
Emerging Markets | Equities | Europe | FX | Rates | US
Emerging Markets | Equities | Europe | FX | Rates | US
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Bilal argues US equities suggest narrow hot sectors, a stable consumer, and optimism for the rest for the economy; Dominique argues the Fed would likely read a wage print above 40bp on Friday as a signal that disinflation is at risk; Caroline anticipates the NBP hold policy again on Wednesday after inflation uncertainty; Mirza argues key events risks this week will test his rationale for long EMFX; Henry expects the ECB will leave policy unchanged and revise down 2024 core CPI forecasts, but the tone should be hawkish; Ben thinks the BoC are unlikely to change to a cutting bias; Viresh outlines why he likes long Aug/Sep-24 time spreads in WTI; John expects equities in wait-and-see mode until Friday’s labour market report.
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Table 1: Current Trades | ||||||||
*Total returns using daily close price. Positions are sized such that impact of any one trade on portfolio is no larger than 50 bps. | ||||||||
Asset Class | Date entered | Trade | Rationale | Entry | Stop Loss | Target | Current Price | P&L* |
FX | 28-Feb-24 | Long EM FX Basket vs USD | Click here | 100.000 | 102.000 | 95.000 | 100.281 | -0.3% |
30-Jan-24 | Long EUR/GBP | Click here | 0.854 | 0.846 | 0.877 | 0.856 | 0.2% | |
30-Jan-24 | Short EUR/USD | Click here | 1.083 | 1.095 | 1.055 | 1.085 | 0.0% | |
24-Jan-24 | Short GBP/USD | Click here | 1.276 | 1.275 | 1.235 | 1.268 | 0.6% | |
24-Jan-24 | Long EUR/CHF | Click here | 0.939 | 0.951 | 0.970 | 0.962 | 2.7% | |
15-Jan-24 | Long EUR/PLN | Click here | 4.360 | 4.295 | 4.480 | 4.326 | -1.2% | |
06-Dec-23 | Long 6M 32.0 EUR/TRY Digital Put | Click here | 31.350 | < 32.00 | 34.369 | -0.2% | ||
10-Oct-23 | Long EUR/CZK | Click here | 24.650 | 24.000 | 25.600 | 25.373 | 2.3% | |
Rates | 01-Feb-24 | Pay 2Y EUR vs receive 2Y GBP Swaps | Click here | 132 bps | 155 bps | 90 bps | 137 bps | -5 bps |
11-Jan-24 | Long 10y Spain vs BTP and Bund | Click here | 30 bps | 36 bps | 12 bps | 28bps | 2 bps | |
08-Jan-24 | 5y10y MXN TIIE Steepener | Click here | -10 bps | -30 bps | 40 bps | -6 bps | 4 bps | |
20-Nov-23 | Receive BRL DI F27 (from F25) | Click here | 10.45% | 10.50% | 9.00% | 9.94% | 51 bps | |
Source: Macro Hive |
US stocks are up 8% this year and 15% in the last six months. But the gains are not equally distributed, so what can we learn?
I think US equities suggest some narrow hot sectors, a stable consumer, and optimism for the rest of the economy. The weak link is the optimism, which is premised on benign interest rates. If that changes by yields rising, the US outlook could change dramatically for the worse.
The FOMC is trying to determine whether the January inflation bump is a one off or signals the end of disinflation. Therefore, the most important data of the week is the NFP, especially wages. This is because the Fed wants to see disinflation broaden from goods to services ex-housing (‘supercore’) inflation, and it believes (I agree) that the main driver of supercore inflation is wages (Chart 2). Average wage growth has accelerated in the past three months. The Fed will likely read another wage print at 40bp or above (consensus expects 20bp) as a sign that disinflation is at risk.
The Fed will also monitor headline NFP (consensus expects 200,000). It is a proxy for growth that it wants nearer trend.
