Macro Edge #41
Originally posted on: thepensivenugget.com
Macro markets have taken a break from moving in tandem, but the global macro backdrop remains challenging at best.
How long can markets keep going their separate ways before moving together again?
Macro Markets Start To Diverge… But For How Long?
- While the USD is no longer broadly correcting, its performance is diverging
- Commodity currencies are still eking out gains against the USD, while EUR, GBP, and most importantly the CNY, have begun to consolidate
- US 10y and 30y yields look like they want to make a run to test their current cycle highs after rallying strongly, but
- Long yields are struggling to make new highs even with record inflation and a very hawkish Fed
- 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, and has been trending in this direction for about a year now
- 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. 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
- Commodity prices are also diverging
- WTI is almost back at its Russian invasion highs
- Base metals prices do not yet paint a decisive picture, with Copper still range bound, Aluminum very weak, and Iron ore bullish
- 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
- A painful week for the trading book. Gold has settled into a range, killing profits on our straddle, and US long yields have risen, pushing our long put position into the red
- 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 may 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 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 performance diverges… EUR
- EUR has started to trade sideways after bouncing off support at 1.064
- Short term resistance lies ~ 1.0785
- The chart remains very bearish, and a break below 1.064 could see another test of 1.034
USD performance diverges… GBP
- GBP has also started to trade sideways after bouncing off support ~1.245
- Resistance lies at 1.268
- The trend remains bearish, and a break below 1.207 is still possible, which could lead to a fall to 2020’s low at 1.144
USD performance diverges… AUD
- AUD managed to rally to test resistance at 0.7265 but failed to break higher
- Support lies at 0.70
- Its broader trend is bearish; a break below 0.68 could see it drop to 0.64, and possibly 2020’s low at 0.5
USD performance diverges… CAD
- CAD also continued to rally vs the USD, moving towards major support at 1.245
- Resistance lies ~1.287
- The trend is still bearish, although CAD could be trading in a wide range between 1.2314–1.305
USD performance diverges… CNY
- CNY is consolidating against the USD having established support ~6.64
- A break of resistance at 6.75 to test 7.02 remains possible, which would not bode well for risk assets
US long yields look to retest their highs… US 10y
- US 10y yields have reclaimed the 3% level, and look primed for a run higher to test their current cycle high at 3.2%
- Support lies ~2.71%
- Global USD shortages could soon see USTs catch more bids
US long yields look to retest their highs… US 30y
- US 30y yields are also pushing higher after catching bids ~2.9%
- They also look like making a run to test their current cycle high ~3.3%, having failed to reach support at 2.8% before rallying
The US yield curve struggles to steepen…
- US 2s10s remain range bound between 20–40 bps
- 5s10s are moving in and out of inversion around -1 bps
- The yield curve continues to signal high levels of stress in the financial system
As US breakevens push higher…
- Breakevens continue to move higher after bouncing at the end of May, but 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 start to diverge…
- France & Italy have seen their yield curves steepen, and are almost back to early May highs
- Germany’s curve remains flat and off its steepest level — headlines about Italian debt concerns will proliferate if this continues
Oil finally makes a proper move above 114, & towards 125…
- Oil managed to decisively break above major resistance at 114, and is now trading ~120, threatening a test of its March 7 highs at 125
- Will March 7th hold as a cyclical top?
Copper holds steady in its range…
- Copper rallied strongly back to ~4.5, but remains in its wide range
- A decisive break below 4.05 is needed to signal that global economic conditions are really deteriorating
Iron Ore continues to rally…
- Iron ore has broken out of the top end of its range at 960
- It remains in its bullish channel, and is currently testing major resistance at 1008 (last July’s high)
As Aluminium continues to languish…
- Aluminium managed a small bounce over the past week, but remains in a deep sell off
- A test of major support at 2570 is likely
Gold is still consolidating in the mid 1800s…
- Gold is still consolidating between the upper end of its old bearish channel and its current uptrend, ~1850
- Resistance lies at 1880
- A decisive break below 1790 could see a fall to 1760, even 1690
And Wheat remains above 1000
- Wheat has stabilized ~1000 having not reached the bottom end of its range ~985 (yet)
- Its price is heavily influenced by macro factors like war and politics right now, as governments scramble to respond to food shortages
Comments