Attack the Week (ATW)
July 21, 2024
Sunday Thoughts
Summer has finally arrived in London town, even if it only lasted for 24 hours. Thirty degrees Celsius feels like “extreme heat” on the British Isles, as nobody is really equipped to endure these temperatures. The ideal operating temperature for the UK seems to be between 1 and 25 degrees, as everything outside of this range stresses the system. We can’t grumble, though.
Equities seem to have caught the same disease as of late, unable to fight against what started first as a rotation and has now moved into something less comfortable. This is all coming as we are just at the beginning of earnings season, which is rather unusual. 70 out of 500 SPX companies have reported an upside surprise to most of them.
In the upcoming week, we will see roughly a third of the SPX and NQ report earnings.
While earnings might be on the back burner, given the current degassing of positioning, it will give us a good idea of where we stand in terms of the expected EPS trajectory and forward-looking indications.
I will also update my thoughts on bonds soon. My longer-term bond allocation models have been long bonds for a few weeks now, and it’s interesting to see them still signalling strength ahead. Yes, they can flip-flop again as they have done for most of this year so far, but it begs the question of whether we are finally seeing the build-up for a major next bond bull leg ahead.
In this context, it’s also interesting to see what hedge funds are printing in short-date interest rate futures (STIRs). Read my primer on STIR below.
A Guide To Short-Term Interest Futures (STIR)
STIR contracts stand for short-term interest rates securities which are futures on global exchanges pricing in various maturity forward contracts and options. The underlying are generally money-market rates from various different currencies and markets with the goal of efficiently hedging or speculating on the direction of money market rates which are o…
Brokers are reporting quite sizeable option trades in Euribor futures, speculating on a more aggressive easing cycle by the ECB than is currently pricing in. It’s especially interesting to see as the ECB hasn’t really sounded enthusiastic about cutting rates in September. The below chart shows the March 2025 Euribor contract. Someone bought 98 calls in very decent size, betting on a return to the December levels in the coming months.
At the same time, people have been reporting some upside (rally) SOFR plays, betting on 50 bps steps by the Fed later this year. While the data doesn’t yet show this turn in sentiment, the big boys are getting ready to pounce. And we should take note. This, in combination with my models being long, would indicate a coming shift change. While I am not a big fan of trend lines, I do like a triangle formation as an indication of the approaching shift change. Let’s focus on this in the upcoming weeks.
Let’s now hear from Macro D and his latest thoughts before going through the relatively light Macro calendar in the week ahead before exploring some important charts for us to look at.
Let’s go!