Core macro themes traders need to roll with:
The week ahead playbook
Most have their eyes on US CPI this week, but trading China reopening is also front and centre and causing some incredible moves across markets – aside from a number of unsubstantiated tweets focusing on a reopening, there are multiple focal points for traders to sink their teeth into, including:
In essence, the news flow, while consistent, has largely been of limited substance - the market, however, has taken the comments seriously enough to cover shorts and initiate longs for the more aggressive traders. Rightly so, China's re-opening is a game changer as it would clearly help reduce global inflationary pressures and catalyse a low in the synchronized global growth slowdown. If we consider the USD ‘smile’ theory, increased demand from China and improved supply chains suggests reduced demand for USDs and play into a view that the USD is putting in the process of a top.
Weekend news is perhaps not so inspiring with the official rhetoric pushing back on reopening hopes, with authorities vowing to maintain “unswervingly” its stringent Covid Zero policy – galvanised by the daily covid case count which is pushing 3500 new cases. It will therefore be interesting to see if we see a reversal in a number of the Friday moves – notably where we saw the yuan rally over 2%, copper +7.6%, AUD +2.9%. gold +3.2% and HK50 +5.4%. The HShares had its best one-week gain since 2015. These are incredible moves, but what seems apparent is the market is living in the future and starting to price in a higher probability of a reopening – even if it is staggered and likely to occur in Q1 23.
With the Fed the standout, and almost lone hawkish central bank, it’s not all about the Chinese market (and its second-order derivatives – such as the AUD), but the key event risk of the week is the US CPI print – core CPI is what gains the central focus with the consensus at 6.5%, and with the market just so used to above consensus prints it would shock to see a below estimate print.
As part of the risk assessment, I question how this print reconciles with current market sentiment – ask yourself, do we get a bigger move in the USD on a below-consensus core inflation print, or a gain in the USD on an above-consensus print? Positioning is always a factor here, and the extent of the beat/miss, as well as the components – my own view is risky assets rally harder on a 6.3% core CPI print than a 6.7% core print – I know many will disagree.
(Gold daily chart)
Gold is front and centre partly because Friday’s monster 3.2% rally took price up to channel resistance and the top Bollinger Band– this will happen when the USD is smacked 1.8%, and US 5yr real rates move 11bp lower. Clients have started to build a net short position into this resistance zone.
Europe and UK also look interesting – Europe equity indices are on a tear (even when priced in USDs), EU Nat gas prices are down 66% from the August highs – Italian 10yr BTP spreads remain contained vs German bunds at 2.16% – the downtrend in EURUSD - drawn from the Feb highs – looks to be over and despite a barrage of bad news over the last 2 months is still printing higher lows. There is a China play in EU assets, but the momentum in EU and UK100 equity indices looks real, although the move is becoming overbought and suggesting buying weakness may be the better play.
SpotCrude daily is one to focus on, with price into the 7 Oct highs and making some power plays on Friday – a break of $93.52 naturally puts $100 back on the radar, but again while this reflects the China reopening expectations, a higher crude price isn’t perhaps what the world needs now.
Rates Review – we look at market pricing for the next central bank meeting and the step up (in basis points) to the following meetings
Other known event risks for traders to navigate this week
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