This week could set the tone for Emerging Markets. China’s ‘two sessions’ could establish the baseline for stabilization in the economy, and Powell’s testimony to Congress and US labour market data will provide a critical read on outlook for US rates.
We turned positive on EMFX last week, buying an equally weighted basket of BRL, INR, IDR and KRW funded in USD. Our rationale was that US rates, especially in the front end, had reached a local high and inflows to EM could increase. That thesis will be put to the test this week. We will monitor event risks and re-mark our conviction accordingly.
Wednesday’s MPC meeting in Poland will be more interesting for the forecasts and post-meeting commentary, rather than any action on rates. Glapinski said at the February meeting that rate cuts are unlikely this year. While that could undoubtedly change, it is difficult to have conviction given high uncertainty over the inflation outlook.
Updated inflation forecasts will probably show a fairly sharp V-shaped inflation profile for this year. But with no announcement yet on restoring the 5% VAT on food (currently extended through Q1) and phasing out electricity and gas caps for households (currently extended through H1), the point forecasts are highly uncertain. And with still elevated core inflation, expect commentary to remain hawkish.
In line with our expectation, last week saw February Eurozone core inflation beat consensus at +3.1% YoY (consensus: +2.9%). Headline, too, beat consensus at +2.6%, and services inflation came out strong at +3.9%.
Together, these outturns present a concerning picture for the ECB in their battle against inflation. Momentum across headline, services and core CPI have all bounced strongly since the start of the year to levels inconsistent with target 2% (Chart 4).
The ECB will update their policy on Thursday. No change in policy is expected, but the question will be how hawkish Lagarde will dare to sound. Forecasts will be updated, which could see end-2024 core CPI revised downwards, but probably by less than the market had hoped. Comments reiterating the need to wait at least until they have Q1 wage negotiation data and final March inflation data are likely.
We have recently closed our April-dated ESTR payer just ahead of reaching target. We have long argued June is the earliest the ECB can cut. However, with the market now pricing 23bp of cuts for then, there could even be value in fading this pricing on the risk that March inflation overshoots and/or Q1 wage negotiations remain high.
Following the January meeting, the BoC made it clear they wanted further and meaningful progress in core inflation, a looser labour market, and weaker wage growth and inflation expectations. None of this has happened. Core inflation momentum inched lower, the labour market is tighter than at the January meeting, and wages remain in their uber-high range (Chart 5). Therefore, the BoC are unlikely to rotate to a cutting bias at the March meeting.
OPEC+ extended their voluntary cuts over the weekend (extra 700k b/d – excl. Saudi) until the end of Q2, broadly as consensus expected. The price action following the announcement shows this as flat price fell, while time spreads also narrowed.
However, Russia announced a further voluntary cut in addition to their previous commitments as well. This was new. Not new was confusion surrounding their commitment. Russia stated they will cut:
A full implementation of the cut would clearly be bullish for the oil market as it further reduces supply by c. 0.4mn b/d in Q2. This would take Q2 deficits up to around 0.8mn b/d, effectively doubling our original estimate.
The takeaways from this announcement are:
For now, we like long Aug/Sep-24 time spreads in WTI.
It was a disappointing week for companies pinning their hopes on AI, as three major players cut their 2024 outlooks (Snowflake, Hewlett Packard Enterprises, and Salesforce). AI is still coming, but it may be a while before it turns into a widespread and profitable business model.
Most regional banks managed to rally modestly after the latest NYCB revelations and write-downs, showing NYCB is on its own now. We expect most regional banks will recover as rates eventually fall (Chart 6).
The wait for Friday’s labour market report will dominate this week. But still, some 35 companies are slated to report, including retail bellwethers Target Corp and Costco Wholesalers. Together they should reveal what consumers are buying.
On the tech side, Broadcom and Oracle will provide more colour on how quickly AI might spread as essential infrastructure is established.
Markets may revisit and revise expectations about when the Fed might start cutting rates after Friday’s labour market report.
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