Macro Monday Wk 4: US hikes rates, rest of world follows — #SaxoStrats
- The impact and duration of the US government shutdown is still unclear
- Precious metals have gained ground, although silver still lagging
- Key share indices have achieved strong year-to-date gains
- Soft commodities could make for some interesting contrarian trades
Summary of prior week
- Cryptocurrencies: Got absolutely smoked, with some names down as much as 30% to 60% from recent highs. E.g. Ripple at $1.59 is down 53% from recent $3.40 high, yet still up +5.9 times from early December 23 levels.
- US: Government shutdown still unclear, cleared at House level, yet Trump’s immigration attacks causing a logjam with Democrats in the Senate. Blame & distorted facts game begins
- China: China's GDP came in better than expected +6.9%a +6.8%e
- Bank of Canada: Hiked as was expected to 1.25%, concerns on NAFTA as well as potential effects of US tax cuts. Domestic growth still intact.
- Fixed income: Continues big move up in US rates, with the key level of 2.63 having broken we close the week at 2.67% & still have bunds below pivotal 60 basis points at 56.8 basis points.
- Forex: Euro seeing higher highs… as is Cable… continuing their momentum this wk at +16bp & +95bp res. Euro range 1.2323 / 1.2165
- Commodities: Precious metals up – silver still lagging. Natural gas now about 20% over last 1m. Sugar and wheat continue to be offered.
- Equities: Continued uplift in in global equities, for the third week after what was already a very impressive first two weeks.
- Here are some YTDs percentage gains: S&P+5.1%, NAS+6.3%, NKY +4.7%, Dax+4.0%, EEM+7.0%, MIB+8.7%, HSI+7.8%, AR +11.7%
- Vol: Continued grind up for the week closing at 11.27, a +14% move
- Forex: Slight tickup in USD short exposure, a bit of a pullback in Euro longs and JPY shorts.
- Commodities: Very similar to last week’s picture: “Market continues to be very long the energy space in general, over 1.4bn barrels of crude oil that the market is long. The short bias on the softs continues, which KVP and Ole Hansen think could make for some interesting contrarian trades if we have any weather upsets in 2018.
- Gold positioning starting to tick up, yet feel that the big laggard to fill up soon will be on silver’s side”
- Key focus: World Economic Forum meeting in Davos, US Q4 GDP, and ECB
- Central banks (Singapore times): BoJ -0.10%e/p (January 23), BNM 3.25%e 3.00%p (January 25) NO 0.50% p (January 25), ECB -0.40% e/p (January 25), ID 4.25% e/p (January 18), Fed Speakers (Singapore times): Senate – Goodfriend confirmation hearing (January 23, 23:00) Evans (24, 07:30)
- Other: Australian public holiday on Friday January 26, for Australia Day.
- US: PMIs manufacturing. 55e 55.1p, Services 54.5e 53.7p, Leading Index, Inv., Durable goods, Q4 GDP +2.9%e +3.2%p
- China: Industrial profits
- Eurozone: ZEW exp., PMIs manufacturing. 60.3e 60.6p, Services. 56.4e 56.6p
- Japan: TB, PMI manufacturing. 54.0p, CPI 1.1%e 0.6%p
- UK: Public Sector Net Borrowing, Jobs Data, 4Q GDP +1.4%e +1.7%p
- New Zealand: Credit Spending, Q4 CPI 1.9%e/p
- Australia: Westpac leading index.
- Equities spike: Again, anytime you make too much money, either take some capital off the table and/or hedge some of the gains. Given its still at the start of the year, the latter makes a lot more sense. Been speaking to a lot of clients on this, i.e. use some of the gains from the first 2-3 weeks to partially hedge your portfolio for 2018… volatility is still low… so premiums are cheap.
- Back of the envelope example of a table of 10% OTM options on 3m, 6mand 12m time frames on the Nasdaq and S&P500. See’s you paying away premium of about 20bp to 390 bp… for buying puts. Of course one can set specific baskets of puts, e.g. FANG put basket. Have one year horizon for trade, so roll with 1m left to optimize premium outlay…
- Another possible approach would be to also be selling calls on underlying equity exposure, thereby lowering the portfolio’s overall delta (exposure).
- Bank of Canada: Figure out when (or if?) NAFTA turns for the positive and you will probably get the inflection point on when BoC is happy to get more hawkish again.
- Rates: US rates breaking higher, so that means that global rates are breaking higher as well…. Bunds a screaming lag (i.e. short outright or vs. periphs or treasuries)… a touch potent with ECB this week… but bunds should be well over key 60bp level.
