Macro Dragon: It Does Not Matter, Until It Matters...
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: It Does Not Matter, Until It Matters...
Top of Mind…
- O/N pretty much flat-lined session if you were looking into Dixie (DXY), SPX & UST.... yet…
- …looking at the energy, gold & the Euro we were anything but flat
- WTI was +20% to 17.05, Brent Crude +5% to 21.90, Gold +0.965 to 17223 & EURUSD -0.43% to 1.0766. We’ve talked about the risks to the Euro-zone, our CIO Steen Jakobsen is generally the bearish he has been in the decades of following the dynamics out there, our chief Economist Christopher Dembik is slightly more constructive: EUCO Review: There is hope
- Still watch the European open today… usual suspects EURUSD, EURJPY, EURCHF, BTPs, Bunds, Dax etc…
- And yes gold is looking great for the upside technically & price action wise, even with DXY at 100. And yes, the bull case on our mini-gold series will come… $4000 is initial tgt that KVP & incidentally CIO Steen Jakobsen is thinking… obviously we will have to let our Chief Commodity Commander Ole Hansen, set the formal House target…
- To KVP at least, the key point here is that the convexity for gold is highly skewed to the upside… highly skewed… there will likely come a time when this puppy will be putting in back to back days of +$25, +$50, +$100… no one is paying attention to gold… it does not matter, until it does… & that’s Macro in a nutshell. Think $2,000 is very doable before year end... could go on, on this... yet lets save it for The Bull piece
- Are the lows in, in energy?
- Only easy questions here on the Macro Dragon…
- …KVP does not know… he does not think they are in, yet we have come off a lot & a few more days of intense rallying cannot be ruled out. Can also imagine we have a wave where energy rallies as the US is set to open up in increments, then the unescapable reality of demand not going back to Jan 2020 levels being completely laid bare, before we crash again.
- The challenge for energy… given that all the storage is taken up, production is still sky high (demand shortfall is -20mbd to -30mbd depending on how you look at it) there is going to be a lag in any constructive change in lower supply dynamics. The more switched on players who are playing a structural bounce in energy are doing it through Brent Crude (better structural parameters than WTI) & much further along the curve…
- It’s worth noting USO has continues to redistribute its exposure from c. having it across two months, to then three, to I believe now at least four – latest KVP heard it was 20% Jun, 50% Jul, 20% Aug & 10% Sep, which would reduce pressure (as well as unwind / blow-up risk) to the next scheduled rolling period of May 5. What a lot of people fail to understand is that USO had already finished rolling last wk, i.e. there is a misconception that they were chiefly responsible for Monday’s May contract move to -$37, -300%.. yet this was just supply demand – this short interview with the CME Chairperson is crisp, spot on & worth the watch.
- Whilst still on energy, Ole flagged that NatGas bears watching was looking like it may have a break upwards technically & tends to benefit form lower oil… so perhaps next big leg down in oil… there is a spread trade there…
- Next key date – now that USO has diversified the time decay of their exposure – is really going to be the expiry of the current contracts so run up to
- Not worth talking about PMIs… & the mkt still could not give a fudge about jobless numbers in the US… that’s right 1 / 6 US works (17%) are without a job. And the markets don’t care… it does not matter… until it matters. The US at back end of 2019 had c. +$15trn in consumer spending, the cast majority of that will be from the people working.
- Now 17% of them are out of work, that number is still likely to go up (granted we are likely past peak job loss velocity)… that is going to not just have a huge deflationary impact on their ability to spend but also ripple into the remaining 83% (& dropping) – who have also been forced to save during this period – who are likely not going to be rushing out to spend when the economy opens.
- Yes we’ll see an initial & natural boost… discretionary spending as a theme in the US is going to be in dead waters for a while… unless your doing something very niche & in the echelons of wealth where their discretionary spend has 0 correlation with the economic cycle.
- So would KVP go limit short SPX here?
- Nah… but short the discretionary spending XLY etf vs. say long the utilities XLU etf?
- That resonates & think there is some shelf life there, because utilities have transcended being defense… in a world with no yield there will be a structural bid in the utilities space. Funnily enough YTD their performances are not much different. XLU -10.3% & XLY -12.0%
- Lastly here is a link to a recommended reading book list that our regional CEO, Adam Reynolds, All-Star StashAway Founder & CIO Freddy Lim (awesome book recommendation by the way – on of KVP’s Top 10 for sure) & KVP were featured on.
- Now these are great books, yet what is potentially ‘wrong’ with the list?
- TGIF & have a great weekend out there – be well.
On The Radar Today…
Flash PMIs (Thu), when + how do we reopen (May-Aug) themed week 17
- JP: All industries Activity
- US: Durable Goods Orders, UoM Consumer Sentiment
- EZ: GER IFO Business Climate
- UK: Retail Sales
Good luck to everyone out there, be nimble & position accordingly.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.