The Week Ahead
Hello and happy Funday!
Markets seem very confused with Fed policy and now rumours/speculation of a Friday emergency rate hike are now going around. I can’t say I agree and I am not sure how this has come about. As I mentioned before, I think Jay made a very calculated decision with the last rate hike. I am sure Jay will be monitoring inflation breakevens very closely as the market has sent Jay cautionary messages on inflations expectations in the last two weeks. If inflation breakevens or data start to jump we will very quickly see a change in Jay’s tone. Since the last FOMC the yield curve is beginning to make more sense now and I would expect we can see the 10yr head towards its anchor of 3.000. This week we could see the 2s10s invert even deeper and potentially the 3m10y invert in the next fortnight.
Somebody asked me this weekend where I can see equities topping out and where do I see them heading. As I mentioned in my last post I can see this summer bid lasting, if I had to decide a number it would top at it would be 4400 but I try not to call tops and bottoms as you are well aware. As we have seen from markets, investors have taken the last FOMC meeting as dovish and thus bid equities. The thing is, the rally has been completely technical. Many PMs were allocating at the lows - with the likes of some FAANG stocks trading at a 15x PE and other big names down 70% YTD plus 2 negative quarters. The S&P remains in balance and I expect it to be below 4200 until we have the CPI reading, which personally I expect to be a bit cooler than expected. Investors are really waiting to see some sort of confirmation that the Fed is in control of inflation and trying everything in their power to tackle it. As I expected on Friday post NFP a quick 100bps move down in S&P would be met with somewhat of an aggressive bid. I guess I expected this as I knew people are waiting for CPI. Even though you can see asset classes seeming to price in that peak-inflation is behind us with the likes of crude oil down massively last week.
Anyway, add to the people allocating at the lows we have seen CTAs cover their shorts in a desperate fashion. I would expect CTAs flip net long @ 4200. Like I mentioned before at the lows CTA were suicidally short the S&P and HFs became net short semis. Add on top of that being heavily short high beta names and unprofitable tech it has led to this aggressive technical rally. What do I expect from here? Personally, I think shorts are really feeling the heat now. I think they are worried where this could head. My gut for this week looks for 4307. We should continue to see these aggressive short squeezes in the worst-of names YTD. Strangely and unexpectedly retail tourists remain strong-ish, retail buying has slowed down but it is picking up again. We have seen huge OTM call volumes and premium paid and I would expect to see $delta added continuously.
So yes for now I remain bullish, I expect S&P to try and head above that 4200 level with most likely a move higher to 4307 off the back of more short covering and a stronger bid come into these high beta names and FAANG. I think what’s different to the prior bear market rallies we have seen this year is that in January and March they were a buy the dip scenario where as this has been driven up by a lot of short covering rather than people buying the dip. Though saying that many are trying to short the rally which could lead to more covering if we can break these key levels.
Commodity-wise well, I won’t blow my own trumpet. Summer demand, haha. Newbie tourists went into oil stocks on FCF growth and for the summer demand, now getting rugged as they realise they were hoodwinked by financial commentators and charlatan stock pickers. I’d be concerned by the mass employing by oil co’s, there’s this weird cycle of that. My base case still remains 70-80 as it always has even when I got short that first time 50 cents or so off the 52w high. I think we can see my base case in the next few weeks. My extreme case would be seeing oil below 70 by the end of the year. I think bull case of 150 oil is out the window, quite frankly I don’t think it was ever in sight. Where are the 250 and 300 dollar guys at?
K enough laughing.
FX - I won’t be doing anything this week unless given an opportunity to do so. Quite difficult to navigate right now. I have some FLEX options on cable which are 1.21300 strike calls expiring Wednesday - that’s it though. Could see DXY slow down a little bit.
Can expect vol to continue to melt, I don’t think it’s a bad idea to buy vol here.
So. To sum it all up I expect more upside in equities. If things change then I will write a post accordingly to why I think it has and what I expect to happen.
I hope you enjoyed the insto research I shared on Friday, some really good positioning research there. If you missed it I will attach link below. I will post some commentary about stocks I like later on today.
Have a good end to your weekend,
As always if you have any questions please feel free to ask in the comments or reach out via twitter DM.
Fed