Friday Chart Book

December 20, 2024

We are almost there, folks. The final week of this amazing year is upon us, and boy, this has been a hell of a ride. I hope you all had a successful trip around the sun and, more importantly, that you and your families are happy and healthy. The rest is a bonus.

It’s hard to call regimes, and it’s even harder when you have several regimes intertwining within a few months all at once. Remember that we have experienced massive overshooting on the rates side over the past few years. We had no cuts pre-March 2023 SVB fiasco to immediate cuts to no cuts, then pivoting into the Fed’s amazing guidance pricing 6-7 cuts at the beginning of this year to then price them out and then realise 100 bps of cuts over the past few months to now again pricing nearly the end of the cycle. Given the history above, I wouldn’t be very surprised if this once again fails.

Markets fluctuate. I just read a Bloomberg story about a JPMorgan executive calling for the US bond market to experience one of the most boring years next year. I almost choked on my biscuit. What nonsense. It’s going to be fun and certainly not boring. Remember to always take the big house calls with a grain of salt. Mildly put, nobody wants excess volatility in bond markets next year; that’s bad news for banks and large asset managers. Not for us, though. There are plenty of opportunities out there to collect some returns. As always, time over a year isn’t linear. It never is. So it’s about capturing some big swings and themes while protecting the downside at all times.

As for the Fed, my initial thoughts are still the same as outlined in a peace on Wednesday, which you can find here.

We had one of the largest SPX drawdowns in history on FOMC day.

One very simple and crude method to analyse the market’s implied probability of a cut or rate hike is to look at call or put spreads. In the case of assessing the market’s implied probability of a rate hike by year-end, I am looking at SFRZ5 (more accurate on SFRU5) options. With post-cut SOFR settling around 4.35%, one rate hike by year-end would take us to 4.60%, which is 95.40 in future terms. SFRZ5 is currently at 95.99.

To assess the probability, I’m looking at the 95.625 / 95.375 put spread. The current price is 7 ticks offered. This means you pay 7 to make 25, which is a 28% probability. Now, before you go all Bayesian on me, these are back-of-the-envelope type of calculations, but they are accurate enough as far as I’m concerned. The 28% probability, if we assume it's correct, clearly highlights the market’s move away from an easing cycle and getting angsty about the potential for rate hikes further out. Too much? Too little? What is sure is that next year is going to be anything but boring.

Do you know what is also not boring? Argentina. It’s too long of a story to untangle here, but look at what Milei has done. He’s cut budget deficits and returned them to a surplus.

Inflation has come down from nearly 300% y-o-y to “only” around 150%.

Growth, due to the spending cuts, has taken a hit but is expected to rebound as animal spirits have woken. That’s the power of a tight fiscal policy returning to the shores.

What has it done to local government bonds? Yields have plunged an insane amount this year. Without knowing the numbers, I’d guess this is possibly one of the best-performing bond markets this year.

The local equity market loves it. Keep in mind that this is local currency terms.

This is the same chart rebased in USD. Still, that’s quite a respectable performance.

Maybe we are looking into the wrong corners. Bonds behave if the government behaves. As we move into a fiscally expansive continuum, things might change, and more drastic measures will have to be taken. The future is always bright, but financial markets will never be boring. Rest assured, I will be there to untangle and make sense of it all. Thanks for being part of this journey. I am very grateful to all my readers.

As we move into year-end, things could get a bit nasty as liquidity dries up and people aim to protect some YTD gains. Unsure how things could play out, but it sure makes sense to bank some profits. Everything that made money is vulnerable. There are plenty of reversals flashing in the charts. Stay nimble, always.

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Most of you will be familiar with the models and their signals by now. If not, please study the guide I have published. I highly recommend that you go through these notes and guides if you are new to the pack. I am also working on an intra-day model.

Further below, the full book of 250+ charts covers the whole asset spectrum from equities, bonds, commodities, FX, and Crypto to give you the most inclusive view. On average, it will generally provide a good 5-10 set-ups every week. The Trial is still open, so if you are curious, why not try it out?

This is a reminder that you can now also use my models in TradingView scripts, which I made available for subscribers to use on their charts. This is not for free and incurs an additional cost. I am also in the process of making one of my intra-day models available. This will come at no additional cost to existing users, but new admissions will see a price increase. If you are interested, ping me an email with your TV username. Note that only paying subscribers will be granted access. No exceptions.

Let’s also read my friend Macro D’s recent thoughts on markets before engaging our scanning eyes across the multitude of charts that I have updated for you below.