Saxo News & Research - Trade Views

Topics: Trade View Forex GBP GBPUSD Brexit

Fri, 29 Mar 2019 14:50:00 Z

Fixed income investors looking to pick up some extra yield over Chinese government bonds without adding risk should consider the Export-Import Bank of China, one of three policy banks in China and an attractive alternative to CGBs and the China Development Bank.

Strategic Trade / Buy

Instrument:

Export-Import Bank of China CNY bonds (CND10001PY09)

Price Target:

n/a

Market Price:

n/a

Background:

The Export- Import Bank of China (Chexim) is one of three policy banks in China. It implements policies to promote the export of Chinese products and services. The bank is the sole provider of Chinese government concessional loans, but it also performs other commercial activities such as providing credit for infrastructure projects andChinese businesses overseas in the industrial and energy fields.

We prefer Chexim to the China Development Bank because its operations are more selective and focused. The past few years have seen the CDB issue a large number of loans to Chinese municipalities, causing its total assets (mainly loans) to soar to more than 15% of China’s GDP.

Now that China is welcoming foreign investment, we can expect these development banks to be under more scrutiny, and for investors to select the one with the heathiest balance sheet.

Investment

We believe that the Export-Import Bank of China's senior unsecured notes (3.74% fixed coupon, maturity September 2021) offer an attractive yield of approximately 3.1%. This means that this bond provides an approximatively 50 basis point pick-up over Chinese sovereigns of the same maturity with no additional risk.

In addition, last year saw a change to the taxation rules for Chinese onshore bonds, which now permit a three-year exemption on foreign institutional investors’ withholding tax on interest coming from Chinese onshore investments.

(On this last point, it must be said that insufficient details have been released regarding tax clawbacks on previous investments or tax on investment after the exemption period, thus it would be prudent to check this information with a tax advisor.)

Management And Risk Description:

The Chinese financial market is just opening up to foreign investors and liquidity may still be an issue for both sovereigns and supras. The Export-Import Bank of China is closely dependent on the performance of the Chinese economy. Although a default doesn’t presently seem likely as the bank is owned by the state, China is an emerging economy and default is always a risk.

Entry:

n/a

Stop:

n/a

Target:

n/a

Time Horizon:

n/a

Minimum piece is 10,000,000 nominal CNY with 100,000 nominal CNY increments. Return objective is primarily repayment and coupon payment.

Export-Import Bank of China 3.74% September 2021 price since issuance (source: Bloomberg)

Althea Spinozzi

Head of Fixed Income Strategy

Saxo Bank

Topics: Trade View China Government Bonds Bonds

Wed, 27 Mar 2019 09:00:00 Z

We are updating our initial trade recommendation to buy rare earth minerals producer Lynas Corp. Upcoming downside and volatility risks may lead some investors to take profits, though our overall case remains intact.

Strategic Trade / Buy

Instrument:

LYC:xasx

Price Target:

AUD 3.00

Market Price:

AUD 2.17

Background:

This is an update on our initial trade recommendation to buy Lynas Corp (ASX:LYC), a company that explores, mines, and produces rare earth minerals.

Yesterday, Wesfarmers Ltd (WES) announced a bid to acquire Lynas at AUD 2.25/share, representing a 45% premium to Lynas' last close. This offer was subject to Lynas having its Malaysian operating licensing intact for a reasonable period of time. This license is up for renewal in September but is conditional upon Lynas removing 450,000 tonnes of residue from Lynas Advanced Materials Plant (LAMP), which the company has said won’t happen.

On that basis, considering Lynas was trading at AUD 2.40 in November 2018, before the Malaysian government imposed the licensing renewal conditions on the company, the bid is actually a 0% premium on Lynas’ fully licensed operations. With that in mind, it is no surprise that the offer looks considerably less generous and hence Lynas has rejected the offer unambiguously, with the CEO citing the bid as “opportunistic”.

Lynas explores, mines, and produces rare earth minerals. Rare earths are counter-intuitively not “rare” but are difficult to find in deposits that are not contaminated with other materials and with a concentration high enough to be mined economically. Lynas operates the world’s highest grade operating rare earths mine in Mt. Weld (a collapsed volcano), Western Australia, and a chemical processing operation, Lynas Advanced Materials Plant, in Kuantan, Malaysia.

Lynas is in a very unique position as it is only miner and processor/producer of rare earths worldwide outside of China. In a world of heightened geopolitical tensions, a non-Chinese supplier has a significant competitive advantage for some manufacturers and businesses wishing to diversify supply chains away from China. Chinese producers typically dominate the market have benefited from strong governmental support aimed at providing downstream consumers with a competitive advantage as the high-tech and green tech industries that rely on rare earths are crucial to propelling the next phase of China’s economic expansion. But although China is currently a major producer, the source is not sustainable and over the coming years China could become a net importer of rare earths, particularly of Dysprosium.

Rare earths are crucial for a number of high growth, high-tech commercial industries including hybrid and electric vehicles, renewable energy (wind turbines), energy-efficient lighting, LEDs, advanced electronics, chemicals, and medical equipment. Without rare earths a number of high-tech industry applications would not be viable. Take the iPhone, for an example: screens are polished with lanthanum and cerium and within the phone is a magnet made with neodymium and praseodymium.

Management And Risk Description:

There should be little doubt that Lynas is sitting upon a valuable asset and could be the target of other bids in the future from Wesfarmers and other possible bidders. While the company is currently in a bind due to the regulatory clash with Malaysian regulators, the bid from Wesfarmer’s does not take into account Lynas' exclusive position as a non-Chinese supplier, and the long-term asset value given the current trajectory for rare earths demand and is likely seeking to capitalise on the company’s current vulnerable position.

Permanent magnets containing NdPr, of which Lynas is the second-largest producer globally, are a key enabler of electric vehicle technology, a sector which we expect to grow considerably in size becoming a game changer for NdPr demand.

The problem now is the license renewal issues in Malaysia, the outcome will be binary and Lynas will be able to negotiate LAMPs ongoing operations or they will need to exit Malaysia and find an alternative processing plant for the RE they mine. Smartkarma have an excellent analysis of the ongoing issues and potential resolutions of this current bid.

This presents a key regulatory/political risk so for investors with a lower risk tolerance, taking profit at this point would present a 16% gain on the trade ideas entry price and would be advisable. The long-term investment thesis still remains intact, but those that continue to hold must be prepared for volatility in the share price emanating from heightened regulatory risk.

Entry:

AUD 1.86 (original trade view, published September 20, 2018)

Stop:

AUD 1.12

Target:

AUD 3.00

Time Horizon:

long term

Please find charts below.

Source: Saxo Bank

Eleanor Creagh

Australian Market Strategist

Saxo

Topics: Trade View Australia Commodities AUDUSD

Wed, 06 Mar 2019 14:15:00 Z

A significant speculative short-covering potential has emerged in cotton after hedge funds have driven the net-short to the highest since May 2007 following 30 weeks of selling.

Medium Term / Buy

Instrument:

May19 Cotton option call strike 75: OCT/K19C75:icus

Price Target:

80.00 cents/lb

Market Price:

74.30 cents/lb

Background:

In the week to February 26 the net-short reached 21,000 lots with data covering the week to March 5 being available on March 8. Since peaking at 96.50 cents/lb last June the price on the first month futures contract hit a through at 69.53 cents/lb on February 15 before recovering.

The negative sentiment up until now reflects expectations from several major forecasters such as Cotton Outlook, the National Cotton Council and the US Department of Agriculture that a production surplus, helped by a strong US harvest, will emerge this coming season.

The recent recovery to the current level just below 75 cents/barrel has partly been driven by expectations of a trade deal between the US and China could trigger increased cotton exports to China.

Management And Risk Description:

Going long cotton at this stage reflects a trade that goes against current fundamentals which point to larger US acreage and increasing ending stocks this coming season. The main reason for entering the trade is for a trade deal between the US and China to drive the price higher through short-covering. On that basis we chose to implement the buy through options on the May contract. That way we reduce our risk to the premium paid for the option.

Please note that liquidity can be poor, especially outside US hours. In order to avoid unwanted slippage we recommend using limit orders when entering and exiting the market. We focus on the 75 cents/lb call on the May futures contract but please use the option chain (see example below) on the SaxoTraderGO or SaxoTraderPro for further inspiration.

Entry:

Buy the 75 Call on May Cotton, ticker: OCT/K19C75:icus

Stop:

Use limit orders

Target:

80 cents/lb on CKZ8 (representing an intrinsic value of $2500 minus premium paid plus remaining time value)

Time Horizon:

Before option expiry on April 12

Aprox. cost: 1.5 cents/lb or $800 per contract

Option chain on cotton from the SaxoTraderGO:

Source: Saxo Bank

The May contract (CTK9):

Source: Saxo Bank

Long-term view using the first month continuation chart:

Source: Saxo Bank

Topics: Trade View Cotton Commodities

Mon, 04 Mar 2019 12:00:00 Z

Policymakers are taking yet another dip in the 'pretend-and-extend' punchbowl as both monopolies and central banks snap up assets across the board. No market trades freely, price discovery is zero, and it is time to get long inflation.

Strategic Trade / Sell

Instrument:

10-year US Futures

Price Target:

not specified

Market Price:

spot 121 19.5/32

Background:

The ongoing talk about Modern Monetary Theory is getting out of control. Yesterday, I sent an internal note to my team outlining my view on MMT and the Great Policy Panic:

"Rarely have I seen such a turnaround in the dominant narrative in such a short time... it's almost impressive (the speed and scale of the turnaround, that is – not MMT!). It appears as though we need to adjust out policy response book to reflect another leg of pretend-and-extend now that quantitative easing and low interest rates are finally being viewed as inadequate.

It's remarkable how no one is discussing the fact that socialism, or statism, is already here! After all:

• No market trades freely.
• There is zero price discovery.
• There is no marginal cost of capital allocation.

In the face of all this, we see monopolies and central banks continuing their run of purchasing across the board. Without testing the premise, of course, we are doomed to make further mistakes."

My conclusion?

Be long – very long – inflation, particularly as we head into the growth low in Q4'19/Q1'20!

All of this MMT talk, as well as the concept of "no price for infinite debt," is creating the potential for a major move in US interest rates. For 2019, the 10-year yield is way, way behind the move inflation. Look at the charts below on how five-year/five-year swaps, a key proxy for inflation expectations, are rising fast.

Also read the following:

• An MMT response on what causes inflation (Financial Times)
• An 'explanation' of MMT (from Bernie Sanders' adviser Stephanie Kelton)

Our trade on this would be: sell 10-year US Futures at spot 121 19.5/32 with a close at 122-29 (daily)

Management And Risk Description:

For those of you who are inclined to learn from history, I implore you to read Paul Volcker's book 'Keeping At It', noting particularly the chapters on how he and then-Treasury Secretary Connally took the US out of the Bretton Woods agreement with the policy at the time being: controls, tariffs (on Germany), devaluing the dollar and trying to ditch the trade deal in place with Canada!

