Macro Trading Opportunities: Major Warning Sign!
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Commodities prices, especially base metals, are flashing serious warning signs.
We now have three major macro markets indicating worsening global conditions – the USD, US yield curve, and base metals. When will UST yields follow?
- Commodity markets are aligning 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 lower, now trading slightly above $100
- Base metals are breaking lower, with Dr Copper finally breaking below its range to trade below $4, Iron Ore falling sharply off resistance, and Aluminum still crashing
- The USD cooled off over the past week, moving sideways against most other 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
- Even US 10y and 30y yields turned lower over the week, 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
- 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:
- 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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