Macro Dragon WK 50: US Fiscal Stimulus, ECB, Brexit, EU Budget & the Melt-UP...
Summary: Macro Dragon = Cross-Asset Daily Views that could cover anything from tactical positioning, to long-term thematic investments, key events & inflection points in the markets, all with the objective of consistent wealth creation overtime.
Macro Dragon WK 50: US Fiscal Stimulus, ECB, Brexit, EU Budget...
Top of Mind…
- Happy & gratitude filled Monday from the Asia Pacific, welcome to WK #50
- So the Dragon’s skew should be no surprise, whilst always being open to the pathway that we could be wrong & missing something… the Dragon has been outrageously bullish for wks now as covered in a few pieces including:
- Point is, KVP is not going to rehash the multiple cross-asset, tactical & strategic skews that we have previously touched on the Dragon. We will just touch on the delta &/or what is top of mind…
- Bottom line the path of least resistance is a continued melt-up in risk assets, as well as melt-down in the dollar & volatility. As always, as within all investment & trading thesis, there are clearer waters to swim in than others.
Potential Tailwinds to Risk-Assets
- Bullish Technicals & general price action continue break-out to the upside across multiple risk-assets. From the Russell-200, Nasdaq Composite, Google, CAT, Dow, EEM, Copper, Platinum, Mary-Jane Stocks, NKY & Kospi, CNH, KRW, TWD either breaking out to all-time new highs or YTD highs…
- As well as things like the Shanghai Composite, NDQ looking ready to hit the “Next Stop Mars” button… including a lot of EM FX names, e.g. the USDRUB shorts that we wouldn’t shut up about going into US elections, had a phenomenal technical break lower last wk at -2.5% to 74.12& yep the “easy” move is still to high 60%... 50% fibo is only 72.00. Kudos to those that caught onto this skew, in c. 6-12m this should be well south of 60 (We were 61 in early Jan 2020) & that’s regardless of whether Sputnik V is a success or not (Moscow begins vaccination roll-out) .
- All this leaves the Macro Dragon looking ever closer to the laggards in the so called Covid Misery bucket (i.e. sectors & names that got smashed: energy, travel, hospitality, F&B, Retail) & in some cases are still down YTD anything from -24% (EWZ Brazilian EQ etf) to -40% (XOM & BP/ on the energy side, XLE energy etf is still -32% YTD) to -54% (Carnival Corp for those cruisers).
- Airlines in particular are interesting, with United Airlines (UAL) & American Airlines (AAL) still down -44% to -43% vs. say -30% on Singapore airlines. It’s worth noting earlier in the summer KVP kept harping on how he could not understand that China airlines were still down -more than 30% YTD… well checking in this morning They are now only down anything from -4% to -17%. Whats the takeaway here?! China & North Asia was the playbook in the start of the year for the RoW in rgds to Risk-off, its not the opposite… i.e. they are the playbook in regards to risk-on – granted with a touch more turbulence growth wise, yet given new vaccine news… likely all evens out. Different, different, but same.
- Bottom line, KVP would be putting at least 5% of AUM on a tranche of calls on the Covid Misery Basket. So say we got a $100M book, that’s $5m – to be concentratedly diversified across say 6-10 names, over two to three maturities (Apr, Aug, Nov) for some time diversification. Focus would be min 10% OTM calls & potentially in cases like Carnival even 15-20% OTM. Would expect these calls – the reopening & vaccine distribution being faster than anticipated – would at worst do 50% to 100% of their premium, yet in some cases could still be yielding +3x to 5x.
- Precious Metals wise, the Dragon has been bullish on Platinum since we plug it at 907, skew then was entry 907, stop 848 & first tgt 1000. Well we are off to the races with platinum well above $1000, having clocked +11.2% last wk alone to 1072.80.
- Yet the more surprising part of the precious metals complex to KVP, was gold clawing it was back for a wkly close above the critical $1830 (this was post the previous last wk of Nov, where it dropped by -4.5% & closes below some critical lvls). Ideally the bulls would like another wkly close above the $1830. Yet as we said 2wks back, with an acceleration of a global reopening (still massively underpriced in the Dragon’s view), the convexity to the upside has vastly improved for silver - & platinum, which has better supply constraints.
- Last wk Silver clocked +7.1% to 24.1850, whilst the yellow metal tagged +2.9% to $1839. Bitcoin continues to flirt, wine & dine with the $20K lvl, yet still for WK #49 it clocked in at +10.7%. Generally speaking over the course of the last 2wks, the price action across Bitcoin, Silver & Gold have cancelled one another out – lets see if we get a trend this wk.
- One last note, its almost all certainly the new stimulus talks that is saving Gold’s hide (from a tactical horizon, strategically we are still more bullish that a herd of cape buffalo). Its worth noting that from the metrics that KVP watches, even with 10s at these critical 95bp lvls, real negative yields are back to the most recent lows (i.e. suggesting that gold & silver are a steal here).
- Lastly, did someone say Braaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaazil!? We know equities bottomed ages ago, the country ETF (EWZ) has been on fire with a +6.2% yet still down -24% YTD. And whilst BRLUSD had its first bullish weekly close above the key 200DMA of c. 18.80, clocking +3.6% last wk, its still the first loser in the EM complex vs. the USD. No one else comes close!
- For YTD total returns vs. the USD, the real is -20% vs. the next two laggards at c. -12% in the Turkish Lira & the Russian Ruble. Its not always rocket science folks, the more the rest of the EM FX & risk-assets melt-up, the bigger the pressure building in the coil springs that will be the BRLUSD rerating. We could easily have a wk as we saw with TRY when it came in & crushed the USD for a +11.3% pop. Lastly, nothing like a margin of safety play, i.e. a +10% pop still does not get us back to where we were at year highs.
Potential Headwinds to Risk-Assets
- Obviously a breakdown in US fiscal news would be a tactical stunner & upset for the bulls, as we finally seem to have gotten both
- EU council meeting failing to approve the budget this wk (Dec 10 & 11) could potentially also throw a dampener on things, if no work arounds can be found. Then again, David Blaine has nothing on these Brussels Bureaucrats.
- Brexit naturally would be more specific to UK assets be they sterling based or equities – it looks like the latest deadline really does have to happen over the next 24hrs… okay maybe 48hrs… yet rationally it would need to have an agreed on blueprint so the EU Council can vote on it over Thu & Fri (wonder if Poland & Hungary decide to rock the boat there again – risking to be thrown out twice!).
- ECB not extending maturity of purchases through to 2021 would be a big disappointment given how small delta it is. With that said risk there is to the upside, for Lagarde to give one last push as no doubt Covid-19 cases will continue to spike with Winter in the Northern Hemisphere just kicking off & the EZ, not having the flexibility of the UK in fast tracking approval of the Virus use (i.e. Similar to Russia, the UK starts to also administer its first round of vaccine shots this wk)
Rest of the WeeK
- Bank of Canada… KVP out of tune there, yet know on the Fiscal Side they are setting the bell curve for the rest of the world. JT does not mess around!
- We also have rate decision out of Brazil where they are expected to keep rates at 2.00%.
- Fed should be on blackout yet as always there has to be one, Quarles.
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