Entry:

spot 121 19.5/32

Stop:

122 28/32 on the close

Target:

118 ½

Time Horizon:

long term

Also, please review the charts below.

5y5y EUR (red), USD (dotted green) and 10-year US yield (blue, source: Bloomberg)

Inflation expectations are now at the same level as January, when the US was forcing tax cuts and a 'full MAGA' agenda (source: Bloomberg)

Steen Jakobsen

Chief Investment Officer

Saxo Bank

Topics: Trade View Futures Macro GDP Indices Central Banks Equities Corporate Bonds Government Bonds

Thu, 28 Feb 2019 14:30:00 Z

High grade copper was a star performer this past month on the back of tightening supply and optimism on several Chinese fronts. However, this could be an opportune time to hit the pause button.

Short Term / Sell

Instrument:

HGK9 or COPPERUSMAY19

Price Target:

$2.820/lb

Market Price:

$2.960/lb

Background:

Just like other industrial metals high grade copper has experienced a strong beginning to 2019. Following seven months of range-bound trading, the price surged higher during February en route to record its best month since December 2017. Tightening supply and optimism surrounding a trade deal between the US and China, together with recent tax and interest rate cuts in China, and a stronger CNY, have all helped support the recovery.

While we maintain an overall constructive view on copper due to tightening supply more than increased demand, we also see signs of a market in need of a correction. The RSI has moved into overbought territory and with a lot of good news on trade now being discounted the risk of a disappointment has risen. Either from the trade talks or from weaker than expected macroeconomic data from the world’s three biggest copper consuming regions.

Supporting the rally has been a recent decline in copper stocks held at London Metal Exchange-monitored warehouses. While this has created a sense of tight supply, we have simultaneously seen a strong increase in deliverable stocks at the Shanghai Futures Exchange.

The US government shutdown between December and January resulted in a delay in the reporting of speculative positions held by hedge funds. While the CFTC is expected to have cleared the backlog and be “live” again from March 5, the latest available data covers the week to February 12. It shows that hedge funds during a four-week period from January 15 had cut a near record short to almost neutral. Buying is expected to have continued since then with funds now holding a net-long.

Management And Risk Description:

Selling copper at this stage is going against the current trend, hence our relatively conservative price targets. We have chosen to place the stop above at $3.025/lb which is just above the 61.8% retracement of the June to August sell-off last year. We choose to take profit just above $2.815/lb, which represents a 38.2% retracement of the run up since early January. Besides the potential of a knee-jerk reaction to a trade deal the risk to this trade's success will also depend on the above-mentioned daily stock reports from the London Metal Exchange.

With the trade parameters laid out we do not plan to update this trade recommendation on a regularly basis.

Entry:

Sell at current price around $2.965

Stop:

$3.025/lb (1.5 ATR)

Target:

$2.82/lb (3.6 ATR)

Time Horizon:

1 – 2 weeks.

Source: Saxo Bank

Long term chart. Source: Saxo Bank

Global Head of Macro Strategy

Topics: Trade View Copper Commodities

Thu, 28 Feb 2019 13:00:00 Z

Shares of Danske Bank have fallen by 44% since early 2018 on the firm's Estonian money laundering scandal, but Denmark's largest bank retains solid fundamentals. In our view, Danske shares have the potential to offer attractive returns for the patient investor.

Strategic Trade / Buy

Instrument:

DANSKE:xcse

Price Target:

DKK 207.50

Market Price:

129.50

Background:

Danske Bank is the second-largest bank in the Nordic region as measured by total assets. It was also a post-financial crisis success story as the bank managed a spectacular turnaround in its business, lifting return on equity from around 2-4% in the years after the financial crisis to 10-12% more recently. Investors were rewarded in the 2009-2019 period with Danske shares up 12.2% annualised including reinvestment of dividends. This return is at par with the MSCI Nordic Index in the same period, but at its peak in around mid-2017, Danske had outperformed the Nordic equity benchmark by eight percentage points (annualized, starting in January 2009), which is impressive for a banking stock.

Danske Bank’s money laundering scandal, which came to light in early 2018 and related to issues at the bank’s Estonian branch in the years 2007-2015, has lowered the share price by 44% since it surfaced. The scandal is the biggest in Europe’s history and an embarrassment for Denmark as the country prides itself as a transparent country with high ethical standards. Shareholders are deeply concerned over the revelations and management's slow reaction to the scale and consequences of the scandal.

The Estonian branch’s non-resident business profited around DKK 1.7bn in the period 2007-2015; this implies penalties in the US of up to around $1 billion according to estimates provided by Bloomberg. Danske is being investigated by the US Securities and Exchange Commission, the Department of Justice and the Treasury Department, with the latter likely posing the biggest risk to Danske Bank.

We also see a small probability of Danske Bank being cut off from the US financial system like Latvian bank ABLV was in 2018, though Danske Bank is cooperating with US authorities.

The Financial Times reported back in January that consensus is looking for an aggregate fine of around $5bn while the Bloomberg Intelligence team covering banks put the estimate around $2bn. Both amounts can be dealt with by Danske Bank, particularly as the fines will drag out over years, diluting the impact.

From an ongoing concern perspective, the fines are one-off items with some potential effect on the bank's continuing operations (likely a small impact due to the stickiness of banking business), so the impact on return on equity should be limited.

Management And Risk Description:

Danske Bank is naturally a high-risk investment given the 44% decline in the share price since early 2018 and the downside risks to fines from various financial regulators in the US and Europe. The ultimate risk is if the fine goes above USD 6bn as that would begin to eat into the bank’s buffer against the Pillar 1 requirement.

Danske's money laundering scandal obviously carries the risk that client relationships will be lost, impacting the business negatively. Danske Bank also derives around 52% of its net revenues from Denmark, making the bank dependent on a strong economic outlook for the country.

So far, Denmark’s macro numbers have outperformed those of other European countries despite the global slowdown. But should we experience a steeper slowdown that impacts Denmark as well, it would most likely increase loan impairments and lower return on equity. Should interest rates continue to go lower or just stay at current levels, it will act as an upper ceiling on return on equity. For shareholders there is also the risk of dividend cuts but currently sell-side analysts are still modelling a payout ratio of 50% of earnings despite the outlook and potential fines.

The biggest risk to our target price is our assumption that Danske Bank can maintain a 10% return on equity. We are basing our assumption on the guidance from the bank, sell-side analysts' assumptions and recent history, coupled with the bank’s market position. Should the return on equity drop to around 6% due to macroeconomic reasons and business impact from the money laundering scandal, though, the fair price drops to DKK 157.60 – around 21% higher than the current market price.

Given the historical relationship, the return on equity could drop to as low as 4% given the current price-to-book ratio. It our opinion the share price leaves a significant margin of safety, but clearly our return on equity assumptions are critical to the fair price estimation.

Entry:

Limit buy in the DKK 120-140 range

Stop:

DKK 100

Target:

DKK 207.50

Time Horizon:

Until June 30, 2020

See charts below for more data on Danske Bank shares.

Danske Bank (five-year, source: Saxo Bank)

Peter Garnry

Chief Investment Strategist

Saxo Bank

Topics: Trade View Denmark

Wed, 13 Feb 2019 11:00:00 Z

A gloomy outlook in the wake of January's profit warning means high two-way volatility around chipmaker Nvidia's Q4 earnings release on Thursday. We look to trade the event via a long strangle options strategy.

Short Term / Not Specified

Instrument:

Nvidia call and put options

Price Target:

n/a

Market Price:

151.17 for the underlying stock

Background:

The graphics card market has been growing since the late 1990s, and Nvidia is arguably the largest supplier of GPUs to the consumer gamer market and increasingly to businesses driven by surging demand for machine learning applications across image recognition, self-driving technology, et cetera, and massive growth in datacenters driven by cloud computing demand.

The company has five main end-user segments:

1) Gaming (56.8% of total revenue)
2) Datacenter (19.9% of total revenue)
3) Professional Visualization
4) OEM & IP and 5) Automotive

In the past 12 months Nvidia delivered $12.4bn in revenue (+38% year-on-year) and $4.8bn in EBITDA (operating profit). Despite the company’s high revenue growth, the company had to adjust its FY'19 Q4 financial projections. The company reduced its Q4 fiscal guidance citing macro conditions (specifically in China), excess inventory (related to slowing cryptocurrency growth) and slower adoption of its new GPU chip. The reduced forecast could hint at a lacklustre performance in Q4 when the company announces earnings on February 14 after the close.

Performance

Last year, Nvidia launched its new high-end chip on its Turing architecture. The company stated it was the fastest adoption of any server GPU in history. However, the company overestimated the adoption curve as the company is currently faced with a surplus in these high-end chips.

On the medium range of the spectrum the firm underestimated its exposure to the cryptocurrency mining market, which it has also acknowledged. A recent report suggests Nvidia has a majority market share in the GPU mining sector. The 2017 bubble in cryptocurrency caused an increase in demand for GPUs and the subsequent decline in cryptocurrency prices caused demand for the mid-range GPUs to plummet just as quickly. The lack of demand for mid-market GPUs created an oversupply for the company.

The firm's inability to accurately forecast GPU demand from China, datacenters, and cryptocurrency miners has caused it to reduce its revenue guidance by about 20% from $2.7bn to $2.2 bn.

Nvidia’s bad news unfolded in Q4, which saw the share price drop by around 57% from peak to bottom. The share price has since recovered somewhat despite the downward revision to guidance in late January. Sell-side analysts are expecting FY'19 Q4 revenue of $2.29bn, down 22% y/y, which is an astronomical collapse in y/y growth rates as Nvidia's Q3 revenue growth rate was 21% y/y.

Management and risk description

The most significant risk facing the company now is the global macroeconomic outlook. A global slowdown or a worsening of the trade war between China and the US could result in further revenue pressure for the firm. Additionally, a prolonged bear market in cryptocurrencies would continue to hurt sales of GPUs that sit in the Gaming segment. A lack of funding going into AI applications and cloud computing solutions could impact sales of Nvidia’s higher-end chips. It will be interesting to see the company’s financials during its earnings release on February 14. Nvidia has tried to take most of the downside risk out of the company’s outlook with its late-January negative revision of the outlook, but more negative information could be revealed during the Q4 earnings releases and subsequent conference call.