- Pain and contrarian Trades: Long USD… we have the inverse of start of 2016… when many people – including KVP – were wrongly massively bearish on euro and massively bullish on the USD. We now have the opposite, even though USD shorts – apart from a few crosses – are by no means at multi-year lows… just elevated against EUR and GBP. Getting long US bonds is also starting to (finally :-) get contrarian…
- The big Kahuna question is, does higher US rates lead to a higher USD? Not so sure… going to be very contested. The Federal Reserve no longer the only game in town, have already done a good chunk (Five hikes, 1x in December 15 and 16, then trhree in 2017) if not more than half of their lifting cycle. Also new Fed squad coming in… Meanwhile one could argue everyone else is potentially behind. Much stronger USD complicates things…
- Long US treasuries: For the first time in a very long time it seems, seeing very few advocates of US bonds yields… this is quite significant as we had some die hard bond bulls to the grave sentiment for most of this regime. Perhaps the US fiscal stimulus (tax cuts) on top of the best economic data in over a decade, alongside an incoming new Fed is really forcing people to recalibrate their probabilities of a move up in yields vs. move down.
- Steepeners: Just like our January 2019 Fed Fund futures has been a rock and roll trade, so have flatteners for much of 2017. Not a lot of people out there thinking that we could see steepeners this year.
- Tactical Book had a great start for much of 2017, finishing Q3 up about 7.56%, with very high hit rate… well over +70%....
- Made strategic decision to increase the level of risk for trades in Q4, logic being higher win ratio should results with overall higher return for the quarter
- Did not have many opportunities in Q4, combo of year-end travel (off desk), less clear opportunities, general fatigue, etc. led to -3.39% in Q4. It’s a marathon, not a sprint
- Average risk taken per quarter were 0.57%, 0.81%, 0.58% 1.33% respectively
- Total return for the year was 4.18%, greater than average Macro HF’s +2.94% in 2017, yet quite disappointing given high win ratio and high watermark just short of +10%
- Overall Takeaway: Increase min risk per trade to 75-100bp (raises bar on ideas), have a min of three to four different trade ideas at any time to dampen volatility and bad luck
- Strategic Book was the opposite, struggling for most of the year before turning around in Q4 through a heavily concentrated bet on crypto proxy through ETNs.
- Win ratio of about 54% is more realistic from a sustainable perspective. Worth noting that without crypto trade, avg. win per trade is only +74bp vs. average loss per trade of -71bp; this is too low of a sustainable edge, unless your running several hundred million dollars or a yard.
- Biggest losses were from initial big bet on structural shorts on US rates (-1.89%), trade idea was right, structure of picking up 1 year puts was wrong. Also high conviction long.
- On silver (3% of risk) through SIL (silver ETF) was poorly timed & cost the book its biggest loss at -2.67%.
- Total return for the year was +8.80%, basically triple the average Macro Hedge Fund’s +2.94% in 2017.
- Overall Takeaway: Start slowly in a more structured manner, keep average. risk per trade at 100bp, keep wide structured stops, have more lower correlated trades.
Quick Technicals Snapshot (Quick Take; more in-depth from next week)
- James Kim is back with some great charts, overall on forex theme is some of the technical may be due for consolidation/pullback given hard run. Meanwhile equities never got that memo
- The euro's diverging RSI could be indicative of exhaustion... yet note that it is ECB week. 1.2516 is really the key level to watch for potential profit taking & play tactical reversals in the euro
- Cable is now getting back to Brexit levels, we closed 1.4358 the day pre-vote, then hit a low of 1.3229 the following day... Now at 1.3859... all about 1.40...
- DollarSwissy has still not made a floor.
- The Australian dollar had a massive run-up (this was James Kim's Macro Monday call towards end of the year), we'd expect some consolidation and a test of 0.79 from these circa 0.80 levels.
- The Nikkei 225 other equity indices exploding upwards.... S&P now +5.1% YTD THAT IS 25% OF TOTAL 2017% RETURNS!
- ASI one of few exceptions on lagging Equities rally, 6,000 has to hold
- Gold feels like it was to take off, have to break this 1340/1350 congestion zone...
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– Edited by Robert Ryan
Kay Van Petersen is Global Macro Strategist at Saxo Bank. You can follow him on Twitter: @SaxoStrats or @KVP_Macro. Please join us live for next Monday's Macro Call at 0830 [Singapore/Hong Kong], 0930 [Tokyo], 1130 [Sydney].