Prime Trade Ideas: Our Favoured Trades for H2 2023

We consolidate our favourite biases into one, easy-to-read, weekly report! Please find the original pieces linked throughout and a summary table at the end of the document. Reach out to us on Slack or email the author with any questions about the content.

Latest Updates

Market and Central Banks Views:

• Receive 2-year Australia and New Zealand rates, long NOK/SEK (6 July, Richard Jones, Ben Ford).
• Dominique expects equity rally to continue (6 July, Dominique Dwor-Frecaut).
• Value in owning US and German 2-year bonds and shorting GBP (29 June, Richard Jones).
• Q2 earnings season to prove more challenging than Q1(29 June, John Tierney).
• Fed Monitor: Watch What the Fed Does, Not What It Says(28 June, Dominique Dwor-Frecaut).

Momentum Models

• Momentum Models Flip Bearish on EUR/CHF and Bullish on NZD/USD (6 July, Bilal Hafeez).

Bilal’s Asset Allocation

Find Bilal’s latest asset allocation biases here.

• We stay overweight cash and TIPS while maintaining our underweight allocation to equities, long-duration bonds, property, and private equity.
• Within equities, we think Quality looks attractive as it provides exposure to companies with high profitability and strong balance sheets.
• We find that S&P earnings forecasts show that analysts are no longer expecting a mild. earnings recession this year, instead expecting earnings growth to re-accelerate from Q4. We would look to fade this view
• Within fixed income, the interest rate market has all but priced out the cuts expected in 2023. However, as inflation continues to remain sticky, we still see value in cash and shorter-duration bonds.

FX, Rates, and Commodities

G10 FX

More Favoured H2 2023 Trades After Central Bank Deluge. You can read the entire piece here.

Richard and Ben focus on Australia, New Zealand, Norway, and Sweden. Like the larger DM central banks, we think the RBA, RBNZ, and Riksbank are near the end of their tightening cycles.

Their favoured way to play this is via:

• Receive 2-Year Australia OIS – With additional hiking priced into the Australian curve, in addition to the RBA itself hinting at further tightening, we advocate a patient approach to building a position.
• Receive 2-Year New Zealand OIS – The argument in favour of building a long 2-year New Zealand rates position is very similar to what we advocate above in the Australian rates market, although the trade is even more compelling in NZD.
• Bullish NOK/SEK – We think that the Norwegian economy will outperform the Swedish economy, and that Norges Bank will be more aggressive than the Riksbank in tightening monetary policy. This will shift interest rate differentials in favour of NOK.

Our Favoured H2 Trades After the Central Bank Deluge. You can read the entire piece here.

In most cases, we see that markets are beginning to price the big G10 central banks near the end of their current tightening cycles. This presents market opportunities for H2 2023.

Richard’s favourite trades for such an environment include:

• Receive US 2-year bonds – US 2-year yield should trade back towards the year-to-date (YTD) low just above 3.5%.
• Receive German 2-year bunds – Likewise, 2-year bunds should head back below the YTD low at 2%.
• Short GBP – Richard expects sterling to underperform against most of its G10 counterparts, with GBP/CHF downside a particular standout.

EM FX

Our latest Asia currencies insights, in partnership with SGX. You can read the entire piece here.

We look deeper at what carry strategies have worked this year, and what could be in store for the second half of 2023.

We also refresh our views on Asian FX, turning bullish on several key crosses including KRW, INR, and THB.

Commodities

What Is Driving the Rebound in Chinese Demand? You can read the entire piece here.

Chinese oil demand has been strong. Rebounds in gasoline and jet fuel consumption have been the key drivers. We think inventory builds combined with ‘surprise’ oil production increases from Iran and other sanctioned countries have prevented the oil price from rising.

This cuts off the right tail in oil prices for the second half of this year and results in Viresh flipping from bullish to neutral on oil.

Equities and Credit

Equities

Our broader equities view remains the same. We remain tactically bullish on small-caps and regional banks, as they play catch up with some of the larger winners so far this year.

Earnings Outlook: Investors Downshift Views About Earnings Outlooks. You can read the entire piece here.

Earnings reports in the past 10 days exhibit a softer tone than much of the Q1 earnings season. Companies are still reporting handsome beats, but investors are focusing more on weak points and often punishing equities that disappoint. We expect the upcoming Q2 earnings season will be more challenging than Q1.

John still likes the Russell 2000 (RTY) and regional bank ETF KRE as tactical trades.

Macro Indicators for Reluctant Rally Participants. You can read the entire piece here.

Dominique believes this rally has further to run, until a recovery in energy prices exposes strong underlying inflation dynamics.

Investors’ limited enthusiasm is understandable, in view of the many unresolved macro issues. Investors’ dilemma is summed by the low ERP (Equity Risk Premium, the difference between SPX earnings yields and 10-year yields), that is back to the levels prevailing in the early 2000s.

However, given the combination of accelerating real wage growth, a strong labour market, and inflation continuing to support the pricing power for corporates, Dominique believes the equity rally has further to go, at least for the next few months.

Cryptocurrency

Technical Signals:

Crypto Breaks Support Levels, Negating Bullish Outlook. You can read the entire piece here.

Both Ethereum and Bitcoin broke out of their downward channel in recent weeks.  

However, while Bitcoin targets new highs, it is less clear at this stage whether Ethereum will do so. For now, though, while over 1765 support, we should see a further move up to next resistance in the 2050 area, if not a test of the highs.

Fundamental Signals:

Should I Buy Bitcoin Now? You can read the entire piece here.

We are less bearish on Bitcoin as the macro backdrop improves marginally. Therefore, we shift our view from leaning bearish to neutral.

We still expect two hikes by end-2023, based on no expectation of significant disinflation over the remainder of the year. But given the slowing in the pace of hikes, our macro signal moves to neutral.

When looking at on-chain/flow metrics for Bitcoin, our on-chain signals show two bullish, one bearish, and three neutral signals.

Momentum Models

Our momentum models cover FX, equities and rates. The basic strategy is to use returns (lookback windows) to give buy/sell signals. You can find the latest report here. Find out how to enhance your portfolio using momentum models here.

Momentum models progressed +0.5% WoW, having stumbled for the first time in seven weeks in last week’s report. Performance over the past three months remains positive, with equities driving the average return higher (+5.9%).

Since our last update, momentum models have flipped slightly bearish on the FTSE-100, become slightly less bullish on JGBs, and now signal EUR/CHF downside as well as NZD/USD upside.

Central Bank Monitors and Previews:

Fed: Watch What the Fed Does, Not What It Says. You can read the entire piece here.

The evolution of the SEP end-2023 inflation and unemployment forecasts shows the Federal Reserve(Fed) is much more focused on employment than inflation.

Meanwhile, the tightening of credit conditions remains in line with previous Fed tightening cycles, and credit demand is weakening. Regarding inflation, Dominique believes that falling energy prices continue to mask strong underlying inflation dynamics.

Dominique believes the market continues to underprice the Fed, especially into 2024.

Viresh Kanabar has worked in the UK financial services industry for over 8 years including in Consulting and Investment Risk. Most recently he launched The Macro Journal Substack where he puts out regular in-depth reports covering all areas of global macro.

Photo Credit: depositphotos.com

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)