Outlook

As for now, investors should remain wary of any upside in Nvidia. An extension of the trade deadline will continue to stifle the demand coming out of China, as well as the prolonged bear market in cryptocurrencies. The company’s FY'20 Q1 fiscal guidance should give the market insight into what management is expecting. If revenue misses the guidance and the forecast is substantially below the trend, this may cause the stock to drop. However, a beat of the estimates or a trade deal could support the price. The company is likely to experience revenue growth in FY'19. By how much and to what extent is this part of a larger trend will likely determine the opening price of this key technology stock on February 15. After the earnings release we will follow up with a longer-term view.

Trade recommendation

The short-term risk is very high due to the FY'19 Q4 (ending January 2019) earnings release after the February 14 market close as the outlook is extremely dynamic due to the situation in cryptocurrencies, China (gaming), datacenter, and automobile growth decay. We recommend a long strangle (buying volatility, see illustration below) over the earnings release.

Historically Nvidia’s share price has moved around 7.9% in absolute terms around the earnings release and last earnings release saw massive volatility with the share price declining by 18.8%.

Tuesday’s close was $151.17

• Buy limit calls Feb 15 C157.50 in the interval $2.50 to $3.15 (last trade was at $2.80)
• Buy limit puts Feb 15 P145 in the interval $2.75 to $3.35 (last trade was at $3.05)

Assuming fills at the last traded prices on the call and put options, the combined premium is 3.9%. The call strike at $157.50 is 4.2% above the underlying price (last trade) and the put strike $145 is 4.1% below the underlying price (last trade). Assuming fills at last traded prices, the breakeven level on the upside is $163.35 and downside is $139.15.

The strategy becomes profitable on the share price moving more than 8% in either direction.

The investment recommendation has a natural expiration date on February 15 when the options expire.

Entry:

as above

Stop:

n/a

Target:

an 8%-plus move in the share price

Time Horizon:

Options expire February 15

Note: Saxo Bank cryptocurrency analyst Jacob Pouncey also contributed to this report.

Nvidia (daily, green lines mark break-even levels on the long strangle strategy, source: Saxo Bank)

Nvidia (five-year, source: Saxo Bank)

Peter Garnry

Chief Investment Strategist

Saxo Bank

Topics: Trade View Equities Corporate Earnings

Wed, 13 Feb 2019 10:30:00 Z

EURUSD is heavy near range support and may push lower still as the Eurozone outlook sours more quickly than the outlook for the US, where the Fed continues to actively tighten. We trade the risk for lower EURUSD levels via a put option, given very low implied volatility.

Short Term / Sell

Instrument:

EURUSD put option, strike 1.1200, expiry May 15

Price Target:

Spot price below 1.1000

Market Price:

72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13)

Background:

EURUSD is heavy near range support, with the turnaround in the US Federal Reserve guidance since the hawkish December Federal Open Market Committee meeting unable to engineer a more profound sell-off in the US dollar as the Eurozone outlook has worsened so drastically that the European Central Bank may be forced to consider easing measures at coming meetings while the FOMC is actively tightening. EURUSD may eye new local lows for the cycle, driven chiefly by concerns for the Eurozone economic outlook and ECB being a first mover in bringing new policy accommodation.

As well, given the weakening outlook for global growth, markets may have been a bit premature in celebrating the Fed’s and other central banks’ turn away from a tightening bias as historically, an easing cycle from central banks only arrives at this point in the cycle due to mounting worries of recession and with a backdrop of very weak asset markets. A fresh sell-off in global equity markets could support the US dollar, typically a safe haven from a liquidity angle during times of crisis. A wildcard risk for the euro side of the EURUSD equation is the risk of fresh existential worries driven by populist demands for expanding fiscal stimulus and concerns on sovereign debt funding at the periphery.

Management And Risk Description:

Technically, the EURUSD softness points to the range lows as a possible trigger for a more profound move lower in coming months. We take a three month put option position, in the hopes of the price action moving well below 1.1000 over the three month time frame.

Consider longer dated options and different strike prices for a different risk/reward profile.

Risks: risk to this trade is 100% loss of the amount paid up front for the option premium.

Entry:

72 pips, or 0.0072 (Spot ref: 1.1320 on Feb 13)

Stop:

n/a

Target:

Price target: Spot price below 1.1000

Time Horizon:

Short-term

FX Trade View: Downside via EURUSD put option

Chart: EURUSD

The market looks heavy near the ultimate range low posted late last year at 1.1216. Downside optionality looks “cheap” for two reasons. First, it is rather cheap as implied volatilities are quite low relative to the historically range due to the lack of recent volatility in EURUSD and lack of anticipation that anything dramatic is set to happen. EURUSD implied volatility is currently below 6.5% for 3-month options. Second, we have to remember the interest rate carry is rather high for EURUSD and means that the forward price (on Feb 13 with a spot price of 1.1320) is 1.1405 for the May 15 expiry date.

Source: Saxo Bank

Longer-term chart:

On a longer-term chart, traders may note the lack of notable support levels should the support levels below 1.1200 – perhaps the round, psychological levels starting with 1.1000 the most important if the pair finds itself on the way down.

Source: Saxo Bank

John J. Hardy

Topics: Trade View EURUSD

Wed, 07 Nov 2018 10:00:00 Z

Saxo Bank Head of APAC Macro Kay Van-Petersen looks at a long USDJPY trade ultimately targeting new highs above 120.00 on the basis of historical seasonality.

Medium Term / Buy

Instrument:

USDJPY

Price Target:

116.00, 117.00, 120.00

Market Price:

113.04

Background:

The Macro Monday book goes long $20 million of USDJPY from the 112.78 level with the thesis that we will soon challenge the 114.55 highs and break through 115, which would open up the cross for a potential move to 120.

We see a target price at new highs north of 116.00 to 117.00 for half the position, with the balance looking for a 120-plus handle. Apart from the recent price action of USDJPY – a lack of yen buying in the October equity sell-off plus overall higher US yields and rates – the main rationale for this trade is based on historical seasonality for USDJPY in November.

As you can see from the five-year seasonality grid below, the average historical move in USDJPY has been +401 basis points, with the skew being +920 bps to -97 bps. It's worth noting that on a 10-year historical range, the average drops to +198 bps and the skew, while still asymmetrical, drops drastically from +920 bps to -108 bps.

USDJPY closed last week over the key 200-week moving average of 113.03 – a second consecutive close above that point would bode well for USDJPY bulls.

Management And Risk Description:

There are both fundamental as well as technical risks to this tactical break-out higher call. First, a technical pullback and a weekly close below the 100-week moving average of 111.32 would potentially put this cross back into bearish control. Second, any kind of sharp and prolonged pullback in US yields and rate expectations could move the cross lower. Third, if we were to potentially see a blow-up in emerging markets or a massive dislocation in equities (S&P 500 down 5% in one day, VIX over 30, etc.) then the yen may get a bid.

Finally, while positioning in yen shorts is not at extremes against the USD, on a broad basis the market is quite long the US dollar, which always invites positioning risks.

Entry:

112.78

Stop:

n/a

Target:

116.00-117.00

Time Horizon:

One to three months

Some final thoughts and a contrarian view

Given that USDJPY volatility has been relatively subdued, one could also look to express this trade through long calls and call spreads, or even out-of-the-money 115 calls.

You could also look to play a six-month one-touch with a 120 strike; with an expiry of 26 April you would be paying about 18% in premium. Remember as well that these can always be closed out before 120 is reached and/or prior to expiry.

Finally, those looking to play the reverse of this trade view could potentially put their stops above the recent 114.55 highs, targeting a break for 111.32.

Source: Bloomberg

USDJPY (weekly, source: Saxo Bank)

USDJPY (monthly, source: Saxo Bank)

Kay Van-Petersen

Global Macro Strategist

Saxo Bank

Topics: Trade View USDJPY

Mon, 01 Oct 2018 12:30:00 Z

Long-term trends in fertility and family formation favour investments into the artificial reproduction technology industry, and Sweden's Vitrolife is a solid vehicle for exposure.

Strategic Trade / Buy

Instrument:

VITR:xome

Price Target:

SEK 165.0

Market Price:

SEK 131.90

Background:

Saxo Bank’s Conviction Equities is a list of investment recommendations on stocks that are viewed to be an attractive investment theme with return expectations above the expected market return. The investment horizon is long-term which is typically one year or more unless the price target has been reached. The artificial reproduction technology (ART) industry benefits from demographic trends and societal shifts, and with few pure-play listed investment options, Vitrolife represents an opportunity to gain exposure to long term structural growth in the infertility treatment sector.

Vitrolife: IVF for declining fertility

Vitrolife is a Swedish biotechnology company that develops, produces and markets fertility treatments aimed at increasing pregnancy rates. Vitrolife aims to be a global leader in the supply of medical devices for assisted reproduction.

The global market for In Vitro Fertilisation (IVF) - the medical procedure of fertilising woman's egg outside of the body -- is growing at a steady pace of 5-10% per year, with growth accelerating fastest in Asia compared to North America and Europe. Vitrolife has a strong presence in all of these regions, with sales growing fastest in Asia at 33% per annum.

Ten to fifteen percent of all couples in the fertile age range suffer from fertility problems. In developed nations throughout the last decade, changes in the timing of family formation has meant women are postponing the birth of their first child. Throughout most of Europe, first-time mothers are on average 27 to 29 years old. This has increased from 23 to 25 years at the start of the 1970s according to OECD Family Database statistics (2014). This demographic shift is not unique to Europe; the average age at first birth is increasing in Asia, Japan, and the US. This pronounced shift is now also seen in developing nations such as China.

Age is one of the most important factors that can affect a woman’s ability to conceive. From the age of 30, fertility starts to decline for most women with the number of eggs and quality of those eggs being reduced, thus the chances of natural conception are significantly reduced. More specifically, once a woman reaches the age of 36 the chance of conceiving naturally is halved compared to the chance at 20 years of age. At age 41, this chance falls to 4%. The risk of miscarriage also increases with age, so for older women it is not only more difficult to conceive naturally but also more difficult to carry the pregnancy to full term.

As these demographic shifts persist, the need for ART has increased. The increasing rate of infertility is expected to be a continued driver of growth for years to come in the IVF market. Other factors such as increased technological advances increasing IVF success rate, growing awareness of infertility consequences, and an increase in lifestyle disorders (smoking and obesity) that increase infertility are also contributing to the growth of the IVF market. In developing economies, like China and India, a key contributor to driving growth is the growing middle class resulting in higher incomes and increased social acceptance of IVF treatments.

According to Allied Market Research, the global IVF services market generated $10.6 billion in 2017 and is projected to reach $22.5bn by 2025, growing at a compound annual growth rate of 9.8% from 2018 to 2025. Government funding in many developed nations is expected to contribute significantly to this ongoing growth as egg/sperm freezing allows women to have a child later and advances in ART enable pre-identification of genetic disorders.

