Macro Trading Opportunities: Breakevens Signal More Trouble
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Yet another macro market is flashing red as we head into the historically quiet summer trading months.
US breakevens have joined the stronger USD, inverting US yield curve, and falling base metals in signaling trouble ahead for the global economy.
- US breakevens have collapsed to 2021’s Omicron levels, another market warning of major global macro weakness, as Dr Copper extends its weakness
- The USD strengthened a little over the past week, but remains in broad ranges against most major currencies, but
- 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 is
- 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 markets continue to align with the USD and the US yield curve to signal serious deterioration in global conditions
- WTI failed to test its current cycle highs ~$123 before tumbling to ~$100, although it has bounced back to $110
- Base metals are breaking lower, with Copper now trading below $3.9, Iron Ore still range bound, and Aluminum still selling off
- US 10y and 30y yields have stopped rallying for now, and conditions are lining up for UST yields to fall sharply
- With the Dollar continuing to rally, the US yield curve re-inverting at some points, and commodities markets aligning with both, global markets are looking at further, and possibly steeper, sell offs
- More expensive energy, raw materials, and food costs, combined with a global USD shortage, increases the likelihood of stagflation, if not outright deflation
Trading Ideas – Performance


Trading Ideas – Commentary
- Re-entered EUR & GBP shorts on their technical breakouts, initiated a short in AUD as well
- Gold has turned down, but can’t seem to break lower with any real conviction, keeping our straddle in the red
- Decision to straddle gold using GLD options, instead of putting on an outright long position, can still pay 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
- US long yields remain elevated, racking up losses in our long TLT call position, but we purchased a year long expiry for this reason, to give the market time to make a top (if it does!)
- Went long TLT calls with 1 year expiry, as 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, plummeting breakevens, and now base metals breaking lower, are all ominous signs
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, and mid June (even as the Fed turned hawkish) is 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
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