Macro Edge – Trading Opportunities In Macro Markets
How are the macro winds blowing?
Macro Edge tells you what you need to know about macro developments in financial markets, together with our latest trading ideas.
Summarized and presented to you in charts!
Watch The Dollar & US Rates As Credit Suisse May Fail
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Trouble in the banking system has very quickly metastasized from the failures of regional banks, Silicon Valley Bank and Signature Bank, to hit a globally systemic important one, Credit Suisse.
Systemic risk is obviously a major concern now, which is best observed and indicated in two macro markets, the USD and US rates.
Pay very close attention to what they are doing!
- While each bank has its own individual issues that contributed to their problems, the common underlying factor determining their fate is the same – the global repo market (as explained in our article on SVB)
- Systemic risk is obviously a major concern now, which is best observed and indicated in two macro markets, the USD and US rates
- The main indicator to watch for is an alignment in these two markets, where both move together in a direction which signals deteriorating conditions in the global financial markets. This specifically means a stronger USD, and lower US rates
- The more important macro markets, like oil and base metals, that line up in the same direction, the more danger of a global crisis and selloff
- Currently, US rates have begun to move sharply lower, but the USD has yet to breakout of key levels
Charts for this week’s report can be found in the slides embedded at the beginning of the article.
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How To Make Money In Uncertain Markets?
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Recession or no recession?
This is the crucial question that traders are grappling with at the moment. Naturally, how you answer the question will determine how you position your portfolio for the months ahead.
But what if you simply want to wait for the markets and/or data to give a clearer heading? Waiting and not trading is certainly one way to go, but so is taking non-directional positions.
- Markets are not fully aligned towards a weaker global economic environment (do note that they were fully aligned and indicating a global recession as recently as October 2022)
- Weaker USD in short term, but the medium term trend is still biased towards strength
- Same in US equities, medium term weakness, but short term strength
- Commodities also aren’t aligned. Oil and Aluminum remain range bound, while Copper and Iron Ore have rallied strongly since Oct ‘22
- When the Fed starts to cut rates in response to a slowing economy, expect lower short term and long term rates, but also lower prices in risky credits as investors pay more for safety and liquidity
- Hedge market risks:
- Not a good time to take directional risk in markets. Short term trends are not aligned with medium term trends in key markets, which makes the future direction of global markets unclear
- Given the current uncertain macro environment, what characteristics should we look to add to portfolios?
- Preferably, positions which are relatively:
- Stable
- Low risk
- Non-directional
- And also offer some sort of yield
- Long 1 month or 3 month US Treasury Bills
- Fed controls the short end of the curve, and long term rates are not pricing in levels of growth driven inflation commensurate with the Fed’s hikes; hence massive curve inversion
- Buying bills in this uncertain environment gives:
- Higher yields than buying at the long end
- Flexibility to roll them over every 30 or 90 days, without having your capital locked up for longer should market conditions shift rapidly
- Buying longer term Treasuries at this point for the sake of yield will:
- Lock up your capital should their short term trend reverse and prices fall, saddling you with a capital loss
- Give you a lower yield
- Represent a directional bet, even if their prices continue to rise (giving you a capital gain along with yield)
- US 1 month Bills are currently trading with a yield of 4.56%, and 3 month Bills at 4.67%. US 10y Notes are trading with a yield of 3.55%
- These trades are non-directional, but more aggressive in terms of cost and the risk profile of the asset classes involved
- Long SPX, hedge with ATM 1y put
- Gives upside exposure if equities continue to rally, guards against downside crash if downtrend resumes
- SPX (S&P 500) is currently trading at 4136
- Straddle (buy calls and puts) on risk assets, which will profit should markets begin to trend strongly in one direction. ATM straddles on:
- SPX, NASDAQ, Russell 2000
- NASDAQ Composite is trading at 12006, and the Russell 2000 at 1985
- USD, via the most liquid currency pairs – EURUSD, GBPUSD, AUDUSD, USDCAD, etc.