This trend is already in place in developed nations. In 2016, for example, the Canadian province of Ontario announced a $50m fertility program to cover IVF treatment for 5,000 people, and in Singapore the government offers up to 75% co-funding for various ART procedures such as IVF, gamete intrafallopian transfer, and intracytoplasmic sperm injection.

The company

The IVF market is segmented based on reagents and media, instruments, technology, and end users. Vitrolife’s product offering covers all the stages of the IVF process, from the handling of eggs and sperm to the culture and transfer of embryos as well as cryopreservation for eggs, sperm, and embryos. The product range includes needles for oocyte retrieval; nutrient solutions and media (where Vitrolife leads the market) for the handling and culturing of eggs, sperm, and embryos; and disposable plastic products. Vitrolife is also a market leader in Timelapse technology, used by clinics worldwide to monitor embryo development and selection.

Vitrolife’s brand name is strong within the IVF industry. According to data from Allied Market Research, Vitrolife accounts for approximately 36% of the IVF market for reagents/media, instruments and technology, ahead of rivals EMD Serono Inc, Irvine scientific, Cooper Surgical Inc, Cook Medical, Thermo Fisher Scientific, Genea Biomedx, Auxogyn, Oxford Gene Technology, and Ovascience. Vitrolife products are not only market leading but their perceived quality as measured by customer satisfaction is outstanding. The company surveyed customers in 2017 with the results illustrating a positive response – 81% of customers gave Vitrolife a grade of between eight and 10.

Valuation

Aside from investing in ART, Vitrolife stands alone as an attractive investment. The company has a long history of profitable growth, with little debt and strong increasing cash flows.

2017 was yet another successful year for Vitrolife. Growth during the year amounted to 22% in local currencies, of which 19% was organic growth. All market regions and business units contributed to this growth. During the year, Vitrolife also passed sales of SEK 1 billion on a rolling 12-month basis for the first time, a milestone in the history of the company. This growth has been achieved without sacrificing profitability. EBITDA strengthened during the year to 39%.

Vitrolife

In 2017, Vitrolife’s sales were SEK 1,046.2m, a 22% increase in SEK from the year before. Organic growth throughout all regions totalled 19% in local currencies. In monetary terms, global growth in the IVF market was estimated to be between 5–10%, which means Vitrolife also gained market share in 2017. Vitrolife has gained market share through continued expansion of its sales organisation globally and increasing its product portfolio. This trend is expected to continue as Vitrolife maintains a strong capital base to grow organically and through acquisitions, but also as the company continues to develop market-leading products internally.

In 2017 the EBITDA margin increased to 38% from 35% in 2016 and sell side analysts estimate this margin expansion will continue in the coming years to 41% in 2020. Margin expansion is driven by increasing economies of scale, Timelapse product growth, and removal of one-time expenses incurred in 2016.

The current Enterprise Value is SEK 13,737.5m, translating to a trailing 12-month EV/EBITDA multiple of 32.8x compared to 11.7x for global equities. Although Vitrolife is a quality company with exposure to a long-term structural growth thematic, the investment comes at a price and the company is expensive relative to global equities.

Vitrolife is also expensive relative to equities listed on the Stockholm Exchange (average EV/EBITDA 11.6x) and to other Swedish biotech companies like Karo Pharma, Swedish Orphan Biovitrum, and BioGaia, whose average trailing 12-month EV/EBITDA multiple is 21.5x.

Despite being expensive on a fundamental valuation basis, Vitrolife is a high-quality company with exposure to a growing industry. The company has consistently lived up to it- reputation and market leading position, and continues to grow organically and take market share.

Vitrolife operates at the cutting edge of research and product development in collaboration with leading scientists in the ART field. Continuous research is performed to create new products and to enhance existing products, which we expect to drive existing sales growth and market share over and above the organic growth of 5-10% per annum expected from the ART industry.

Based on a terminal EBITDA estimate of SEK 726m in 2023 and a discount rate of 9.9%, a 26% upside move remains tenable for Vitrolife – the calculation can be seen in the table at the end of this article.

Management And Risk Description:

Vitrolife’s goal is to become the world-leading supplier of medical devices for assisted reproduction. Risks pertaining to reaching this goal include, but are not limited to, macroeconomic risks, operational risks, and financial risks.

Macroeconomic risks: Changes in economic conditions, legislation, and the market

An economic decline could lead to decreased demand for privately financed IVF treatments, thus impacting Vitrolife sales. Changes to legislation in any of the jurisdictions in which Vitrolife operate could also affect the business. Reimbursements and subsidy levels from local governments affect the level of demand for IVF treatments. Vitrolife’s products also need regulatory approval before they can be sold. Approval regulations increase product development costs for Vitrolife, but at the same time they increase barriers to entry, helping to stem competition. The nature of the business also entails risk relating to liability and damages claims; the company holds insurance policies to cover the financial obligations of any such claims. The ART industry is highly competitive, with new products being launched continuously, and the development of new devices may impact Vitrolife’s future competitiveness.

Operational risks: production, personnel, and legal

Production risks entail disruptions to the supply of raw materials that could impact the ability to develop and manufacture high quality products. These risks are managed through contractual arrangements with suppliers and managed on an ongoing basis by the company. Elements of the company’s future development is dependent on certain key individuals’ expertise within the ART industry, this risk is managed through internal processes to ensure key skills are passed through the organisation.

Vitrolife has its own patents and intellectual property but within the field of ART, patents that are held by other companies can be difficult to demarcate. Vitrolife is currently involved in disputes with Auxogyn in the US and the EU regarding a patent in the timelapse field; according to Vitrolife the financial risk relating to these disputes is insignificant. Given the high-tech nature of the business, risks remain that in the future the company could suffer financial impairment from legal processes regarding its own or third-party rights.

Financial risks: Currency and credit

Vitrolife’s largest exposure is to EUR value changes given that 47% of sales are in this currency. The company also has considerable cash flow exposure to CNY as 16% of sales are in this currency. At the time of writing, the company has not entered into any currency hedge agreements. Vitrolife has no material financial loans and historically low credit losses given stable customer demand.

Entry:

Market

Stop:

Not set

Target:

SEK 165.00

Time Horizon:

Long term

Chart (weekly) and financial data below

Source: Saxo Bank

Eleanor Creagh

Australian Market Strategist

Saxo

Topics: Trade View Equities SEK Sweden

Fri, 28 Sep 2018 08:30:00 Z

This week natural gas broke back above $3/therm after once again finding strong support below. We look to buy on a weekly close above $3.053 as this could signal some additional demand from momentum traders looking for an extension towards $3.50/therm.

Medium Term / Buy

Instrument:

US Natural Gas (NGX8 or NATGASUSNOV18)

Price Target:

Open

Market Price:

3.039

Background:

The US natural gas future (NGZ8) is about to finish a quarter that yielded the lowest trading range since Q2 of 1995. In percentage terms, the $0.407/therm range was the lowest since 1990 when the contract was launched. During this time we have seen record production off-set by rising exports and consumption.

This week, natural gas broke back above $3/therm after once again finding strong support below. A weekly close above $3.053 could signal some additional demand from momentum traders looking for an extension towards $3.50/therm.

Management And Risk Description:

Short to long-term weather forecasts hold a major sway on the market given the limited amount of time left to see an acceleration in storage injections. While high oil prices may provide natural gas some tailwinds, it also must be remembered that high prices attract higher shale oil production, thereby supporting a continued increase in natural gas given that some US natural gas is produced as a byproduct from shale oil.

Entry:

Market or weekly close above $3.053/therm

Stop:

Trailing stop of $0.14/therm (equivalent of 2 ATR)

Target:

Open

Time Horizon:

Medium-term

As we approach the winter months one piece of data has begun to show support. During the summer months between April and October, natural gas is being injected into underground storage facilities only to be extracted during the winter months when the need for heating raises demand from utilities, especially across the US Northeast. The current supply-demand balance is therefore used to estimate whether enough gas will be injected into storage by the end of October to meet winter demand or withdrawn from storage by the end of April to meet storage restrictions during the build-up phase.

On Thursdays, the US Energy Information Administration publishes its Weekly Natural Gas Storage Report which shows the amount of gas that goes in and out of storage. What we have seen during the past few months are lower than normal injections into storage, as consumption and exports have stayed strong relative to production.

As of last week, following another lower than expected injection, the total amount of gas in storage reached 2,768 billion cubic feet (Bcf) which is some 18.3% below the five-year average of 3389 bcf. With time running out to replenish stocks before November, we could see a market increasingly being left exposed should the US winter prove to be colder than expected.

From having been a horrendously expensive investment for passive long investors for years due to the structure of the futures curve, there are now emerging signs that a change is on the way, not least due to the ever-increasing amount of Liquified Natural Gas exports. The emerging tightness has seen the one year futures spread (1st minus 13th futures contract) move into a solid backwardation of 10% compared to a contango which at it worst point back in 2015 went above 50%.

In other words, an investor back then would need a 50% return on a one-year horizon before making any money.

Short-term Natural Gas (source: Saxo Bank)

Long-term Natural Gas (source: Saxo Bank)

Topics: Trade View Commodities Natural Gas

Mon, 24 Sep 2018 11:30:00 Z

Brent crude oil has reached its highest level since November 2014 in the wake of this past weekend's Opec+ meeting in Algiers. We look to buy the December contract on the break of the double top from May at $80.50/barrel, setting our stop at $77.40/b.

Medium Term / Buy

Instrument:

LCOZ8 or OILUKDEC18

Price Target:

Open

Market Price:

80.03

Background:

Brent crude oil has reached the highest level since November 2014 after breaking the double top from May at $80.50/barrel. The move comes after the Opec+ meeting in Algiers over the weekend failed to deliver the production increase that President Trump demanded in a recent tweet.

Trump's actions, i.e. the re-introduction of sanctions against Iran, remain the key reason why oil prices are moving higher at a time when the US-China trade war and emerging market weakness have raised some concerns about the demand outlook.

Given the immediate negative impact on supply and the not-yet-measurable future impact on demand, however, the price has found the upside to be the direction of least resistance. Adding to the strength this morning are comments from two of the worlds biggest oil traders, Trafigura and Mercuria, at the annual Asia Pacific Petroleum Conference (APPEC) in Singapore. Both highlighted the risk of crude oil (Brent) reaching $90/b this year and $100/b in 2019. Mercuria saw the potential drop in supplies from Iran as high as 2 million barrels/day. A drop of this magnitude is somewhat higher than expectations; if realised, Opec and its friends would struggle to meet the shortfall, hence the call for higher prices.

The combination of low inventories, falling spare capacity, US production beginning to look constrained, production challenges in Venezuela, and not least the re-introduction of Iranian sanctions have created a situation where fundamentals, price momentum, and geopolitical risks all point to higher prices.

