Week Ahead: Trades, Geopolitical Risk, Alpha

Geopolitical Risk premia

Let’s start by addressing the elephant in the room:

There was geopolitical volatility over the weekend but the transmission into the market was almost nothing.

I want to point out two things for this: First, we had news out of the Middle East all last week and crude couldn’t make new highs. Second, crude had a massive intraday reversal. These are not the type of signals you want to see for a bullish crude view.

Economic Calendar:

The most recent CPI print had a mini inflection point on the market and a large impact on bonds. Please see the full report here because this frames the trades I will be running this week:

I will be watching retail sales in connection with how consumer discretionary and retail stocks perform relative to broad beta. I will also be watching the housing data because this will inform my view on the investment portion of GDP:

The Atlanta Fed Nowcast remains positive and the investment line item remains in expansion:

Are there pockets where the hikes in interest rates are being felt? Of course but it is in no way pervasive enough to cause personal consumption to fall enough and real GDP to go negative. NO RECESSION IN 2024.

Final note before getting into market views and trades, inventory to sales ratios are still well above 2021 levels. This connects to the idea I shared in the bond report where a comparable acceleration in inflation is unlikely because we don’t have the same conditions. When inventory-to-sales ratios are low and demand is increasing, inflation is the release valve. Again, we are in a period of very specific tension you need to operate within.

Trades and Market Views:

As you know I have been bearish crude:

• Reports on bearish crude:

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With the recent reversal from highs and lack of bullish price action on geopolitical risk premia over the weekend, there is a very high probability of us making a large move down in CL this week.

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Gold had a large reversal on Friday after a significant squeeze. This reversal overlapped with a strong dollar and a bearish move in bonds.

Additionally, so much of this move has been on expanding volatility. My view is that we reverse in gold and move DOWN. As long as we can stay below that reversal level from Friday, we are likely to move to $2280 or at the very least mean revert in a range:

Continue to watch bonds and the dollar for confirmation on gold.

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I am bearish duration here and believe we are very likely to remain below the CPI level and Friday level.

We need to see the curve steepen here and it is most likely to be a bear steepener.

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We are likely to see some positive returns in equities this week but as I previously noted (link), I am neutral on equities for the time being until we can have some normalization in the bond side.

Stocks are likely to outperform bonds so the long ES / Short UB pair is something I am trading very actively to the long side.

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Conclusion:

This week I will be sharing a lot more FX and fixed income analysis because there are some great trades setting up that are uncorrelated to the regular moves we see in the dollar and in US assets. The Mexican Peso is a key long you should be watching every day.

Overall, don’t get distracted too much by all the Middle East headlines. In my view, they aren’t that big of a deal yet. Focus on the impact of the most recent CPI print and the tensions noted in the interest rate report.

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Remember, macro vol is back and we are here to capitalize on it