- EURUSD is trading at 1.0795, GBPUSD at 1.2066, AUDUSD at 0.6930, and USDCAD at 1.3406
- SPX, NASDAQ, Russell 2000
- More importantly, these trades allow:
- Exposure to both sides of the market during this uncertain time
- Flexibility to reduce exposure to one side should markets begin to trend strongly in one direction
Charts for this week’s report can be found in the slides at the beginning of the article.
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Focus On Markets, Not Headlines! Macro Trading Opportunities
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A high CPI reading reversed last week’s rallies, reiterating the bearishness that has been in place, while increasing volatility and correlation between markets – which isn’t good news.
- Global markets were rallying strongly before this week’s US CPI print, which drove everything into reverse. Inflation is a problem, but focus on markets instead of headlines
- Macro markets and equities have begun to really move in tandem, which together with rising volatility and how macro markets have aligned over the past few months, does not bode well for risk appetite
- Although UST yields are rallying, the US yield curve remains deeply inverted at multiple points, base metals are still weak, and breakevens remain low
- 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
- CNY has broken out vs the Dollar in a bad way, and is now approaching the key 7.00 level. If CNY continues to weaken vs the USD, expect more selling in global risk assets
- Commodity markets are aligned with the USD and the US yield curve, signaling serious deterioration in global conditions
- WTI has fallen below major support, Aluminum has fallen to make new lows for 2022, Copper is way off its highs for the year, and Iron Ore remains stuck in consolidation
- US 10y and 30y yields have bounced strongly after breaking below key support in early August, with the 30y making new cycle highs over the last week. However, UST yields can fall sharply given poor global conditions, and how other markets have been trending
Trading Ideas – Performance
Trading Ideas – Commentary
- Re-entered Dollar longs against EUR, GBP, AUD, and CAD, as broad USD strength continues
- Entered a short position in Copper’s December 2022 contract in anticipation of further weakness given deteriorating global economic conditions, and bearish indications from other macro markets
- US long yields continue to rally, and 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
- 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
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
- 10y yields have broken below key 2.71% support – keep an eye on whether the breakout is sustained
- 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, or E-mini futures
- Can express the short oil trade by shorting XLE, or purchasing puts on XLE (see ETF Edge)
- Short oil, copper, aluminum, iron ore, given that so many macro markets are indicating more macro weakness to come
Charts for this week’s report can be found in the slides at the beginning of the article.
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Another Week Of Dollar Warnings. Macro Trading Opportunities
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The USD’s warning continues to sound, as it pushes higher against both EM and DM currencies.
Keep watching USDCNY, base metals, and the US yield curve.
- The USD continues to rally. Given how macro conditions and markets remain weak, renewed Dollar strength is signaling further sell offs
- CNY has broken out vs the Dollar in a bad way, and is now approaching the key 7.00 level. If CNY continues to weaken vs the USD, expect more selling in global risk assets
- Although UST yields are rallying, the US yield curve remains deeply inverted at multiple points, base metals are still weak, and breakevens remain low
- Given how macro markets have aligned over the past few months, 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 are aligned with the USD and the US yield curve, signaling serious deterioration in global conditions
- WTI has fallen below major support, Aluminum has fallen to make new lows for 2022, Copper has broken below major support, and Iron Ore looks set to break below its recent range
- US 10y and 30y yields have bounced strongly after breaking below key support in early August, with the 30y making new cycle highs over the last week. However, UST yields can fall sharply given poor global conditions, and how other markets have been trending
Trading Ideas – Performance
Trading Ideas – Commentary
- Re-entered Dollar longs against EUR, GBP, AUD, and CAD, as broad USD strength continues
- Entered a short position in Copper’s December 2022 contract in anticipation of further weakness given deteriorating global economic conditions, and bearish indications from other macro markets
- US long yields continue to rally, and 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
- 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
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
- 10y yields have broken below key 2.71% support – keep an eye on whether the breakout is sustained
- 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, or E-mini futures
- Can express the short oil trade by shorting XLE, or purchasing puts on XLE (see ETF Edge)
- Short oil, copper, aluminum, iron ore, given that so many macro markets are indicating more macro weakness to come
Charts for this week’s report can be found in the slides at the beginning of the article.
