Prime Trade Ideas: GBP Has Likely Peaked for This Cycle

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

FX, Rates, and Commodities:

• We like EUR against GBP and SEK (26 October, Richard Jones)
• GBP downside to accelerate (19 October, Richard Jones)
• Fed to hike in December (26 October, Dominique Dwor-Frecaut)
• Higher bond yields unlikely to slow US economy (19 October, Dominique Dwor-Frecaut)

Momentum Models:

• Models turn bearish FTSE 100, bullish USD (27 October, Bilal Hafeez)

Bilal’s Asset Allocation

Find Bilal’s latest asset allocation biases here.

• Our views on the major asset classes remain the same. We are slightly more positive on the FTSE 100 given this environment of rising rates at the long end. The UK market remains cheap and has the lowest sensitivity to higher rates. Also, the FTSE 100 is dominated by global firms, so the domestic weakness in the UK is unlikely to be a big headwind.

FX, Rates, and Commodities

G10 FX

We Like EUR Higher Against GBP and SEK. You can read the entire piece here.

Despite a challenging macroeconomic backdrop, with less than stellar survey and hard data in the Eurozone, the euro (EUR) has proven resilient in recent weeks.

We think market pricing for the Bank of England (BoE) is far too hawkish, and that there is still room for UK yields to fall further, as they have in recent weeks. The UK short end has been our favoured position across the G10 rates space, and we have been received the UK short end for several weeks now.

Putting this together, Richard thinks EUR/GBP can trade back to the YTD high, just below 0.9000. He also sees EUR/SEK heading to 12.

GBP Downside to Accelerate in Q4. You can read the entire piece here.

The UK economy is showing signs of slowing, and this is set to continue into Q4 and beyond. Market expectations for Bank of England (BoE) monetary policy have tilted dovishly in recent months. This trend has room to run further.

Focusing on two pairs, Richard likes short GBP/USD and short GBP/CAD.

Commodities

The oil market remains tight, but peak tightness is likely now behind us. We see signs in the physical market that support this. First, prompt spreads have narrowed, second crack spreads have fallen driven by lower gasoline cracks, and finally the premium for physical grades versus financial benchmarks has narrowed materially.

For now, Brent should trade near the $90 mark, but beyond this $85 /bbl could be the near equilibrium price.

Macro Hive Collaborations

Guest Article: Market Underestimates 2024 BoE Cuts. You can read the entire piece here.

The BoE has re-priced lower, but this could go further: the UK economy is in dire straits, and the central bank will likely cut rates more than the market expects in 2024.

Regarding inflation, consensus expects core CPI annual growth to fall to 6% (from 6.2%) and services CPI YoY to remain unchanged at 6.8%. The latter has proved quite sticky, but remember, the UK PMI services index has dipped below the breakeven level of 50 since August. Also, service sector companies reported in September their first staffing decline in over two years, while input prices and prices charged continued to ease.

A weaker sterling and BoE repricing even lower should allow the recent FTSE 100 outperformance vs European equities to extend.

CME: Are There More Currency Bears in Canada Than Grizzlies? You can read the entire piece here.

In our latest collaboration with CME, we delve deeper into the drivers behind the Canadian dollar.

The Canadian dollar has whipsawed within a 5% range this year. Frequent cases have been made for both strength – for example, it appreciated +2.5% against the dollar in June – and weakness. Since its summer high, the Canadian dollar has weakened nearly 4% against its US neighbour. The reason for this was unfavourable repricing of two-year yields in Canada versus the US, as markets take resilient U.S. growth and ‘higher for longer’ rhetoric to mean a smaller likelihood of US interest rate cuts. Meanwhile, a recent collapse in oil prices has caused the Canadian dollar to weaken further.

We see little reason to chase Canadian dollar strength against the US dollar. While near-term oil prices could offer an upside to the Canadian dollar, demand will likely falter through H1 2024 as further production comes online.

Equities and Credit

Equities

We remain neutral on the S&P 500 while remaining overweight the S&P Consumer Staples sector.

Big Tech Earnings Will Set the Pace This Week. You can read the entire piece here.

Geopolitics, primarily in the Middle East, rates, and earnings together drove the S&P 500 (SPX) down 2% last week – we expect this pressure to continue into next week. We are reluctant to move to an underweight in equities as we see the selloff of recent months as a rational response to higher rates rather than the beginning of the herd rushing for the exits.

Low unemployment, a dovish Federal Reserve (Fed), and rising earnings continue supporting equities. If this continues, we think a major selloff is unlikely.

We like to be tactically overweight in the consumer staples ETF XLP.

Credit

There are no changes to our credit view since last month.

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 (+0.4% WoW) continued their positive performance, with equity models (+0.8% WoW) leading. FX (+0.4% WoW) and rates momentum model (+0.1% WoW) performance was more moderate.

Rates momentum models are the best-performing models over a three-month timeframe (+5.2%). FX (+1.1%) followed, while equity (-2.1%) struggled.

Central Bank Monitors and Previews

Fed:

Powell to Leave Door Open to More Hikes. You can read the entire piece here.

The Federal Reserve (Fed) faces three issues:

• Higher than expected growth.
• Risks to disinflation.
• Tightening financial conditions.

Dominique still expects an additional 2023 hike for three main reasons. First, growth should remain sustained through the end of the year, despite the tighter financial conditions. Second, she expects banks to remain stable and continue growing their loan books, thanks partly to Fed liquidity support and government implicit deposit guarantees. And finally, core PCE should end the year near the 3.7% q4/q4 included in the September SEP.

In sum, expect one more hike in December!

 Maturity Wall Far, Far Away. You can read the entire piece here.

Because of the structure of household debts, the recent increase in long-term yields is unlikely to have much impact on their debt service ratio. The data also shows no evidence of bunching of corporate bond maturities.

Listed companies could be more exposed to tighter financial conditions than the average US employer, but the former account for a much smaller share of employment growth than the latter.