Our breakout model, which is built on the Donchian Channel Framework, has given us a buy signal today on a close above $79.80/b, the previous highest close from May 23. Adding to this the break above $80.50/b today and a continued extension to $81.90/b and beyond look increasingly likely.

Management And Risk Description:

Continued dollar strength could weigh further on demand as it increases the strain on EM countries already feeling the impact of high oil prices in local currencies. Another risk is the US releasing oil from its strategic reserves to counter the shortfall.

Entry:

On a close above $79.80/barrel (LCOX8)

Stop:

$77.40/b followed by a trailing stop of $3.2/b, equivalent to 2 ATR (Average True Range). Given a reference spread between LCOX8 and LCOZ8 of $0.6, the initial stop at $77.40 on LCOZ8 corresponds with a 76.80 stop on LCOX8.

Target:

Open.

Time Horizon:

Medium term

Charts below (daily and weekly)

Brent crude (daily, source: Saxo Bank)

Brent crude (weekly, source: Saxo Bank)

Global Head of Macro Strategy

Topics: Trade View Crude Oil Commodities

Thu, 20 Sep 2018 09:30:00 Z

Australian rare earths producer Lynas is one of our high-conviction equity ideas over the coming years as RE demand enters a new and interesting phase in the new energy revolution.

Strategic Trade / Buy

Instrument:

LYC:xasx

Price Target:

AUD 3.00

Market Price:

AUD 2.05

Background:

Saxo Bank’s High Conviction Equities is a list of investment recommendations on stocks that are viewed to be an attractive investment theme with return expectations above the expected market return. The investment horizon is long-term which is typically one year or more unless the price target has been reached. Lynas is one of our high-conviction equity ideas over the coming years as Rare Earth demand enters a new and interesting phase in the new energy revolution.

Rare Earths are essential for many future-facing technologies

Lynas Corp (ASX:LYC) explores, mines, and produces Rare Earth (RE) minerals. RE are counterintuitively not “rare” but are difficult to find in deposits that are not contaminated with other materials and with a concentration high enough to be mined economically. Lynas operates the world’s highest grade operating Rare Earths mine in Mt. Weld (a collapsed volcano), Western Australia, and a chemical processing operation, Lynas Advanced Materials Plant, in Kuantan, Malaysia.

The most valuable Rare Earth Oxide (REO) produced at the LAMP is Neodymium-Praseodymium (NdPr), of which Lynas is the second largest producer globally and leading supplier to the free market. Other REO’s produced by Lynas include, Cerium, Lanthanum, Dysprosium, and Terbium.

Rare earths are crucial for a number of high growth, high-tech commercial industries including hybrid and electric vehicles, renewable energy (wind turbines), energy-efficient lighting, advanced electronics, chemicals, and medical equipment. Without rare earths a number of high-tech industry applications would not be viable. Take the iPhone as an example: screens are polished with lanthanum and cerium and within the phone is a magnet made with neodymium and praseodymium.

Rare earth applications:

Source: Lynas

Source: Shades of Grey, Wikipedia

The rare earth market is significantly dominated by low-cost producer China, both in terms of supply and demand. Chinese rare earth producers have benefited from strong governmental support aimed at providing downstream consumers with a competitive advantage as the high-tech and green tech industries that rely on rare earths are crucial to propelling the next phase of China’s economic expansion. But although China is currently a major producer, the source is not sustainable and over the coming years China could become a net importer of rare earths, particularly of Dysprosium.

Although China dominates the rare earths market, for now, Lynas benefits from strong demand for RE sourced outside of China and Lynas has long-term relationships with end users globally. Lynas is an attractive investment option to gain exposure to the RE thematic, being the only miner and processor of RE worldwide outside of China but also maintaining efficient processing capabilities and quality customer relationships. Lynas is one of our high-conviction equity ideas over the coming years as REO demand enters a new and interesting phase.

Lynas' average selling price (revenue basis) of REO has increased from AUD 15.7/kg in 2016 to AUD 18/kg in 2017 according to the annual report. UBS forecast this average basket of REO will rise to AUD 23/kg by 2020.

As demand for magnetic materials grows Improved pricing for REO is expected to continue, benefitting Lynas. Permanent magnets, containing NdPr which Lynas is the second largest producer of globally, are a key enabler of electric vehicle technology, a sector which we expect to grow considerably in size becoming a game changer for NdPr demand.

NdPr analysts are more bullish than other REO with UBS having a long-run target for NdPr prices stabilising at $60/kg.

According to Peak Resources NdPr white paper the automotive industry alone will have the potential to absorb today’s global annual production of legally manufactured NdPr in just one year when electric mobility reaches a global market share of approximately 40%.

The electric vehicle industry is one of the most topical investment themes today with government backing meant to kickstart a revolution in transportation away from the internal combustion engine (ICE). There are vast opportunities to reshape the global economy with the application of clean energy to cars, but the transport industry doesn’t stop there, aviation, shipping, and trains are all forecast to become part of the green revolution within which REO currently feature heavily in the clean energy technology.

Forecasted new BEV sales globally (via Bloomberg):

Valuation
Aside from the current trajectory for RE demand, Lynas itself is a high-quality profitable producer with sufficient ore reserves to maintain future growth. The company's half-year FY'18 results delivered record profits stemming from operational and cost improvements over the past four years, revenue growth of 75%, and REO production growth of 21% from the previous year indicative of strong relationships with customers in Japan and China.

Balance sheet improvements were also attained in FY'18. Lynas reduced debt and increased EV by nearly five times through early repayment of US$20 million to the Japan Australia Rare Earths (JARE) and conversion of convertible bonds. The current Enterprise Value (calculated as the market capitalisation plus debt, minority interest and preferred shares, minus total cash and cash equivalents) is AU$1,433.4m, translating to a trailing 12-month EV/EBITDA multiple of 13.6 compared to 11.7 for global equities.

Sector multiple comparisons are limited given Lynas is the only miner and processor of REO worldwide outside of China; Chinese counterparts lack compliant data points to perform a valid comparison. Another listed Australian NdPr miner has yet to generate revenue from sales so a valuation comparison is defunct.

Lynas' free cash flow yield (FCFY - a representation of the income (free cash flow) created by an investment), based on enterprise value is 5% indicating the company is generating 5% of its EV in free cash flow yearly to reinvest and grow the business. Free cash flow yield combined with capital growth generates an attractive rate of return for an investment in Lynas.

Another key consideration for this investment is Lynas' ability to maintain margin expansion as REO demand picks up and the cost improvements continue to take effect. Sell side analysts estimate EBITDA margins will expand from 34% this year to 49% in 2021.
In 2017, Lynas announced the AUD 35m NEXT project in order to increase output, expand its product range and deliver increased production efficiency. As part of this project, Lynas commenced a drilling project at Mt. Weld to ensure future demand can be met. In August 2018, the results of the first drill confirmed a 25+ year economic life at increased output rates allowing the company to cement long-term commitments to customers and continue to invest in mining technology and improvements at the LAMP processing plant.

Lynas is now on track to produce 600 tonnes/month of NdPr by January 2019, highlighting its capability to improve performance within production volumes and not just across the balance sheet.

As production volumes increase, sales revenues rise, and EBITDA margins expand, Lynas’ balance sheet will continue to improve. In the next three years, gross profit is estimated to more than double from AUD 121m to AUD 387m, which combined with the aforementioned should provide accretive earnings per share expansion to investors and a higher valuation.

Source: Lynas

Management And Risk Description:

Lynas’ performance will be heavily determined by prevailing REO prices. REO prices have historically been volatile due to several factors:

Supply side factors: The supply of Rare Earth materials is typically dominated by Chinese producers where illegal production has generated excess capacity causing downward pressure on prices. The Chinese government has recently increased regulation and environmental standards, closing plants and cracking down on illegal production contributing to stabilised REO prices in FY'18.

Fluctuations in demand: A key factor determining REO demand is automotive market demand. Hybrid/electric, emission controlled, and luxury vehicles utilise significantly more RE materials in the manufacturing process than other motors. The price of RE materials will be influenced by future demand for these vehicles.

Competition: An increase in RE prices could incentivise new mining and processing facilities, which would increase the supply of REO and cause downward pressure on prices.

Currency fluctuations: REO prices are denominated in USD so the AUDUSD exchange rate affects income exchanged from USD to AUD. The company holds cash in USD as a natural hedge against adverse currency movements. A devaluation in CNY increases the attractiveness of Chinese REO exports and consequently China’s internal supply, so the company is also exposed to yuan fluctuations. Lynas is exposed to fluctuations in the Malaysian ringgit (MYR) as cash operating outflows are predominantly priced in MYR. Additionally, Lynas’ non-current assets are LAMP assets denominated in MYR.

Regulatory/Political risk: Changes in government policies and regulations in Malaysia and Australia could affect operations and Lynas’ long term performance. In May 2018 a new Malaysian government came into effect and Lynas’ operations could be subject to review. Lynas has a history of compliance with government regulations, licensing and health and safety standards in both Malaysia and Australia which should prevail in future reviews from the new Malaysian government.

Tariffs/Trade: The trade war could be both an opportunity and a threat to Lynas’ future. If China were to restrict REO exports or raise prices in retaliation to US tariffs, Lynas could become significantly more attractive as a non-Chinese REO source. This could become a threat to the entire industry in the long term as Lynas accounted for just 12% of REO output last year, according to Adamas research, in the event of a supply crunch, companies could look to use other materials/technologies in industries that utilise REO.

Entry:

AUD 1.86

Stop:

200-day moving average (currently at AUD 1.12)

Target:

AUD 3.00

Time Horizon:

Long term

Lynas long-term chart below

Source: Saxo Bank

Eleanor Creagh

Australian Market Strategist

Saxo

Topics: Trade View Equities

Wed, 05 Sep 2018 13:00:00 Z

Spotify is one of our high-conviction equity ideas over the coming years as monetisation enters a new and interesting phase. We are looking for strong profitability in a five-year timeframe, and are bullish Spotify shares.

Strategic Trade / Buy

Instrument:

SPOT:xnys

Price Target:

300.00

Market Price:

184.87

Background:

In April of this year one of the most anticipated IPOs took place as Spotify was listed on the NYSE in a big blow to Europe. Again, a European technology giant chose the US as its gateway to financial markets, underscoring a theme we have been arguing lately that European equities are becoming uninteresting due to a weak technology sector.

Spotify’s share price is up 42% from the IPO price and up 13% from the first secondary market price (the open price on April 3, 2018). For years, the music industry was under pressure with falling revenue and rampant piracy by consumers. With Spotify and the music streaming revolution, things have changed; 2015 was the first year that saw total music revenue grow again since the mid ‘90s according to Spotify’s Investor Day slides.

Spotify is one of our high-conviction equity ideas over the coming years as monetisation enters a new and interesting phase.

