Monday Thoughts
Apologies for the late running of ATW this week. I was escaping the scorching London heat by fleeing to the countryside, only equipped with my phone. When the news about the US bombing nuclear sites hit, I thought we would see the usual Asian open, which would likely be used as a fade. Arriving late last night, I therefore decided it would be a better use of my time to write this all up, having digested 24 hours of early-week market action.
That was probably not a bad idea. A lot of new information has emerged since yesterday, with Iran’s retaliatory response so far limited to shooting six missiles towards US air bases stationed in Qatar. The market reaction showed a strong positive tone with equities rallying, while Oil was selling off nearly 7%.
This initial market response makes sense, although I would caution people against prematurely declaring the end of the ongoing conflict. Anything can happen; that’s the case in any war. While the chapter of this crisis might be closing, I am of the firm belief that the complexities in the Middle East are just about to get started.
As I outlined in last Friday’s chart book, I was looking at markets that would benefit from a de-escalation and lower oil prices, as oil options didn’t provide an attractive risk/reward profile, and I didn’t want to go outright short. Those worked rather well.
On Friday, I lifted SFRZ5 and tweeted the following. Since then, we are up a good amount of basis points.
Some of the rationale stems from examining the chart below, which plots the third serial SOFR future, currently the December 2025 expiry. The sideways action over the past few weeks looks like a distributive nature, which is just a fancy word for saying that it’s coiling for a breakout.
I looked at it more like an option, given everything that is going on. With a very good first half under the belt, I am now positioned to get on board the next macro trade early. The front-end rally was also helped by dovish comments from FOMC members on Friday and again today. What has changed? I will comment on this in more detail behind the paywall. As for my overall macro roadmap, nothing has changed, as I am still very much aligned with my thinking laid out in early April.
Waiting for April Fools + 1
With quarter end now firmly behind us, we and everyone else are awaiting April 2nd and with it the potential repercussions. A seismic event for financial markets or just another one of those unclear presidential communications where everything is still very much up to interpretation? I am not sure financial markets want to grapple with continued uncertainty and are pricing in enough event risk premia in case we are indeed presented with a historical event. I wrote about it in
Below are my thoughts on the somewhat surprising FOMC-member dovishness since Powell’s press conference last Wednesday. There will also be additional thoughts from Macro D on the current conflict narrative and possible macro triggers ahead, before we scan the weekly macro calendar, check a few interesting chart setups and update the weekly asset allocation model for its latest change and performance.
Wishing you all a successful week ahead!
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