• European debt concerns have reignited with spreads between Italian and German bonds widening. The ECB held an emergency meeting to discuss the issue, but why isn’t anyone asking the crucial questions:
  • How healthy is the European economy if the ECB is so worried that rising rates will spark a new debt crisis?
  • If the economy is not healthy, with the ECB having just announced plans to raise rates (and not by a lot), how effective are their policies considering that they have held rates below 0% for so long?

• The USD rampaged higher over the past week, signaling an end to the short-lived rally in May
  • 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

• US 10y and 30y yields blast higher, making new cycle highs, but
  • With the Dollar continuing to rally, and the US yield curve re-inverting at some points, global markets are looking at further, and possibly steeper, sell offs

• Commodity prices continue their divergence
  • WTI still has its Russian invasion highs in sight
  • Base metals prices do not yet paint a decisive picture, with Copper still range bound, Aluminum very weak, and Iron ore bullish

• 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

• Yields continue to rise, racking up large losses in our long TLT put 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 and plummeting breakevens are 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 (even as the Fed turned hawkish) gave us 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