Source: Spotify Q2 earnings release

Below are some our key views on Spotify:

• It will not create its own record label (except for low-penetration background music used for commercials, restaurants etc.)
• It will not go into video content (except maybe for selected live concerts)
• Strong profitability will come but it will take five years
• The firm will move into direct communication (fans-to-artists) – think Instagram
• In-platform advertising (used by record labels for album promotion) will likely become a big profit engine in the future
• Record labels will likely not allow high attractive profit margins on music content
• Spotify will win the music streaming war and remain industry leader as consumers want choice instead of concentration with Amazon and Apple

Spotify has a 42% global music streaming market share which means the company dominates the industry. The company offers music through a mobile app and web application on desktops with two subscription types: Ad-supported and Premium. Monthly active users (MAU) have grown from 91 million in 2015 to 157m in 2017. In Q2 the number of Premium subscribers rose to 83m, up 40% y/y driven by family subscription plans.

Spotify is continuously modifying and expanding its offerings with in-platform ads the most likely focus over the coming years. The recent Drake album ad campaign was a clear indication of the future. Spotify wants to enable record labels to activity users to listen to new albums to drive revenue generation and increasing the fan base. With heavy use of data, ad campaigns might be used intelligently to increase awareness and penetration for musicians. In Norway, the company has experimented with hiking prices although industry experts do not expect Spotify to generally increase the subscription price.

Advertising revenue in Q2 was €123mn, up 20% which is still a high-growth business but probably a bit below consensus estimates. Recent data policy changes may have affected the ads business, but that should have only temporary effects on the results. Overall we believe the advertising business remains Spotify's key weapon to increase the gross margin as Spotify does not have significant bargaining power over record labels in negotiating revenue splits.

In addition, music's lifespan is different from video content so Spotify has to acquire streaming rights for old music. Nobody wants a music subscription if they cannot listen to The Beatles or Taylor Swift.

Even more compelling for the investment theme is the fact that 42% of Spotify’s monthly active users are under 25. This is critical as it represents adoption among the young population that will ensure a large sticky customer base in the future. But the most compelling statistic is that on average, MAU spend 32 hours per week listening to music, according to Spotify. This compares with roughly below seven hours for Instagram and Facebook. The major point here is that music can be consumed passively while doing other tasks, whereas social media and video streaming is for the most part a singular activity. Music streaming is probably one of the most time-consuming activities in the world today. Besides large penetration in the young population segment, the company has also a good MAU diversification across many geographies with no region being overly dominant (see pie chart below).

Source: Spotify Q2 earnings release

A key path to a higher market value is Spotify’s ability to lift its gross margin (currently at around 26%). CFO Barry McCarthy has stated that Spotify’s goal is a gross margin around 35% which would bring Spotify closer to other technology platforms and physical distributors’ usual cut. Apple is currently running its old 70:30 model with 30% going to Apple, although both Android (Google’s mobile operating system) and Microsoft have lowered their cuts. Apple has recently switched to a new pricing model of an 85:15 split after one year if the app is sold as a subscription. These pricing pressures on other technology platforms with revenue sharing between platforms and content providers suggest that Spotify has probably hit an upper limit with its 25% cut from record labels. The gross margin expansion has to come from other revenue sources such as advertising or its own copyrighted music (secondary music for commercials and such).

The main reason for our buy recommendation is margin expansion through the new monetisation phase as the business is hitting economies of scale. Free cash flow generation will likely surprise many analysts and investors as the business ramps up. In addition to (and because of) the margin expansion, we believe Spotify’s valuation multiples will expand.

Valuation

As of Q2'18, Spotify generated $4.59bn in 12-month trailing revenue. The current enterprise value is $27.3bn, translating into an EV/sales multiple of 5.95. This multiple is less than other platform companies such as Netflix (11.7x), Facebook (9.3x), iQIYI (6.1x), Tencent (9.9x), Sirius XM (6.9x), Etsy (11.6x), Alibaba (10.4x), Twitter (8.7x). Only eBay with an EV/sales ratio of 3.4x is less than Spotify.

Compared against these other dominant platform companies, it suggests that there is a valuation gap that can be filled. In our view the EV/sales should be closer to around 9 given the firm's margin expansion trajectory, sales growth of 26% y/y, and rising free cash flow generation.

Sell-side analysts have consensus revenue at $10.4bn in FY21 which at a EV/sales multiple of 9x suggests an enterprise value of almost $100bn. Excluding cash generation, this implies a potential 200% upside over the coming three to four years. However, the future is very unpredictable so we stay with a one-year price forecast of $300/share, or around a 60% upside from yesterday’s close.

The free cash flow is expected to be around $200m in FY18 which is a free cash flow yield (versuss enterprise value) of 0.7% – low, but this also reflects the upside potential from growth and new revenue sources. Amazon, by way of comparison, is valued at a free cash flow yield of 1.8% based on expected free cash flow in FY'18 of $18.7bn against an enterprise value of $1.01 trillion.

Management And Risk Description:

Investing in Spotify naturally comes with many different risk sources, below we discuss the three main ones,

High valuation

Spotify currently trades at an EV/Sales multiple of 6.0x which is not expensive for dominant technology companies. Facebook and Microsoft trade at 9.6x and 7.4x on the same multiple respectively. But what makes Spotify’s valuation elevated despite being below other comparable dominant technology companies is that Spotify is still operating with a negative EBITDA (operating income). However, on the cash flow metric Spotify is already making money with Wall Street expecting free cash flow of $200.3m in FY'18. Nevertheless, the valuation is elevated and is especially so compared to global equities, which makes the downside risk considerably high in the event growth figures begin to disappoint against expectations.

Increasing competition

For years Spotify enjoyed minimal competition. Many technology companies looked at Spotify’s growth and could see the business model worked but there was great uncertainty around the profitability. Could this distribution business model ever be profitable on a level that makes sense? As the music streaming industry left a trail of corpses (failed companies) in its wake, Spotify emerged as the clear industry leader and dominant player. As the business matured, other technology companies began to accept the subscription-based business model for music streaming with Apple and Amazon entering the industry. Today the competition is fierce with the biggest competitors being Apple Music, Amazon, Pandora, iHeartRadio, Deezer, and Tidal. This competitive landscape ensures great bargaining power for the record labels.

Less bargaining power compared to Netflix

The fundamental difference between video and music content is its lifespan. Video (TV series, movies, or DIY content) typically has a short lifespan; most viewers don’t watch the same TV series or movies over and over again. This means a continuous investment is needed to replenish the content inventory for the hungry audience. Music content, on the other hand, is more like books, with a much longer lifespan. In the case of 'classics', people can want to listen frequently for decades. This lifespan difference means that Spotify cannot erode its content suppliers’ (record labels) power like Netflix has done with Hollywood through its Original Content attack. Spotify cannot have a music business without Prince, Beethoven, or The Beatles. The lack of bargaining power is the biggest constraint on operating margin expansion. However, Spotify recently made a new agreement with the record labels to increase their gross margin as the company was about to enter public markets. As long as Spotify does not have a strong negotiating position, margins can unexpectedly drop on a copyright contract renewal with record labels – a serious downside risk for Spotify investors.

Entry:

at market

Stop:

134.00

Target:

300.00

Time Horizon:

long-term

Spotify share price since April 2018 IPO (source: Saxo Bank)

Source: Spotify Investor day slides

Peter Garnry

Chief Investment Strategist

Saxo Bank

Topics: Trade View Equities

Mon, 03 Sep 2018 09:30:00 Z

Italy's populist government is on a collision course with the European Union and we expect political and headline risks to remain elevated into Rome's delivery of its latest budget.

Strategic Trade / Sell

Instrument:

FBTPZ8

Price Target:

114.0

Market Price:

121.2

Background:

[Editor's note: this Trade View was co-authored with Saxo Bank technical analyst Kim Cramer Larsson.]

Since the populist Five Star/Lega coalition took power in Italy, the country’s standing within the European Union has grown less clear. What is clear, however, is that the new government is looking to implement expensive domestic policies which will increase the deficit of an already over-leveraged country. Italy’s debt-to-GDP ratio stands at 131%, second only to Greece in Europe; Brussels wants it to contain the deficit and while Italy’s minister of Economy and Finances Giovanni Tria is trying to do so by looking not to exceed 1.5% in deficit, his stance is finding opposition from other politicians which argue that it is necessary to go over the 3% deficit limit imposed by the EU in order to implement new policies and to invest in infrastructure.

Concerns are also arising regarding Rome’s intentions to remain in the EU. This comes on the back of reports that Italian politicians have been seeking support in the form of sovereign debt from countries outside the EU, most notably the US and Russia.

This might be a signal that Italy is preparing for a referendum.

We believe that political risk will remain high, especially during the months of September and October when Italy is due to present the 2019 budget. Another, related risk is that Moody’s could potentially downgrade its rating by one notch, making its sovereign debt rating just one notch above junk.

Management And Risk Description:

Euro-BTPs can be traded both as CFDs and futures, with the choice depending on your risk profile and desired exposure. Clients can choose their stops depending on their risk/reward appetite; although we expect Euro-BTPs to fall, there might be some rebound in the short term depending on news. Because we expect this instrument to break bearish between mid-September and the beginning of November, we are using the December contract as the September one expires next week.

Please refer to chart below, which depicts the continuous current contract for Euro-BTPs, which until September 6 will be the September contract (FBTPU8) before rolling into the December one (FBTPZ8).

The September contract currently trades with a spread of 1.95 above the December contract (FBTPZ8).

After the massive sell-off in May, Italian BTPs have traded in a corrective sideways fashion between 120 and 130, which was the 50% retracement of the selloff.

The bear trend seems to have resumed with support at around 122. That support is likely to be tested once again and quite possibly broken. A close below could fuel another sell-off that could take BTPs towards a test of the next support area between 114 and 116.50 (with some minor support at 120).

The bearish picture is supported by a sub-40 RSI with no divergence, indicating a lower low. If BTPs close above 125.25, the short-term bearish picture will be cancelled. For a demolition of the longer-term bearish picture, a close above 130 is needed.

Entry:

Market

Stop:

125.50

Target:

114.0

Time Horizon:

one to two months

‪‪

Source: Saxo Bank

Althea Spinozzi

Head of Fixed Income Strategy

Saxo Bank

Topics: Trade View Bonds Government Bonds Corporate Bonds Italy

Tue, 14 Aug 2018 11:00:00 Z

We believe that Casino 4.87% fixed-to-floater Perpetual Hybrid Junior Subordinated Notes offer an attractive yield, compared to peers, and that the company's overall restructuring story is compelling.