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Will The Bears Come Out Again? ETF Trading Opportunities
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Equity markets continue to break below key levels.
With the USD running rampant again, bears look set to reassert themselves in stocks.
- The reversal of the summer rally continues, with many markets breaking below key support levels over the last 2 weeks
- SPY, QQQ, IWM, XLI, XLY, and EZU have all broken below major support levels
- Continue to pay attention to EEM. If it breaks decisively below its recent range, it could signal further weakness in risk assets
- Remember that changes occur at the margins first, then spread to the core
- Energy stocks (XLE) are an exception to the current selloff in stocks, and while they have come down a little, could still be headed for a test of its current cycle highs. Oil prices are back in the high $80s, but this is still too high with macro conditions deteriorating all over the world
- XLU has come down from its all time high in tandem with the broader market selloff
- Fixed Income ETFs are in a precarious position
- TLT has broken below its range, and is close to testing its June lows. But if it rallies again, and manages to break out to the upside decisively, be prepared for more turbulence in markets
- EMB’s (Emerging Market USD denominated debt) rally has started to reverse, falling sharply to indicate that the global USD shortage is getting worse, and pointing towards a further sell off
- LQD, HYG, and EMB are not mechanically tied to UST prices. Should a financial or economic crisis arise, UST prices can rise even as other fixed income assets sell off
Trading Ideas – Performance
Trading Ideas – Commentary
- Re-entered short in IWM at 186.95 after it gapped lower on the open
- High beta small cap stocks are primed to suffer heavy losses given equities’ bearish trend, and deteriorating macro conditions
- Re-entered short position in EMB after it broke below major support ~88
- Trade aims to capitalize on EMB’s bearish trend, as well as deteriorating global macro conditions
- EMB can still fall even if prices of USTs keep rising (yields fall), if macro conditions get bad enough
- It has already broken below its 2020 COVID low, signaling increasing stress in the global USD funding market
- Entered a straddle on XLU at a strike of 72, expiry Sep ‘22
- Position will be profitable if XLU makes a decisive move in either direction
- XLU has rallied back to all time highs, and if it continues to push higher from here, will drive our straddle into the green
Trading Ideas – Long
- A straddle on XLU is an increasingly interesting prospect
- Consolidating between critical support and all time highs, which way will it break?
- Straddles are expensive, but will allow us to profit as long as the market makes a decisive break
- With global macro conditions deteriorating, and energy prices remaining sky high, XLU will have to move in one direction or the other
- Consolidating between critical support and all time highs, which way will it break?
- TLT
- This trade is covered in our Macro Edge reports
Trading Ideas – Short
- IWM remains vulnerable to deteriorating macro conditions, especially with how bearish 2022 has been for small cap equities
- The trade can also be expressed via other high beta ETFs, like QQQ and XLY
- LQD, HYG, EMB
- LQD, HYG can still make a large move lower, with a test of COVID 2020’s lows a real possibility, especially with EMB having already done so
- XLE looks like an increasingly attractive short
- Global economic conditions are rapidly deteriorating
- Oil prices are off their peak even with global supplies tight, and Russia’s war dragging on
- Patience is needed here for XLE to make a decisive break lower, as it has managed to rally strongly in recent weeks
- EEM and FXI are good short candidates, as their charts are looking weak even as the summer rally progresses
- Remember that change starts at the margins and spreads to the core (learn more about this in our Global Macro course). In market terms this means that weakness in EM (EEM, EMB, FXI) often presages weakness in DM
Charts for this week’s report can be found in the slides at the beginning of the article.
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