An excerpt from a week’s journal:
Weekend 4 – 5 August 2018: Observations & Thoughts
What a crazy week of a series of risk-off days. It’s time to reassess the macro liquidity landscape:
US high yield bond credit spreads remain under control and are still relatively tight:
The Chicago Fed’s ANFC Index is still at levels that suggest liquidity conditions in the States are healthy for risk-assets.
The VIX futures term structure remains firmly in contango:
The ratio of near-term to mid-term volatility is still way off dangerous levels:
The US Consumer Discretionary/Staples Index ratio has retraced slightly from end-July into August thus far, but it’s still in an overall uptrend:
Together, these variables suggest that the path of least resistance for the US equity market is up.
However, China is still the mother-of-all-worries at the current moment. While the PBOC has intervened in the FX markets, we do not really know the extent of easing on the mainland that policy-makers are conducting and leaning to.
SpaceKnow’s proprietary algorithmic system of analysing satellite imagery data to determine manufacturing activity in China suggests a still tepid trend there:
M2 y-o-y% supply growth continued to be weak as well:
Credit impulse (%) remains weak:
The fate of emerging markets and many Asian economies in this part of the world hinges on what goes on in China next.
If one takes a look at the Hang Seng Index, it clearly has broken downwards this week (probably driven by Tencent, real estate counters and banks?). It could take some more time before prices stabilise:
Oh, gotta watch Dr Copper too:
In the local market, momentum has broken and investor sentiment is generally in the doldrums. Except perhaps for a couple of counters like Sheng Shiong (OV8):
Something that I have to be wary about is the seasonal August period of lower liquidity levels. This means that even modest flows have the potential to create larger-than-normal price swings, and that unexpected news could magnify these swings as well.
JPMorgan’s data on flows and their tracking of the Hui-Heubel liquidity ratio reinforces this point:
As long as such conditions exist or even deteriorate, I’ve got to be aware of this when entering new positions or consider widening my risk points for positions that have longer horizons.
I intend to concentrate on the FX markets for now as I think there are huge moves coming and many interesting opportunities on the horizon.
This week saw the USD strengthening again, with the DXY Index seeing a clear move higher and nearing it’s 200-week moving average:
The move in the DXY was driven by the move in the Euro exchange rate vis-à-vis the Dollar.
It looks like the exchange rate could fall further from here. I may take a shot at it but I’ve to be mindful that long-USD is a crowded trade already (which makes a sudden reversal very likely).
The Aussie looks dismal and has been hammered by a combination of (i) slowing growth from China, (ii) unwinding of AUD carry trades as interest rate differentials change in favour of the USD and (iii) the ever-irritating narrative around trade tensions.
The AUDUSD rate has fallen below its longer-term moving averages, and this may be the canary in the coal mine. AUD short bets are not as lopsided as shorts in Sterling, so this is one area I may take a shot at if the USD could rally further. I also like the chart of the USD against the S.Africa Rand:
One area I’ve been keeping tabs on is the Czech economy, and in particular, the Czech currency (CZK). I’ve been bullish on the Czech economy for some time and the relative growth momentum and interest rate differential between Czech Republic and central Europe will push the CZK higher against the EUR.
I highlighted this in a blog post earlier back in February 2017.
With that kind of pressure, the Czech central bank had to give up its’ peg to the Euro, and the CZK has appreciated relative to the Euro since then (EURCZK decline). Now, market participants are expecting the Czech central bank to tighten monetary policy via more rate hikes, and there could be further room for more CZK appreciation if the ECB continues to be interpreted as dovish.
In commodity markets; after another week, gold did not move much after hanging around it’s 200-week moving average.
The speculative community is overwhelmingly short the barbarous relic, and if gold can’t move further down (especially on news that should make gold fall more), it may mean a bottom is near. I’ll have to sit on the sidelines and monitor since I’m still moderately bullish on the USD.
In other commodities, wheat futures prices have spiked recently on fears over unfavourable weather conditions in the major producing regions. Prices look extended at the moment and ripe for a pullback. I have a bullish-bias for softs; perhaps I should look into the wheat market.
I’m turning more bullish on Uranium prices (I’ve been a bull since 2015) with continued news of further mine closures, trade tensions now involving uranium, and new nuclear plants being launched.
Since the Fukushima tragedy back in 2011, I’ve been monitoring the carnage among nuclear-energy producers. It’s been brutal. More than 90% of the supply side has consolidated. And the long bear-market in uranium has tested even the hardest of hardest die-hard contrarian bulls. Many have been burnt and despaired – this is exactly what’s needed for an entire industry to bottom.
Now, prices may have finally bottomed after forming a long base since late-2016.
There are many ways to play this impending and huge bull market that will play out over the next few years. I also like it because it’s probably one of the lowest-correlated themes to other themes and positions that I have in mind (as well as being lowly-correlated to the broader asset markets).
Time to get creative.