Commodities | Equities | FX | Portfolio Updates | Rates
Prime Trade Ideas: Have US and Germany Bonds Turned the Corner?
- By Viresh Kanabar
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- 3 min read
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.
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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
Equities
- Pressure on equities from seasonal bounce in the VIX (22 June, John Tierney)
- Major equity indices face headwinds (12 June, John Tierney).
FX and Rates
- Short-end German and US yields look attractive again (22 June, Richard Jones)
- Bearish CAD despite Bank of Canada U-turn (22 June, Richard Jones)
- Our Latest Collaboration with SGX (21 June)
- Our Latest Collaboration with CME (19 June)
Momentum Models
- Turning bullish on EUR/USD (22 June, Bilal Hafeez).
Market and Central Banks Views
- Core PCE to End 2023 Above 4% (22 June, Dominique Dwor-Frecaut)
- UK Inflation Soars (21 June, Henry Occleston)
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
Short-End German and US Yields Look Attractive Again. You can read the entire piece here.
The European Central Bank (ECB) and US Federal Reserve (Fed) are near the end of their tightening cycles, having raised rates materially in the past year or so. Meanwhile, German and US bond yields have been extremely volatile so far this year, falling sharply during the banking crisis in March then rising as risk sentiment recovered.
Richard sees value in being bullish German and US 2-year bonds. He thinks the German 2-year yield trade back towards the YTD low just above 2% and the US 2-year yield back towards the YTD low just above 3.5%.
Bank of Canada U-Turn Will Not Be CAD Game Changer. You can read the entire piece here.
The Bank of Canada (BoC) unexpectedly hiked its policy rate by 25 basis points (bp) to 4.75%, after keeping rates on hold since January.
Richard does not think the shift from the BoC will not lead to material gains for the Canadian dollar (CAD) in the second half (H2) of this year, with existing year-to-date (YTD) ranges expected to broadly remain intact for the major CAD pairs.
He sees value in being short CAD against the USD, EUR and GBP.
EM FX
Our latest Asia currencies insights, in partnership with SGX. You can read the entire piece here.
China’s recent interest rate cut leaves a difficult environment for Asia FX. The loss of economic momentum through the second quarter points to increased pressure for key export partners across the region. Meanwhile, a weaker CNH and portfolio outflows from China could sour sentiment across the region.
We provide updates of our views on various EM FX as well as taking a deeper look at recent Chinese data and policy changes.
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.
Equity View: Is VIX in for a Seasonal Bounce? You can read the entire piece here.
The VIX shows a well-defined seasonal pattern, falling during H1 then rising in H2 before declining late in the year.
With the VIX now trading at the lows of the post-pandemic period, investors are clearly not worried about a recession nor anticipating a major crisis.
Between the VIX being at cyclical lows and the prospect of less robust outlooks in the coming earnings season, John expects at least a modest seasonal bounce in the VIX and commensurate pressure on equities in the near term.
Earnings Outlook: Major Indices Face Headwinds. You can read the entire piece here.
The S&P 500 should receive kudos for exiting bear market territory. Not to rain on the parade, but it is still 11% short of its high in early 2022. Meanwhile, NASDAQ 100 is 14% below its peak. To reach previous highs will require earnings growth – but earnings have flatlined in recent quarters.
John still likes the Russell 2000 (RTY) and regional bank ETF KRE as tactical trades.
Cryptocurrency
Technical Signals:
Crypto Breaks Support Levels, Negating Bullish Outlook. You can read the entire piece here.
Both Ethereum and Bitcoin look to be stick in a range in the short term.
Bitcoin bounced off resistance recently and looks to be heading higher, but an impulsive rally through 27,670 is needed to re-energise the bullish outlook for a move back to 31,000 and even 33,000.
Ethereum could be heading lower in the near term and back towards channel support at 1552-1548.
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 delivered a sixth consecutive week of positive returns, led by FX (+0.1% WoW). Performance is better over the past three months with equities driving the average return higher (+6.1%).
Since our last update, momentum models are less bearish on US long bonds, they have flipped bullish on EUR/USD and have pared NZD/USD bearishness.
Central Bank Monitors and Previews
Fed: Core PCE to End 2023 Above 4.0% Read the full piece here.
Due to lower imports, goods inflation has only limited downside over the remainder of 2023. Longer term, due to protectionism, reshoring, and industrial policy, goods price inflation is likely to remain positive.
Solid growth momentum in turn reflects loose fiscal and monetary policies.
Dominique believes the market the market continues to underprice the Federal Reserve (Fed) especially into 2024.
BoE: UK Inflation Soars. Read the full piece here.
May UK inflation beat expectations, with a surprise rise in core and headline readings. The beat was widespread, which will add to BoE concerns that it will stabilise at a rate far above target despite the economic slowdown – stagflation!
The market is now pricing a 6% terminal rate by year-end. Henry believes this is unlikely, but there is little value in fading the move until the turn has come.