Prime Trade Ideas: Wary and Paring Risk

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 summarise the latest updates on our trade ideas here with links to the original analysis.

• Remaining overweight US homebuilders, but wary of headwinds. We still see value in the housing sector due to a supply-demand imbalance but outline risks from Fed tightening.
• Paring exposure to European banking. We had been overweight the sector, but with several risk events this week, we saw value in reducing exposure.
• Bearish bitcoin and ethereum. The macro backdrop is still bearish for both ETH and BTC, but our on-chain/flow signals are starting to pick up – neutral for both. Miners are pulling out of ETH, while a strong dollar threatens BTC.
• Remaining bearish Asia currencies. We express this via short INR and KRW. But we spot tactical (short-term) opportunities to be long TWD, CNH and SGD.

Bilal’s Asset Allocation Update

Find Bilal’s latest asset allocation biases here.

• Our core investment view remains the same. Markets are fragile, preservation of capital is paramount, and cash is king.
• Neutral commodities: We still think both energy and soft commodities have structural supply issues, but market volatility and recession fears could limit gains in the near term.
• Reduced underweight bonds: We have been heavily underweight government bonds. But given the increasing spectre of a recession, we think it makes sense to reduce the size of the underweight. We still think the market is underpricing the scale of Fed hikes, so we like to be underweight bonds with shorter tenors (say up to five years).
• Overall, our bias is to be underweight equities and bonds, overweight cash, and neutral commodities and crypto.

John Tierney’s US Equity ETF Biases

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

• John remains overweight homebuilders. Conventional wisdom expects housing to crash due to higher rates and the prospect of a recession. But housing demand still outweighs available supply. Homebuilders can continue to build through a downturn and still make money. However, Fed tightening poses a risk to watch.
• John remains overweight equities related to energy and commodities. The advent of a bear market always prompts questions about how bad it can get. Those preceded by bubble-fuelled markets (like the post-pandemic bull run of 2021/2) tend to be super bear markets with declines of 40% or more. If earnings momentum of recent quarters weakens (as we expect), the bear market will lurch further downward.
• John recently moved communications from underweight to market weight on expectations it will perform roughly in line with the SPX. The communications index of the S&P500 had a great run until last year. However, it has been the second-worst performer in 2022. The communications sector looks cheap now based on several measures. Aggressive investors could consider investing in GOOG and META and thereby capture most of the sector’s potential upside.

Henry’s European ETF Biases

Henry made these calls back in March. The premise still holds, and we review short-term adjustments periodically.

• Short-term paring exposure to European financials. European stocks will face substantial risk events this week from Russian gas supply, ECB policy, and Italian politics. European stocks will face substantial risk events this week from Russian gas supply, ECB policy, and Italian politics. Long term, though we see strategic value in overweighting financials and renewables (see below).
• Long-term overweight financials (CB5): European banks verge on a new paradigm of higher growth and profitability after post-GFC underperformance. Loan demand should be strong ahead while European banks are positioned to meet this demand. As a result, on a price basis, European banks have room to catch up with the rest of European equities.
• Long-term overweight renewable energy (FAN, INRG): The EU remains hugely exposed to Russian energy – not just in gas but nearly all fossil fuels. It means that simply replacing the supply of Russian gas energy with other sources may be practically difficult (due to infrastructure) as well as geopolitically unattractive. Longer term, a concerted increase in renewables spend is highly likely.

Cryptocurrency Models

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

• We remained bearish bitcoin. Softening growth, climbing inflation and an upcoming FOMC meeting (expected to be hawkish) are keeping the macro backdrop negative for BTC. Meanwhile, a strong dollar threatens the current rally.
• We remained bearish ethereum. Rate hikes, a potential recession and a slew of downbeat crypto news leave us bearish ETH in the short term, although on-chain/flow signals are starting to improve amid the rally. The merge is also boosting sentiment.

FX and Commodities

Our latest discretionary macro biases in collaboration with SGX can be found here while our latest FX options insights in collaboration with CME can be found here.

• In our latest SGX piece, increased talk of a US and global recession keeps us bearish on Asian currencies. We express this via our short INR and short KRW trades. We have held these for the past month, and both moved in the right direction.
• Elsewhere in Asia, we spot tactical opportunities to be long TWD and CNH. In Taiwan, this is because the government will implement a support program for the equity market, which in turn shows a correlation with TWD. In China, because the recent trade data have strengthened significantly. And with this week’s unscheduled policy tightening by MAS we also see an opportunity to be long SGD.
• Bullish a GBP/USD put spread: Three-month GBP/USD put spreads could be attractive as double-digit UK inflation, a too-cautious Bank of England, and global risk aversion point to further GBP weakness.

Momentum Models

Find the latest Momentum Model signals in collaboration with TMX here.

• Bearish S&P/TSX 60 Index: Our one- and three-month CTA lookback momentum models are net-bearish on the S&P/TSX 60 Index.
• Bearish Canada 5-Year and 10-Year: Our one-, three-, and 12-month CTA lookback momentum models are all bearish on the Canada five- and 10-year.
• Net-bearish global equities: Our best-performing CTA lookback momentum models are bearish on the S&P500, Nikkei, and DAX. In contrast, the best-performing CTA lookback momentum models are bullish on the FTSE-100.
• Bearish global rates: Our best-performing CTA lookback momentum models are bearish on the US five- and 10-year, Japanese Government Bonds, Bunds, and Long Gilts.

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.