markets are vulnerable, so we like to return to being underweight equities.

Meanwhile, we turn neutral on commodities (from overweight) as heightening market volatility could impede a commodity rally. Although it has been trading well given the news, we stay neutral crypto as it remains a risk asset.

Finally, we still favour an overweight in cash – our favourite asset in a world transitioning from low rates to high rates. 

FX, Rates and Commodities

G10 FX

BoC pause opens further CAD downside. You can read the entire piece here.

The Bank of Canada (BoC) paused in its rate hiking cycle two weeks ago, the first major central bank to do so. While the BoC’s commentary was hawkish, its actions were dovish, marking them out against other central banks, including the US Fed, the European Central Bank (ECB) and Bank of England (BoE). Going forward, Richard sees value in being bearish CAD:

• With the Fed still expected to tighten policy further, and the BoC on hold, expect modest upside in USD/CAD.
• With similar dynamics in play with the BoC and ECB, we also expect EUR/CAD to grind higher.
• Although we are less positive on sterling versus the euro and the dollar, expect GBP/CAD to also grind higher.

Trading USD amid the SVB chaos and Fed repricing. You can read the entire piece here.

The collapse of Silicon Valley Bank (SVB) has rocked rates markets globally, with extreme pressure on Credit Suisse (CS) weighing on bank stocks in Europe. The FX market has also reacted forcefully, albeit less so than other asset classes. The US dollar has traded choppily but within established ranges. We expect year-to-date (YTD) 2023 ranges to hold in the coming weeks. As a result, Richard sees:

• In EUR/USD, the downside (~1.05) of the recent range has been tested and held, bouncing back near the middle of the 2023 price corridor. In the medium to long term, expect upside in the pair.
• In USD/JPY, the ~127-137 range has contained the pair in 2023 – it will keep doing so in coming months.
• In GBP/USD, the pound briefly fell below the earlier 1.19-1.25 range before bouncing back above the support. We remain bearish sterling long term, preferring to fade GBP strength.

Worried about geopolitics? Look to the Swiss Franc! You can read the entire piece here.

Geopolitics remains a constant risk to markets. As the ultimate FX haven, the Swiss Franc (CHF) is always attractive during heightened geopolitical and economic uncertainty. Therefore:

• As most G10 FX currency pairs are rangebound, CHF pairs will probably trade within established ranges.
• If geopolitical risk intensifies, however, expect CHF to rally against its developed market counterparts.
• This scenario will take EUR/CHF and GBP/CHF to the 2022 lows, with new all-time lows possible if geopolitical risks are protracted or multiply.

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

Our latest Asia currencies insights, in partnership with SGX. You can read the entire piece here.

Banking sector stress in the US and Europe has rapidly reversed expectations for Fed tightening. The roughly 100bp drop in US 2-year yields in a matter of days is unprecedented. Bank stocks and broader equity markets have also seen significant volatility with the collapse of Silicon Valley Bank and Signature Bank in the US, and renewed concerns over Switzerland’s Credit Suisse. Markets priced in a hike for the 22 March FOMC meeting but followed by 100bps in cuts between May and December. The ECB, meanwhile, followed through with the preannounced 50bp hike at its 16 March policy meeting, but moved to a data-dependent approach for future decisions. It did not announce any liquidity support but stressed it stands ready to support the banking sector, within its mandate, if necessary.

Asian currencies have held up well in the turmoil with the positives from lower US rates so far offsetting the negatives from shaky risk appetite. Versus 6 March (before the Silicon Valley Bank collapse), THB, TWD and CNH are slightly stronger, while the weakness in other Asia FX is moderate. By contrast, HUF, MXN and other Latam currencies have seen pronounced declines, reflecting both an unwinding of earlier longs and country-specific concerns returning to the fore. 

We previously analysed the sensitivity to US rates. The context of higher-for-longer US rates has abruptly shifted, but the underlying sensitivities remain highly relevant. KRW, THB and TWD have the most to gain from lower rates, and INR the least. CNH is more sensitive than INR to US rates, but the reopening theme rather than global rates will continue to dominate.   

With recent data confirming our bullish view on China, we remain short USD/CNH. KRW is a tug of war between support from lower rates and increasingly pronounced domestic weakness. We stay cautiously bullish KRW. We remain neutral INR and turn positive on TWD with lower global rates.

Equities and Credit

Equities

Depressed banks present an opportunity. You can read the entire piece here.

Markets appear to have returned to near-normal after the Silicon Valley Bank crisis and now the Fed meeting. But bank equities remain near the lows since the SIVB failure, and the 3-month T-bill is still at flight-to-quality levels. Banks are stressed because of uncertainties about future and tighter regulation, further potential problems with commercial real estate exposures, and potential hits to earnings as they raise deposit rates to compete with money market funds.

We expect the flight-to-quality trade will ease in coming weeks and bank equities – particularly money centre banks – will recover. We suggest investors increase exposure to banks such as JP Morgan Chase (JPM) and Citigroup (C).

Clean energy ETFs: nice idea, crummy investment. You can read the entire piece here.

Our clean energy ETFs trades have underperformed for various obvious reasons, including a slow transition to clean energy technologies, Covid-related lockdowns in China, and a high concentration of loss-making companies. The opaque behaviour and management of obscure underlying indices and a lack of transparency on the part of ETF providers is also factor.

The Inflation Protection Act has been heralded as a source of funding for the industry, but it is actually remarkably small – $400bn spread over 10 years – or about 0.1% of projected GDP over the coming decade. This amounts to little more than a nudge – welcome indeed, but not the game changer the media purports.

We see little upside for clean energy ETFs over the foreseeable future. Given the poor transparency, we suggest investors interested in clean energy companies focus on individual companies.

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 market weight in investment grade and high yield corporate bonds.

Cryptocurrency

Why is Ethereum rallying? You can read the entire piece here.

The macro backdrop is bearish for ethereum. We do not believe the SVB collapse is likely to be systemic. Nonfarm payrolls (+311,000 against +205,000 expected, hawkish) surprised to the upside, but employment data also revealed higher participation and lower wage growth (dovish). Headline CPI for February (+6% YoY) was in line with expectations, but core CPI (+5.5% YoY) rose +50bps MoM compared to expectations of +40bps. The probability of a recession remains over 90%.

Meanwhile, we have four bullish signals, one bearish, and one neutral signal from our on-chain/flow signals.

With the macro backdrop still on the bearish side overall and our on-chain/flow metrics quite bullish, our overall signal is neutral to bullish ethereum.

Bitcoin returns to its underlying bull trend! You can find Robin’s latest technical signals here.

On a shorter horizon, Robin Wilkin, global market veteran with over 30 years of experience as a sell- and buy-side strategist and trader, is bullish bitcoin and Ethereum, expecting the former to outperform over the next couple of weeks.

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 (-0.5% WoW) are yet to recover, performing worst in equities (-1.0%), then FX (-0.6%) and rates (-0.1%). They have struggled through 2023. Overall returns were marginally better in the FX carry strategies we follow. Momentum models have pared S&P 500 bearishness and turned net-bullish on rates, EUR, JPY and GBP.

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.