Strategic Trade / Buy

Instrument:

Casino 4.87% Perpetual EUR bonds (FR0011606169)

Price Target:

n/a

Market Price:

79.50

Background:

Casino is the fourth-largest retailer in France with 11.6% market share after Auchan, Carrefour, and Intermarche. The company is also one of the largest retailers in Latin America. Although the troubled Rallye is the company’s largest shareholder, Casino is operationally strong and it has grown operating profits faster than French competitors such as Carrefour in 2017.

The leverage of the company is expected to improve as the company is planning to sell €1.5 billion worth of assets between this year and 2019 and at the same time, restructuring costs are expected to decline. A gradual decrease in leverage could potentially lead to a ratings upgrade in the future.

After this sale, the company will still have a sizable portfolio of domestic assets which could be disposed of in the event of a deterioration in credit conditions and a consequent incapability to refinance debt. We believe that the selloff that we have seen in the market after the firm’s H1 2018 earing results was caused by investor disappointment given that guidance for FY 2018 was not revised upward and that the company has not been deleveraging as expected. The overall restructuring story, however, is still compelling.

Investment

We believe that Casino 4.87% fixed-to-floater Perpetual Hybrid Junior Subordinated Notes offer an attractive yield (approximately 9.21% yield to 2024 call), compared to peers. This bond is a hybrid, meaning that it has equity-like features such as being a perpetual and the coupon can be deferred at the option of the issuer. The coupon is fixed until January 31, 2019, from then it will pay five-year swap rates +3.819% until January 31, 2039, and then it will pay five-year swap rates +6.569%.

Although the first call date of the bond is in approximately five months, we believe that Casino doesn’t have the economic incentive to call it back. We feel that a call in 2024 is most probable as the instruments will lose its equity credit with S&P. We believe that the bond is most likely to be called back in January 2024 because of this reason and at an indicative current price of 79.50, the indicative yield to 2024 is 9.21%

Parameters

Minimum piece is 100,000 nominal EUR with 100,000 nominal EUR increments. Return objective is primarily repayment and coupon payment.

Management And Risk Description:

You have to be aware that Rallye owns 51% of Casino, which is highly leveraged and may not be able to refinance existing debt before the end of the year. The company is high-yield (Ba3/B+) and it has a high debt-to-capital ratio and could suffer from increasing interest rates, increasing competition, and new tariffs. Default is always a possibility for low rated, highly leverage bonds.

Entry:

market

Stop:

n/a

Target:

n/a

Time Horizon:

Strategic Trade.

See relevant charts below

Source: Saxo Bank

Source: Bloomberg

Althea Spinozzi

Head of Fixed Income Strategy

Saxo Bank

Topics: Trade View Bonds Corporate Bonds

Fri, 10 Aug 2018 12:30:00 Z

Both technical and fundamental factors support a positive view on emerging markets and as a result we are recommending a relative mean-reversion play against US equities via the MSCI emerging markets ETF.

Medium Term / Buy

Instrument:

EEM:arcx, SPY:arcx

Price Target:

10%

Market Price:

n/a

Background:

For months we have been arguing that emerging market equities should be underweighted driven by a weaker China, currency troubles in several EM countries (with Turkey the most evident), and worsening current accounts across many EM countries. With the developments in emerging markets taking Chinese equities down more than 25% from their earlier peak this year and today’s meltdown in the Turkish lira, we observe relative measures both on technical and fundamental factors reaching elevated levels. We are recommending investors to begin adding emerging market equities hedged against US equities that have been the only bright start in the equity universe since February’s volatility shock.

Today’s trade recommendation is aggressive given the circumstances and fully acknowledges that our timing may be too early, but timing is a poor man’s game. With enough patience it’s our view that beginning to add emerging market equities is the right tactical move.

China and Turkey

The current EM weakness started with February’s volatility shock and then continued as President Trump heated up his attacks on China’s trade policy. Over the past six months the language has increasingly worsened and the deadlock between the US and Chinese government has been obvious. Tariffs worth $50bn on Chinese imports have been partly implemented, the last $16bn starts in two weeks with Chinese counter moves being fired back.

Trump has threatened an additional $200bn in tariffs against China weakening sentiment even further. Chinese equities were down almost 30% at their lowest point and the USDCNY is close to all-time-highs. The Chinese government has already begun various monetary and fiscal steps to accommodate the economy but the impact will not reach the Chinese economy until early 2019.

However, it is our view that the market is likely underestimating the flexibility and fire power of the Chinese government despite elevated debt levels. The impulse from recent stimulus will stage another boom which the market will likely begin to discount within the next three months.

Trouble in Ankara

The weakness in China is part of a bigger sentiment decline in EM, where shares have underperformed the US equity market by 15% this year. Turkey has been the time bomb lurking in the background but the past two weeks' weakness in TRY has elevated the situation from something manageable to a situation that has the European Central Bank’s attention as several Southern European banks have large exposures to the Turkish economy.

The crux of the matter is that the current account has gone from plus 2% when Erdogan came into power to -6.3% in Q1 2018. This is a sign that the Turkish economy has lost its competitiveness but is also dependent on foreign capital to preserve current consumption.

While Turkey is the 17th largest economy in the world with a nominal GDP of around $850bn, its importance in financial market is small. Turkish equities have an index weight of less than 1% in the MSCI Emerging Markets Index, which in itself is around 10% of global equity markets, so Turkish equities have close to zero impact on the market. But the size of the economy is the real threat via European banks and loan losses.

The technical and fundamental mean reversion play

It’s often when others hesitate that one should act. In the case of EM equities the sentiment is definitely weak and “don’t touch” as the strong narrative is that emerging markets are in trouble. When China’s stimulus begins to halt the weakness the market will likely reprice EM as these countries are still attractive and even more so now at the current low valuation compared to developed markets.

While EM were the success story in the period leading up to the financial crisis (and also in the subsequent rebound), the story has been mostly mixed-to-negative since 2013. A stronger USD, higher US interest rates, weaker commodity prices, and worsening current accounts have all created plethora of headwinds for EM countries and changed the narrative to being negative.

In the past five years EM equities are up 29% in USD compared to US equities up 89% in the same period. What makes the recent period extremely interesting is the big divergence in performance. In previous declines the correlation between US and EM equities has been positive but it has been negative in the period since April.

If we look at the total return of indices over the past five years and normalise their relative performance, we observe that US equities have gone to relative levels not seen since 2016 when the last bout of EM outperformance started. Technically this represents a good starting point for increasing exposure to EM equities if historical relationships replay themselves.

If we turn to fundamentals we again observing elevated relative valuation. The S&P 500 trades at 12-month trailing EV/EBITDA of 13.5 compared to 8.7 for EM. The valuation gap obviously reflects the technology sector (new economy) versus industrials (old economy), plus US equity valuation premium due to growth and profitability.

The relative valuation is now attractive enough that we see limited downside risk from valuation.

Overall, both technical and fundamental factors support a positive view on EM and as a result we are recommending a relative mean-reversion play against US equities.

Management And Risk Description:

The key risk is USDCNY breaking above the 7.0000 level which would potentially mark a regime shift in China and likely stage another round of tariffs from the US which would exacerbate the situation in Asia. Significantly higher US interest rates or USD trade-weighted spot are also key risks to this trade as it lowers the financial conditions in emerging markets and thus could lower economic activity in EM countries.

Entry:

44.13 (EEM:arcx) & 285.07 (SPY:arcx)

Stop:

5% on the basket P/L

Target:

10% on the basket P/L

Time Horizon:

6 months

See relevant charts below.

Source: Bloomberg

Peter Garnry

Chief Investment Strategist

Saxo Bank

Topics: Trade View China Turkey Equities

Wed, 08 Aug 2018 08:00:00 Z

If China is set to launch another round of stimulus to stave off the risk of its recent deleveraging attempts leading to a hard landing, Australia’s currency would benefit from the injection of fresh cash and mining activity. We enter half a position here at the 0.74225-50 area.

Medium Term / Buy

Instrument:

AUDUSD

Price Target:

0.7700 and 0.7800

Market Price:

0.7422

Background:

Iron ore prices have jumped again, up some 20% from the range this spring and despite all of the trade war rhetoric. This is Australia’s largest single commodity export, most of it going to China. If China is set to launch another round of stimulus to stave off the risk of its recent deleveraging attempts leading to a hard landing, Australia’s currency would benefit from the injection of fresh cash and mining activity.

Already, Australia’s terms of trade have improved remarkably in recent years relative to its history of running large deficits, even as iron ore prices have been in a slump until recently.

Management And Risk Description:

The long term downside risks to Australia include the eventual risk that tightening lending standards will deal a blow to economic growth via a traditional credit crunch, but this risk could be beyond the horizon of a short- to medium-term change of attitude for the better on the Aussie’s prospects.

Entry:

0.74225

Stop:

0.7325

Target:

0.7700

Time Horizon:

Medium-term

Global risk appetite is improving. Our Global Risk Indicator appears to be moving back into positive territory for now after getting mired in the negative since early February – and within the G10, AUD is the classic proxy for risk appetite. Global risk has receive an additional boost from China’s move to stem the weakness in its currency before the official RMB basket reached new lows and before USDCNY threatened the 7.00 level.

See relevant charts below for more.

Source: Bloomberg, Saxo Bank

AUDUSD daily (source: Saxo Bank)

AUDUSD weekly (source: Saxo Bank)

John J. Hardy

Topics: Trade View AUDUSD

Thu, 02 Aug 2018 07:00:00 Z

President Erdogan's victory in the recent Turkish general election gives us reason to long the US dollar and short the Turkish lira.

Strategic Trade / Buy

Instrument:

USDTRY

Price Target:

50% at 5.00 and 50% at 5.24

Market Price:

4.574

Background:

Update (August 2, 2018): First price target hit overnight.

We’ve been long USDTRY from 4.574, based on the “trust Erdogan to be Erdogan” thesis. As a reminder, Erdogan called for snap elections, ran with a mandate of single digit inflation and lower interest rates (yes, the Turkish David Blaine), and... won!

Since then, he has been consolidating his power further and installing his cronies, including his son-in-law as head of Treasury and Economics. Last week saw the first rate decision by the Turkish central bank after the election, the markets was expecting a 100 basis point hike to 18.75%, but the bank did not hike.

The US has now additionally imposed sanctions on two Turkish officials (the ministers of justice and the interior) due to the detention of an American pastor.

Trade details

• We hit our first profit target of $5.00, banking c. +1.15% in total returns to the Macro Monday Book
• We put in a stop level that is in the money at 4.8467, which marks the low in USDTRY this week.
• If I was looking for a more prudent stop to weather volatility then I could either choose the entry price of 4.574 or 4.7060, which is about a 3.5 standard deviation move (based on 10-day vol of 1.64%).
• The next target level is $5.24, but we would be open to potentially close out the trade in the $5.10-5.24 range.

