Macro Edge #39
Originally posted on: thepensivenugget.com
US yields aren’t pushing higher anymore, regardless of the Fed’s hikes, or crazy inflation.
If US yields keep falling, global markets are in for more chaos.
US Long Yields May Signal More Global Sell Offs
- US 10y and 30y yields may have made their cyclical highs and are turning lower as the global cycle shifts
- Yields can’t seem to rally further even with record inflation and a very hawkish Fed (US 2y yields are in the same boat)
- Together with the broadly stronger USD and flat yield curve, global markets are looking at further, and possibly steeper, sell offs
- The USD is broadly stronger against a whole host of currencies. Stress levels in USD funding markets are obviously high, and still increasing
- Global USD funding conditions are critical to how far financial contagion spreads, and how deep the recession gets
- USDCNY is very weak and looking bearish, having moved from 6.4 to 6.75 in just 3 weeks. CNY’s shift, and it being one of the last to weaken vs the USD, heralds a shift in the global cycle - this does not bode well for economic growth and risk assets
- Commodities are starting to price in deteriorating economic conditions around the world
- WTI is still range bound and hasn’t been able to retest its Russian invasion highs
- Base metals prices are beginning to turn, with Copper now near the bottom of its range, Aluminum <$3000, and Iron ore consolidating in a wide range
- More expensive energy, raw materials, and food costs, combined with a global USD shortage, increases the likelihood ofstagflation, if not outright deflation
Trading Ideas - Performance
Trading Ideas - Commentary
- Closed short positions in EURUSD & GBPUSD as the USD corrects
- Looking to re-enter EUR & GBP shorts on the next technical breakout
- AUD is now a decent short with its short term trend having realigned with its medium term one, and with the currency having broken below its 2020 COVID low
- Decision to straddle gold using GLD options, instead of putting on an outright long position, has paid off with gold tumbling after failing its retest of $2000
- At this point, biggest risk to the trade is if gold settles into a tight range again (which it has done quite often of late), with little volatility
- Went long TLT calls with 1 year expiry, as US long yields looked to have topped out, and strong bids for USTs look to be on the horizon as the global cycle shifts
- Stronger USD, with significantly weaker CNY is a huge warning signal
- Flat/re-inverting yield curve and plummeting breakevens
Trading Ideas
- Long USD:
- Well established trend, in place for >11 months in most major currency pairs
- Recent sharp increases in the Dollar’s value signals that global economic growth is going to take a turn for the worse. Global USD funding markets will tighten even more, driving the USD even higher
- US yield curve’s inversion in early April (even as the Fed turned hawkish) gave us a clear warning sign
- USDCNY has started to move higher rapidly, indicating high levels of stress in global USD funding markets
- USD longs in general should do well, but of the G7 currencies, look to go long the USD vs:
- EUR
- CAD
- GBP
- AUD
- JPY
- Long 10y or 30y US Treasuries:
- Yield curve inversion (2s10s in early April, 5s10s earlier) signals the coming end of the current economic growth cycle, which means that nominal yields will start to turn down soon
- Monthly & yearly trends in yields are bearish, and looking for an opportunity to short yields is in alignment with long term trends
- Pay attention to 10y yields, and if they break below2.71% support
- Trade can be expressed:
- Long TLT, or long TLT Calls
- Long US T Note/Bond Futures, or long Calls on Futures
USD ebbs for another week… EUR
- EUR has rallied sharply above resistance at 1.064 and into the 1.07 region
- The chart remains extremely bearish, and another test of 1.034 looks likely, a break of which would see more lows
USD ebbs for another week… GBP
- GBP’s bounce continues as it makes a push to test resistance at 1.268
- The chart is still very bearish, and a break of 1.207 remains possible, opening the possibility of a fall to 2020’s low at 1.144
USD ebbs for another week… AUD
- AUD has rallied back to hug the top end of its bearish channel, with resistance at 0.7265
- It remains in a broader downtrend, and a break below 0.68 could see it drop to 0.64, and possibly 2020’s low at 0.55
USD ebbs for another week… CAD
- CAD is trading ~1.287 resistance, with support at the bottom of its channel at 1.27
- The chart is still bearish, and CAD can’t sustain a rally even with WTI > $100
- Next major resistance lies at 1.305, then 1.339
USD ebbs for another week… CNY
- CNY has also rallied vs the USD, but remains weak and volatile around the 6.7 level
- A break of resistance at 6.75 to test 7.02 remains possible
- This does not bode well for risk assets
Have US long yields peaked?… US 10y
- US 10y yields may have made their highs for this cycle, as they have now fallen from just below 3.25% (2018’s double top) to support in the 2.71% — 2.77% area
- Global USD shortages could soon see USTs catch more bids
Have US long yields peaked?… US 30y
- US 30y yields may also have made their cyclical highs
- They failed to rally out of their bullish channel to test 3.45% in early May, and have now fallen below support at 3%
The US yield curve struggles to steepen…
- US 2s10s remain between 20–40 bps
- 5s10s are flat ~4 bps
- The yield curve remains very flat, and inversions, no matter how brief, are clear signs of stress in the system
And US breakevens keep dropping…
- Breakevens continue to fall, even as inflation (CPI) remains stubbornly high
- The market is clearly concerned about the lack of growth driven inflation here
Have European yield curves reached an inflection point?
- European yield curves bounce slightly after last week’s tumble, but remain off their steepest levels
- Are they finally aligning with other markets that are signaling a shift in the global cycle?
Oil tries to consolidate around $110…
- Oil has begun to consolidate in a narrow range between $108-$112
- Major resistance remains at $114, with March 7th still looking like a cyclical top, although supply remains tight vs demand
Copper hovers at the lower end of its range…
- Copper managed to bounce off the bottom of its range for a while, but remains close to major support at $4.05
- A decisive break below $4.05 will signal that global economic conditions are really deteriorating
Iron Ore trades sideways, but still looks bullish…
- Iron ore remains in its bullish channel, but remains stuck in a wide range between 814–960
- Major resistance still stands at 1008 (last July’s high)
Aluminium continues to look weak…
- Aluminium prices remain far off their highs, and still look likely to test major support at 2570 even after bouncing over the last two weeks
Gold rallies back to the mid $1800s…
- Gold has rallied strongly after finding support ~$1790 last Monday, and is now trading ~$1850
- Resistance lies at $1880
- A decisive break below $1790 could see a fall to $1760, even $1690
As Wheat comes down again
- Wheat’s breakout above 1164 failed to test 1318, and has completely reversed
- Its price is heavily influenced by macro factors like war and politics right now, as governments scramble to respond to food shortages
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