Proprietary Trader /

Global Macro Investment Manager

Weekly Global Macro

Weekly Global Macro

Weekly Global Macro

As we have previously identified, there is a serious luck of conviction in today’s markets; is there going to be a risk on or risk off environment?

There are no clear convictions but only uncertainty, lack of liquidity and serious debate about the future, mainly caused by the monetary policies of major central banks and the zero interest rate environment.

For example, what is the FED going to do? Will they hike interest rates? If yes, then when exactly? What will be the pace of the hiking? Will we move in a period of rising yields or is China and the global deflation threat going to cause the FED to become more accomodative than anticipated? Should we start selling equties since NFP was better than expected or wait for Core Retaill Sales instead this week?

These questions and many more are in the minds of many investments managers and you clearly see that the international environment at the moment makes it very difficult to make a prediction about the global economy for the medium to longer term trend.

This is the reason that I was recommending in my previous posts and also to my clients to focus in shorter term opportunities for now, as this would allow us to manage risk and volatility better and also to allow us to extract potentially more alpha.

So, previously we were suggesting to go short AUD and NZD against the USD for certain technical and fundamental reasons and we were also bearish on the EURUSD. All these trades rewarded us with an excellent reward/risk. We had also identified the positive bias in the USDJPY and USDCAD. In the AUDNZD our stop was hit but with the reward/risk ratios in the AUDUSD and NZDUSD, it is really negligible.

We were staying out of US equities and we were biased to go long the Eurostoxx 50 because of the QE but our trigger wasn’t hit and we stayed out. However we were very bullish on Chinese equities and you currently witness what is happening with the Shanghai Composite! 

This week there are some more opportunities as we eagerly anticipate certain economic releases and please pay attention to the fact that it is the economic calendar and the newsflow that will determine what happens next in certain economies.

Weekly Global Macro

Early in the week I am waiting for the release of the Chinese CPI y/y data which could prove to be a catalyst for the Australian economy and global equities. Also on Tuesday we have RBA Governor Stevens speaking, so my attention is going to be on the AUD currency. The Aussie will also be affected by the data on Wednesday and specifically the Employment Change and Unemployment Report.

Let’s take a look technically:

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At the moment we have returned back to longer term balance and I can’t see an edge technically. I will be waiting for a move away from Value, when I will have a higher probability for a move away from the mean. As you can see currently it’s all data dependant. There is also a bigger catalyst in play at the moment and I think this would be affecting different asset classes in the longer term as well. Please have a look at the relationship between 10y US Notes and UK Gilts:

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Weekly Global Macro

You will notice the correlation that is occuring lately between them and this can be easily explained as expectations about a possible interest rate hike by the FED in 2015 is driving US bonds lower but the same expectations for higher interest rates are also driving the UK Gilts. You can imagine what will happen in those two markets if we suddenly start receiving again “soft” US economic data. In today’s environment we must have a clear understanding of intermarket relationships and I will be focusing on the Gilts in case we have a negative surprise.

At the moment I have a negative bias for both assets and you can see in the profiles the reason why. This is the 10y US note:

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We have moved away from the bigger balance area and below the Value highlighted by the yellow rectangle. I have highlighted with the red lines where I am potentially looking to do business but of course the newsflow must support my case! You will draw similar conclusions if you have a look at the Gilts:

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Both the Eurostoxx 50 and the S&P 500 are also balancing and are located at the moment within a bigger balance formation, but we have a slightly more negative bias towards the Eurostoxx. I am staying away from US at the moment. Here is the Eurostoxx 50:

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We are at the bottom of the balance, below Value but I will be waiting for developments on the Greek crisis before deciding to engage. You will notice similar patterns in different instruments as the same global macro catalysts are affecting all of them and as we were saying at the beginning currently there is uncertainty and indecision as the markets lack conviction. This is the S&P500:

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I will post below the charts of the markets that I am focusing this week but in my opinion the highest probability trade comes from Down Under and New Zealand to be specific. Will the RBNZD cut interest rates, as the market anticipates or will they leave rates unchanged? The AUDNZD interest rate spread has moved to exceptionally high levels and a dissapointment could provide a strong reversal. I will be looking for an opportunity to sell in case of course they are less accomodative than expected.

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Of course NZDUSD is also a good candidate:

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I will befocusing also on GBPUSD, EURGBP, EURCAD, USDJPY and the Shanghai Composite.

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Fotis Papatheofanous MBA

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