Macro Dragon WK # 30: Asia kicks off the new week solidly in the red, given last wk's EQ risk off, stronger USD, higher bond prices & volatility, as well as divergences in the commodity complex
Global Macro Strategist
Summary: Macro Dragon = Cross-Asset Quasi-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 #30: Asia kicks off the wk in the red, as last wk's poor equity price action continues...
Top of Mind…
- TGIM & welcome to WK #30…
- WK #29 was a tough one for equities, oil, value & growth bulls. How much of this is a function of the noise from summer in the Northern Hemisphere, as well as concerns around slowing growth (China) & Delta variant surging (Asia, EM, Europe, US) or just overall correction is always impossible to say.
- There was nowhere to hide in either value (BP 292.25 -6.0%, XLE energy etf $48.68 -7.9%, JETS airlines etf $22.42 -6.5%) or growth (ABNB $134.31 -10.2%, COIN $225.01 -11.4%, ARKK etf $116.53 -7.2% ) were down significantly.
- The WSB complex was also very much on the backfoot, with the likes of AMC $34.96 clocking -24% for the wk on the best volume in 3wks (6x the 12m avg. volume). We are now c. -44% from its ATH of $62.55, the name is still up +1,549% YTD.
- There were few equity exceptions finishing the wk in the green – notable to see three of the FANGS, Microsoft, Google & Apple finish up anything from +0.90% to +1.75%. The China Tech HK listed names also did well last wk (+3% to +7%), even though most of those gains to perhaps all are at risk of being reversed this Mon.
- Its easier to see what went up last wk: Volatility VIX +14% to 18.45, Bond prices rose (bunds are breaking out higher), the USD rose DXY 92.687 +0.60%.
- There was some divergence in the commodity complex with some of the softs such as Wheat, Corn & Soybean oil having a monster wk from +6% to +12%.
- Yet still the space was dogged by -24% pullback in lumber $536.40, Palladium $2,637 -6.2% & energy: WTI $71.81 -3.7%, Brent $73.59 -2.6%.
- So there is a time for everyone in the market. Currently the equity bears, bond + USD + Vol bulls are in limelight. And we are likely going to be in a chopsolidation until the other side of Labor Day in September when the Northern Hemisphere is fully back in from their summer.
- The majority of the charts & price levels, suggest more the same of what we saw last wk with some critical lvls being broken to the upside – German bund prices 175.29 – & to the downside – AUDUSD at sub 0.7400.
- There are some interesting trends that are worth monitoring for either mean-reversion potential, complete breakdown or for trying to buy the dip.
- Bunds have had 3 straight weekly gains of big prices; +77bp, +47bp, +56bp. So a +1.8% move in German 10yr bonds futures. For context on yields, we’ve fone from -0.155% to -0.353%. This raises the stakes for the response to the update from the ECB this Thu on their monetary policy.
- XLE energy etf is now down for 3 straight wk for a total -12% retracement. On top of that, news over the wkd seems to suggest the OPEX+ Alliance is back on track as UAE is brought back into the fold & we should be back to pre-Covid output in 2023. Looks like the agreement will see +400K barrels added a day from Aug, with a reset on the starting lvls for some of the group. So far energy is down c. -1.5% with WTI $70.82 & Brent $72.53.
- JETS etf $22.42 is now down 7wks in a row, clocking -6.5% last wk for a total retracement of -16% over the 7wks. For context, this etf was trading +$10 higher pre-covid in Feb 2020. We are -22% from post-Covid highs of $28.71.
- If an ETF is down -12% to -22% from recent post-Covid highs, it likely means there are some single stock names that are down more & worth looking at… either as relative value plays or buying the dip if one likes the theme.
- The wk ahead is likely going to be a confluence of bearish sentiment being weighed against continued earnings season in the US, with a few of the tech names out to bat this.
- Central Banks: The ECB is likely to command attention this wk, given the anticipated update on its monetary policy framework. RBA mins will be out on Tues.
- Russia is expected to hike by another 75bp to 6.25%. Whilst rate decisions out of Indonesia 3.50% e/p & South Africa 3.50% e/p are expected to be on hold – the first is struggling with the surge in the Delta variant, after never really being in a position to tackle previous strains. And the latter – perhaps failed state in all but name – has seen the trial of Zuma open pandora’s box of anger, frustration & violence that is the culmination of decades of graft & of course the adversity, stress & devastation that Covid has wrecked on the poor in SA.
- Econ data is fairly light outside of flash PMIs, there are retail sales data due in the UK, AU & CA.
- Holidays: SG will be out on Tue, with JP out over Thu & Fri.
Recent Works to Keep In Heavy Rotation
- Market adrift despite max support from Fed this week: Recent Market Call Podcast featuring SAXO's CIO & Chief Economist Steen Jakobsen & FX Strategist John Hardy, as they look at factors suppressing US yields, touch on Powell, as well as expectations around the Fed, Inflation & climate policy initiatives.
- Viva la Revolucion! Saxo 3Q Outlook is out – make some time for it, we touch on the green revolution that is here to stay & having a structural impact on European Politics.
- KVP weighs in on a potential Asia investor skew into Europe, looking at the UK as a spin-off from the conglomerate & less effective EU. As well as highlighting China Tech’s underperformance in the 1H21, vs their Global Counterparts especially in ‘Merica.
- Macro Dragon Reflections: Brazil, Commodity Rich, +210M pop, +$1.4T GDP, Hawkish BCB, 2022 Political Elections & Consistently Punching Below its Weight. Love it!
- Worth noting one of the exceptional stand-outs in WK #29, was the significant relative outperformance of BRL vs the USD, compared to the rest of the FX complex that generally lost again the US Dollar.
- Total returns on the real were +2.93% vs. the greenback. At 5.1152 USDBRL still has to break & trend lower through the 5.00 lvl – we had a false break a few wks back, which likely makes it tough to get back into. With that said Aug 3, should still see the Brazilian Central bank hiking by another +75-100bp.
- And flagged to KVP by the “Indian Jones of EM” is this chart from a tweet by @RobinBrooksIIF that highlights that the Brazilian real now has the highest carry of the major EM currencies, supplanting MXN & ZAR 14.43.
- Equities: Garnry on the Cannabis industry maturing & ready for more growth.
- Equities: Value vs. Growth, earnings season & Robinhood IPO.
- Dragon Interviews U-Tube Channel for easier play-ability…
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