The Week Ahead
Volume 95 - Low Corr, More Dispersion, High Bars
Good morning all,
I hope everyone had a lovely weekend.
What a week… for markets and for paid subscribers.
Let’s recap with some facts and headlines…
*GOOLSBEE: FED HAS TO RECALIBRATE, ‘WAIT AND SEE’ ON INFLATION
*GOOLSBEE: WILL TAKE LONGER TO GET INFLATION DOWN TO 2% GOAL
*NVIDIA SHARES EXTEND DROP TO 10%, ERASING $212 BILLION IN VALUE
(Closed -21% from the highs)
*HOLZMANN: IF FED DOESN'T CUT, CAN'T SEE 3-4 ECB CUTS THIS YEAR
Also the ECB… *LAGARDE: ECB IS NOT FED-DEPENDENT
*EXXON'S MARKET CAP TOPS TESLA'S FOR FIRST TIME SINCE JAN. 2023
*NASDAQ 100 DROPS 2.1% IN WORST DAY SINCE OCTOBER
*NETFLIX SHARES FALL 8% AT THE OPEN IN BIGGEST DROP SINCE JULY
*NETFLIX 1Q STREAMING PAID NET CHANGE +9.33M, EST. +4.84M
*NETFLIX 1Q EPS $5.28, EST. $4.52
*NETFLIX SEES 2Q EPS $4.68, EST. $4.54
Very quickly… the scenario I have mentioned endlessly… no cuts for 2024, is becoming a real possibility.
Where do we find ourselves after avoiding World War 3 (again) and a bloody week for markets? ES1 +26pts, NQ1 +57bps, VIX -0.4v, 10yr +3bps, CL1 -46bps, GC1 -176bps, USD/JPY +10bps, cable -33bps, EUR flat and DXY +5bps.
My book performed well last week, +3% for the week. Hedges kicked in, and shorts began to work. FX positions worked wonders, and we had the best trade of the year (NVDA 775/825 bear call opened at -33, traded near a max loss for a good while, and in the final day, NVDA collapsed, and the spread closed for max gain). Yen calls are going as expected; the cable short is now green by ~380 pips, the EUR/BRL short is offside but not too concerned yet, the EUR/CAD short is +153 pips. On the topic of FX…
FX
Finally, a small spike in FX vol, but the greenback remains strong as it has done YTD. The main drivers? Carry, US exceptionalism (capital flows into US), a great all-round hedge (as I have said from the lows) and growth. As I said in the year ahead… carry remains attractive, so own it… what a trade it has been.
Anyway…, the reality is that the greenback can’t remain bulletproof forever, and positioning is stretched. Strangely, I don’t expect an imminent reversal in USD momentum; it finds itself at a very important inflection point which is the 107-108 area. Break the 108 area and the trend could well continue above 110 (you’d expect markets to be pricing no cuts at this point). Now, the probability of a hike is thin, but if markets started to price in even a slight chance of a hike, you’d be looking at the dollar trading around the 2022 highs of ~112. If the market begins to price in more cuts, be that technically or off fundamentals like inflation cooling again… we would see a reversal in DXY back below 104.
This week, I expect the greenback to continue its upside crusade… cable to revisit 1.225 (potentially below), EUR <1.06 (this is a big handle to watch), USD/JPY >155 (lots of chatter about BoJ intervening here, recent price action has shown that there could have been some small interventions recently but we won’t find out until we see the intervention data)… Interventions don’t really do that much unless done with size; they are a temporary fix, but if done with size, they have the potential to reverse trends.
Single Stocks, Index & Vol
40% of SPX to report earnings this week… SPX 4950 straddle for the week is starting the week at 184bps, QQQ 416 straddle for 245bps…
The bar is high… NFLX smoked after a blowout set of earnings, which sets a tone for the rest of Mag7 earnings (AMZN is the most overcrowded IMO). That’s six consecutive red sessions for the S&P now. Geopolitical risk is rising, rates are magically important again, and plenty of nerves are in tatters for earnings… The 50D MA taken out, next is the 100D which is about 25pts below last weeks lows. As I ’s lows. As I have noted before, retail volumes have been falling off a cliff for some time now (retail loved names + option volumes). CTAs have been in sell mode, naturally, as the trend has changed.