Bilal’s Themes And Trade Idea Update – Portfolio Protected Against Omicron

Our portfolio was tilted defensive before the Omicron news, so it was well positioned and gained 1% on the week. I’ll be reviewing which trades to exit given large gains. Here are the details:

1. China slowdown: long China rates (10y futures, FX unhedged), short KOSPI. Both trades gained with sharp drops in Kospi and China rates rallying.
   • Premise: China property weakness, new regulations on private sector, continued lockdowns around COVID and poor energy management all contribute to growth weakness.
2. Struggling UK: short GBP/JPY. The yen surged on the Omicron news so this trade has performed well.
   • Premise: Hawkish BoE into Brexit supply issues is bearish for GBP.
3. Defensive equities: long SPX/short RTY. This trade crossed the 10% P&L mark.
   • Premise: US growth deceleration, excessive US fiscal optimism.
4. Weak growth and CB divergence: long EUR-USD 2s10s box trade (US flattener). The trade was flat.
   • Premise for box trade: On the US side, beyond base effects and supply-related shocks, there is little evidence of structurally higher inflation. US growth is likely to head lower in 2022. Meanwhile, there is more scope for inflation upside in the Euro-area.
5. Weak Poland: long EUR/PLN. This was the one trade that did not perform well.
   • Premise: Lack of NBP credibility, EU tensions, Belarus border issues, and policy preference for FX weakness

In terms of performance, our portfolio gained 1% on the week and is now up 11% year-to-date. It is up 16% since inception with a Sharpe ratio of 2.3 (Chart 1, Table 2). My biggest risk position is in equities (Chart 2). The P&L are paper returns, so are likely overstated compared to a real invested portfolio.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

(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.)