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Our survey participants turned bearish on equities this week despite an extremely dovish FOMC on Wednesday. It was on 1st December when Powell stated that it was still too early to consider rate cuts, however this week, that all changed when he hinted the timing of rate cuts was now an active topic of discussion. Further, the dot plots hinted towards 3-4 cuts as long as progress continues to be made on inflation.
The market’s reaction has been fierce, both in rates, and equities. Despite the positive reaction, our survey participants have flipped bearish. The general theme seems to be that the rally looks to be overdone – particularly in the short run.
Participant 7 has entered two new shorts. The first is in Cathie Wood’s ARKK ETF – which consists of largely unprofitable tech companies. These names should struggle in an environment where the Fed remains on hold and has already rallied by more than 50% off the lows in October. The other short is in the regional bank ETF – KRE. Participant 7 believes regional banks will continue to see NIM’s fall over time which will keep multiples capped.
Participant 16 has a similar view and has chosen to short the S&P. They see this as a tactical trade with a tight stop rather than a longer term bearish view. Participant 16 has also chosen to short EUR/USD as a marginally more dovish Fed should allow the US economy to outperform Europe in 2024.
Participant 15 has a slightly different view, they chose to buy the Russell 2000 following the FOMC, and believe small caps should outperform in an environment where the US economy does well, while interest rates fall.
Bilal’s Trades and Views
We made three changes, and one adjustment to our model portfolio this week, including one new trade.
New positions:
- Long Front-month Brent (target $82.0; stop $68.5) – read here.
Adjustments (took profit on half position):
- Long NOK/SEK (target: 1.00, stop loss: 0.9533) – read here.
Closed trades:
DM
Rates
- Short KfW 3.125 10/10/28 vs. DBR 0 11/15/28 (target 70 bps; stop 45 bps) – read here.
- Long 10Y Bund vs 10Y BTP (target 200 bps; stop 155 bps) – read here.
- Long 1y1y vs 2y3y SOFR – read here.
- 5s10s UST steepener (target 15bps) – read here.
FX
- Long NOK/SEK (target 1:000; stop 9533) – read here.
EM
FX
- Long 6M EUR/TRY digital put, strike 32.0 – read here.
- Short 2m PHP/THB NDF (target 0.60; stop 0.66) – read here.
- Long 2m CNH/INR (target 12:20; stop 11.15) – read here.
- Long EUR/CZK (target 25:60; stop: 24:00) – read here.
Rates
- Receive BRL DI K25 (target 9.50%; stop 10.80%) – read here.
- Receive 5Y ZAR swap (target 7.50%; stop 8.75%) – read here.
Commodities
- Long Front-month Brent (target $82.0; stop $68.5) – read here.
Viresh Kanabar is an investment strategist with 8+ years of experience, notably contributing to portfolio construction and risk management at CCLA Investment Management, a £12 billion fund. Viresh was also a voting member of the Investment Committee and ran the private asset valuation process.