What a week last week was – one of the most amazing weeks you will see in the bond market. The speed and size of the take down was something you won’t see in a long term and the snap back in the US 10 year was something that has been a long time coming (and expected) – just didn’t expect the veracity.
Therefore with 12 weeks left in 2018 these are the key trading themes I see from the current macro thematic and trading indicators:
o Backing the US: The strength in manufacturing, services, employment, wage growth and consumption which has lead US GDP to expand at 4.2% – points to strength in the S&P 500 and USD. Earning season begins in a week EPS growth is forecasted at ~20% year-on-year that wold back up what was seen in the previous quarter. the US will continue to outperform global peers to round out 2018.
o Bonds are dead, long live bonds: The push-pull between the bull and bears in the bond market has finally broken. Bears are in the ascendancy – expect some moderation in the 10 year over the coming weeks however last week was a clear break out meaning fixed interest HY and corporate bond markets are in for a tough time, it will attract foreign flows over the medium term – USD positive.
o Energy is the other big trade currently – Oil markets will hit the peak cyclical demand period as the Northern Hemisphere moving into winter, couple this with the US sanctions on Iran starting early November – supply pressure is on. I expect supply to start being absorb by non-OPEC in the New Year (and for the President to intervene) as oil hits US$85-US$90 a barrel this price margin will see rig counts skyrocketing – long oil but stop losses needed.
o There is also a domestic trade here; in AUD oil per barrel oil is moving to A$130-$135. Last week, Australian LNG exports hit a record all-time high in August (trade balance data) and was clearly still expanding. The movement in oil has seen natural gas at its highest level since mid-2013 – expect energy plays to keep on until December.
o Emerging markets (EM) to play catch up – there has been a justification for the selloff in EM (trade wars, financial stability mechanisms et. al.) however, the correction has created some rather large value gaps. The pockets of value is likely to see EM ‘catching up’ rather than dragging DM down in the final quarter.
Long USD against risk
Long oil with stops
Long US equities
Long Australian energy
Monitoring EM – trade close to materialising.