• Most macro markets have joined in equities’ summer relief rally, but keep an eye on CNY
  • The USD spent the past week cooling off, except against the CNY which is threatening to break out of its range vs the Dollar in a bad way. If CNY breaks out, i.e. weakens decisively vs the USD past current levels, expect more selling in global risk assets
  • US long yields are threatening to break below key support, the US yield curve remains deeply inverted at multiple points, base metals prices are still trending lower together, and US breakevens remain low 
  • With so many markets in alignment, we are looking at further, and possibly steeper, sell offs

• USD strength remains broad based
  • 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 is forming resistance just above $100, as Copper, Iron Ore, and Aluminum finally begin to trend lower together

• US 10y and 30y yields might have made their cycle highs, and conditions are lining up for UST yields to fall sharply
  • Watch key support levels, 2.71% for the 10y, and 2.95% – 3% for the 30y. Decisive breaks below these levels could signal that US long yields have made their cycle highs

Trading Ideas – Performance

Trading Ideas – Commentary

• Stopped out of EURUSD, AUDUSD, and GBPUSD shorts for a profit of 4.14%, 3.92%, and 3.21% respectively
  • Looking to re-enter USD longs again if the trend remains bearish

• Closed the straddle on GLD for a net profit of 115%
  • Decision to straddle gold using GLD options, instead of putting on an outright long position, has paid off handsomely, with gold tumbling down to ~$1700 after failing its retest of 2000

• US long yields have turned, although it remains to be seen if a top has been made. Our long TLT call position is still in the red, 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
  • Re-inverting yield curve, plummeting breakevens, base metals breaking lower, and now even tumbling oil prices, 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 re-inversion (2s10s, 5s10s) 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

• Short Commodities:
  • Short oil, copper, aluminum, iron ore, given that so many macro markets are indicating more macro weakness to come
    • Oil and copper are the most liquid and accessible markets to trade using futures
    • Can express the short oil trade by shorting XLE, or purchasing puts on XLE (see ETF Edge)

Charts for this week’s report can be found in the slides at the beginning of the article.