Macro Edge #43
Originally posted on: thepensivenugget.com
Commodities prices, especially base metals, are flashing serious warning signs.
We now have three major macro markets indicating worsening global conditions — the USD, US yield curve, and base metals.
When will UST yields follow?
Commodities Are Aligning To Signal Global Weakness
- Commodity markets are aligning with the USD and the US yield curve to signal serious deterioration in global conditions
- WTI failed to test its current cycle highs ~123 before tumbling lower, now trading slightly above $100
- Base metals are breaking lower, with Dr Copper finally breaking below its range to trade below $4, Iron Ore falling sharply off resistance, and Aluminum still crashing
- The USD cooled off over the past week, moving sideways against most other currencies, but
- 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 is
- USDCNY is very weak and looking bearish. CNY’s shift, and it being one of the last to weaken vs the USD, heralds a shift in the global cycle, which does not bode well for economic growth and risk assets
- Even US 10y and 30y yields turned lower over the week, and conditions are lining up for UST yields to fall sharply
- With the Dollar continuing to rally, the US yield curve re-inverting at some points, and commodities markets aligning with both, global markets are looking at further, and possibly steeper, sell offs
- More expensive energy, raw materials, and food costs, combined with a global USD shortage, increases the likelihood of stagflation, if not outright deflation
Trading Ideas - Performance
Trading Ideas - Commentary
- Re-entered EUR & GBP shorts on their technical breakouts, initiated a short in AUD as well
- Gold has turned down, but can’t seem to break lower with any real conviction, keeping our straddle in the red
- Decision to straddle gold using GLD options, instead of putting on an outright long position, can still pay 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
- US long yields remain elevated, racking up losses in our long TLT call position, but we purchased a year long expiry for this reason, to give the market time to make a top (if it does!)
- Went long TLT calls with 1 year expiry, as 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, plummeting breakevens, and now base metals breaking lower, are all ominous signs
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, and mid June (even as the Fed turned hawkish) is 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 below 2.71% support
- Trade can be expressed:
- Long TLT, or long TLT Calls
- Long US T Note/Bond Futures, or long Calls on Futures
USD Bulls Slow Down… EUR
- EUR has made a double bottom at 1.034, but has yet to really rally higher with it trading sideways ~1.055
- A break below 1.034 will see new 5 year lows being made
- Resistance is at 1.064
USD Bulls Slow Down… GBP
- GBP is consolidating against the USD in a wide range between 1.207–1.245
- A break below support at 1.207 could lead to a test of 2020’s COVID low at 1.144
USD Bulls Slow Down… AUD
- AUD is looking primed for a retest of its May low ~0.6825
- A break below could see it drop to 0.64, and possibly 2020’s low at 0.55
USD Bulls Slow Down… CAD
- CAD remains in its range between 1.287–1.305
- The trend is bearish, and a break above 1.305 looks likely, although CAD could be forming a wide range between 1.2314–1.305
USD Bulls Slow Down… CNY
- CNY also remains in its range, between 6.64–6.75
- A break of resistance at 6.75 could see a test of 7.02, which would not bode well for risk assets
US long yields turn down… US 10y
- US 10y yields rallied to 3.5%, but failed to reach major resistance in the 3.6% — 3.7% region
- They have since fallen back to 3.15%
- Major support lies at 2.71%
- USTs could catch more bids if the USD continues to strengthen
US long yields turn down… US 30y
- US 30y yields failed to break above resistance at 3.45%, and have turned down to trade ~3.2%
- A break above 3.45% could see a test of 2014’s highs, ~4%
- Support lies at 3%
The US yield curve moves to re-invert…
- US 2s10s are back in the single digits and flirting with inversion again
- 5s10s have grown even more deeply inverted, ~ -10 bps
- The yield curve continues to signal high levels of stress in the financial system
As US breakevens move lower again…
- Breakevens have fallen again after last week’s brief bounce
- They remain in a pronounced downtrend even with the CPI stubbornly high
- The market is clearly concerned about the lack of growth driven inflation here
European yield curves flatten…
- The past week saw French & Italian curves start to flatten, with the German curve in a clear downtrend
- Concerns continue to swirl around Italian debt and a European debt crisis redux
Oil had a really bad week, tumbling below support…
- Oil failed to test its Feb highs and has now tumbled lower, breaking below support at 111.5
- Major support now lies at 87
- Has demand destruction begun, marking March 7th as a cyclical top?
Copper breaks below key support and out of its range…
- Copper has finally broken out of its range, and below 4
- It is now testing major support at 3.9
- This downside breakout aligns Dr Copper with other markets, signaling that global economic conditions are really deteriorating
Iron Ore also moves lower…
- Iron ore tried to break above major resistance at 1008 (again), but failed (again), and has tumbled lower to the bottom of its range at 814
- A break below 814 could signal a change in trend and lead to further falls
As Aluminum continues to sell off…
- Aluminum is still crashing, and has now decisively broken below major support at 2570 to trade below 2500
Gold returns to shuffling sideways…
- Gold has returned to trading sideways around 1850
- A decisive break below support at 1790 could see a fall to 1760, even 1690
- Resistance lies at 1880, and a break above could see a move to 1930
And Wheat falls below 1000, close to pre-war levels
- Wheat has fallen below 1000, and is testing support ~985
- Its pre-war high is close by ~888, although the threat of global food shortages is still very real
Comments
Ok