Key risks remain:

• Turkish CPI due out tomorrow with the market expecting 16.30% (prior 15.39%).
• Erdogan waking up to the need for higher rates and an independent central bank.
• USD near-term liquidation and a tactical strong EM FX bounce.
• Less hawkish Fed and/or Trump attacking the strong USD
• The magnitude of the depreciation so far – minus 24% year-to-date on spot, minus 17% ytd on total return – could see the need for a tactical bounce in the lira.
• Lower trade war tensions.

At the end of the day, President Erdogan won an election where he campaigned on single-digit inflation, based on lowering interest rates. There is a high probability that he ends up meddling in the independence of the Turkish central bank. At the same time, the country is reeling from running hot on government influenced stimulus (part of the re-election campaign) which may not be curbed post the elections.

Management And Risk Description:

Position is circa 0.25x capital, so for the Macro Monday book that is circa $2.5m

Key risk is obviously broader-based USD liquidation, Erdogan doing better than expected and lower US rates.

Trading Plan

Targeting 50% at 5.00 and 50% at 5.24. Could potentially be looking to add to the lira short if we pull back to 4.50 levels.

Entry:

4.574

Stop:

Target:

5.00 and 5.24

Time Horizon:

Strategic

USDTRY 5-year chart. Source: Saxo Bank

Kay Van-Petersen

Global Macro Strategist

Saxo Bank

Topics: Trade View USDTRY Turkey

Tue, 17 Jul 2018 07:30:00 Z

Following the poor price action by precious metals last week, with an inability to catch a bid despite S&P futures selling off over 1% in the Asia morning and US yields being very tight, we close out our initial short-term bullish stance, that was originally placed on the basis of the technicals looking constructive and the sell-off overdone.

Short Term / Buy

Instrument:

XAUUSD

Price Target:

$1,275/oz, then $1,292/oz and $1,298/oz.

Market Price:

$1,255.48/oz

Background:

We are in a temporary window where sentiment seems to be risk-on, with the dollar weaker and we're getting a technical bounce from all the trade tariffs and trade wars fog. Gold has corrected smartly from its $1,300/oz break of a few weeks ago (at which point I was bearish) to bounce smartly off its 200-week average of $1,235/oz.

It looks like we could get an easy leg to $1,275 / $1,300/oz, with the downside supported at the $1,250/oz to $1,235/oz range.

Management And Risk Description:

Position is circa 1x capital, so for the Macro Monday book that's circa $10m. The key risk is obviously USD strength returning much sooner than anticipated, resolution of trade wars and US bond yields spiking higher. A sustained break sub $1,235/oz would suggest that our timing on this tactical gold long is wrong.

Trading plan

Looking for a gold move up to circa $1,275/oz to take off half the position and leave the remaining 50% to be taken off at $1,292/oz and $1,298/oz. Whilst we may potentially be looking to add at $1,235/oz, the most important thing is to keep track of the near-term sentiment on the USD. This is very much a technical bounce play.

Entry:

$1,255.48/oz

Stop:

$1,250/oz and $1,235/oz.

Target:

$1,275/oz, then $1,292/oz and $1,298/oz.

Time Horizon:

short-term

UPDATE to the trade view originally posted on 10.07.2018: Following the poor price action by precious metals last week, with an inability to catch a bid despite S&P futures selling off over 1% in the Asia morning and US yields being very tight, we close out our initial short-term bullish stance, that was originally placed on the basis of the technicals looking constructive and the sell-off overdone.

The strength of the US dollar continues to overwhelm any near-term agenda in the markets and if we see a break of $1,235/oz of gold (200-day moving average) we may have to head to $1,200/oz for a retest.

Gold 5-year chart. Source: Saxo Bank

Kay Van-Petersen

Global Macro Strategist

Saxo Bank

Topics: Trade View Commodities Gold

Wed, 11 Jul 2018 12:00:00 Z

Trump's global trade wars are escalating and amid the gloom and worry small stocks and tech stocks look like good places to ride out the storm.

Strategic Trade / Buy

Instrument:

Nasdaq 100 and Russell 2000 futures

Market Price:

7,235 for Nasdaq 100; 1,690 for Russell 2000

Background:

We're going long 0.5x Nasdaq 100 at the 7,235 levels and also going long 0.5x Russell2000 at the 1,690 level. This closes off the naked short we had on the Nikkei from Friday, to now a spread play (long US equities vs. short Japanese equities).

Bottom line thesis here comes back to a few assumptions:

* Tech and small/medium equities are not going to be weighed down as much by global trades wars, which seem set to continue to escalate (further news in the Asian morning on Wednesday of more Trump tariffs on $200bn worth of Chinese goods – and we're still we are a a long way away from the November 6 US midterm elections).

* Tech is one of the few sectors that does not get weighed down by rising rates, because unlike other sectors there is very little debt in tech, so higher debt payments are negligible.

* Technically speaking the Russell 2000 and the Nasdaq 100 are the strongest looking charts from a major global index perspective (much more constructive than the S&P and the Dow, let alone their European and Asian cousins).

* I is still expecting these automobile tariffs to be imposed, which should come down hard on the DAX and the Nikkei, like an anchor around a mouse (it's worth noting, quite a few discussions on this trade thesis has come back with the suggestion of the DAX being a better short, due to a potential euro squeeze which does not help its exports).

* US earnings kick off from next week, should provide some uplift for US equities.

* In a global risk-off and escalating trade tensions, US assets benefit from a relative outperformance vs. the rest of the world.

Management And Risk Description:

* Trump getting hit by an ice-cream truck… seriously… markets would rip on this news…

* De-escalation of global trade wars and ‘Americans bullying’

* Dollar-yen rallying massively, pushing the Nikkei short higher

Entry:

7,235 for Nasdaq 100; 1,690 for Russell 2000

Stop:

n/a

Target:

Strategic

Time Horizon:

Strategic

Nasday 100 futures 5-year chart. Source: Saxo Bank

Russell 2000 futures 5-year chart. Source: Saxo Bank

Kay Van-Petersen

Global Macro Strategist

Saxo Bank

Topics: Trade View Equities Nasdaq

Fri, 06 Jul 2018 08:30:00 Z

Trump's trade war has just shifted a few gears higher and things may well escalate even more between now and Monday. We believe that things will get worse before they get better and we're therefore shorting the Nikkei225.

Strategic Trade / Sell

Instrument:

NK225c1

Price Target:

Index level 21,660

Market Price:

Index level 21,730

Background:

Trade tariffs and trade wars are just shifting into higher gear. The combination of potential auto tariffs, a stronger yen and risk-off could set the scene for a triple hit for the Nikkei, which is also struggling technically (it has broken through its 200-day moving average and is failing to hold above 22,000).

I think its only a question of time before we see the next round of tariffs from the US, and potentially more announcement this Friday or over the weekend.

Management And Risk Description:

Position is 1x capital, so for the Macro Monday book that is circa $10m.

The potential key risk here is that trade disputes get solved sooner rather than later, leading to a relief rally in the Nikkei. A weaker yen could also complicate manners as that tends to be supportive for the Nikkei.

Trading Plan

For now its putting out a line on the short side on the Nikkei, looking to potentially add to the short at the 22,000 level – if we get there. And then to add a long S&P futures leg, so this is very much building out from a portfolio composition of the Macro Monday trading book.

Entry:

21,730

Stop:

–

Target:

21,660

Time Horizon:

Strategic

Nikkei index. Source: Saxo Bank

Nikkei and JPY 5-year. Source: Saxo Bank

Kay Van-Petersen

Global Macro Strategist

Saxo Bank

Topics: Trade View Equities Japan

Tue, 26 Jun 2018 05:30:00 Z

A trade war between the US and China looks increasingly likely. Though gold is caught in the battle between a strong dollar versus raised geopolitical risks we see a likelihood that it will improve and we're buying on that basis.

Short Term / Buy

Instrument:

Spot: XAUUSD, Future: GCQ8 or CFD: GOLDAUG18

Price Target:

½ at $1,306/oz. and ½ TBA

Market Price:

: ½ at current level around $1,273/oz and ½ on a break above $1,286/oz.

Background:

UPDATE: Gold has weakened further as the technical picture has continued to deteriorate while improved gold fundamentals such as trade tensions, a slightly weaker dollar, lower US bond yields, and a continued decline in global stocks have failed to make an impact.

The price has hit $1,258/oz which was our stop on the ½ long entered last week. The “death cross” (which occurs when the 50 DMA crosses below the 200 DMA) has received a great deal of attention and likely supported additional selling this week.

The 14-day RSI is now showing gold to be the most oversold since December 2016. The next major level of support can be found just below $1,240/oz. while potential buyers are likely to sit on the fence until we see a break back above $1,286/oz.

A trade war between the US and China looks increasingly likely. The ramp up in trade tensions continued overnight when China vowed it would retaliate after Trump threatened to impose fresh tariffs on $200bn worth of Chinese goods. The market has responded by sending the dollar and bonds higher and stocks lower. Gold remains caught up in this battle between the strong dollar versus raised geopolitical risks.

It’s our view that the higher the dollar climbs on trade frictions the more global growth could end up suffering as consequence. A trade war leaves no winners, especially not the already heavily indebted emerging market economies which are faced with lower activity, a weaker currency and rising dollar debt.

On that basis gold is likely to continue to struggle in the short term as the dollar appreciates. But with stock market volatility on the rise and bonds back in demand we see a favourable outlook for gold emerging.

Management And Risk Description:

The biggest challenges of being long gold are lower oil prices as this reduces inflationary pressure, a poor technical picture following the recent sell-off and a continued dollar surge. Should the US and China once again step back from the brink a relief rally across other assets may also hurt gold's prospects.

The first stop level $15/oz below entry will take it below support at $1,267/oz, the 76.4% retracement of the December to January rally. Our second entry level at $1,286/oz reflects the previous support that was broken last Friday while the first take profit is just ahead of the 200-day moving average at $1,306/oz, a level which has provided strong resistance in recent weeks. In order to isolate additional dollar appreciation XAUEUR can be considered as an alternative.

Entry:

One ½ at current level around $1,273/oz and the other ½ on a break above $1,286/oz

Stop:

1 1/2 ATR = $15/oz below entry (move stop higher once both entry levels have been hit)

Target:

½ at $1306/oz. and ½ TBA

Time Horizon:

Short-term

Gold is looking for support from lower US 10-year real yields and a potentially stronger JPY as risk-off sentiment spreads:

Sentiment has yet to recover following last Friday's washout of speculative longs and with the dollar, especially against EM currencies and the euro, continuing to rise potential buyers need to be patient. This is why we are recommending a gradual, step-by-step approach to position-building.

Short-term chart. Source: Saxo Bank

Long-term chart. Source: Saxo Bank