Trade: Important Equity Market Update

Update on equity view

Jan 30, 2025

∙ Paid

Equity Market Update:

In November during the unwind of election hedges, I published a report explaining why equities were likely to remain neutral into the new year. Since this time equities have had a reasonable degree of volatility and have been at best neutral in both their risk reward and performance. As we moved into the inauguration, I explained why equities likely had downside due to the contraction in macro liquidity interacting with elevated valuations (link). This was amplified by high FX vol and a rising dollar. The marks with when the reports were released are shown below:

The Russell in particular had a significant drawdown from highs and has since consolidated.

As we move progressed through the final weeks of January, we saw a considerable unwind on Monday, the FOMC catalyst today, AND several of the Mag7 names release earnings. The collocation of these variables along with a considerable drop in FX vol has provided a signal about HOW AGGRESSIVE positioning is willing to put up exposure.

Powell made it clear today that his tone is primarily neutral which means the Fed’s stance toward economic data is unlikely to push rates on the short end higher. On top of this, the carry trade index has failed to make a durable push down (an indication you’d expect during imminent risk-off moves)

THE MAIN IDEA:

The main idea is that the absence of additional unwinding in risk assets coupled with falling FX volatility and Powell’s neutral stance has shifted the view on equities. As a result, I no longer believe equities have imminent risk (next 90 days) to the downside. The macro risks that were laid out still remain BUT we are likely to have a rotation in underlying equity flows and FX flows BEFORE, any durable bear market.

The remarks by Powell today and the reaction from assets sent a clear signal about positioning and there are now considerable trade opportunities that will be sent to paid subscribers in a trade write-up tonight.