Friday Chart Book

December 13, 2024

The art of central banking is really in the weeds of doing the right thing at the right time. It’s an impossible task. Good were the old times when you could just raise or cut interest rates without pre-determined dates or any rule of forward guidance. All this current over communication was a tool meant for the post-GFC era to reduce volatility and preserve stability through stable forward rates. This was all well and good when rates were at zero, as our monetary leaders wanted to guide inflation expectations.

I would argue this is not necessary anymore. We are not at zero, as the pandemic has catapulted us back to the new normal. Which one is normal, you ask? That is the billion-dollar question, my friends. Merely a few years ago, a 25-cut or hike came with much fanfare and tons of forward guidance to not upset markets. Since then, we have hiked multiple hundreds of basis points without leaving much of a mark.

Forward guidance has now become the central banker’s biggest enemy. They get themselves into a space where it’s hard to remain flexible as it gets harder to navigate the monetary seas. Take the ECB, for example, where it’s pretty obvious how economically challenged the Eurozone is, with Tarif implications still to play out. The macro framework is pretty much set. As such, financial markets started speculation of not only 25 but 50 bps steps. After all, if the SNB can cut by 50 bps from 1%, why couldn’t the mighty ECB? Lagarde, however, communicated pretty clearly that they were in no rush. I hate to say it, but I can’t blame her.

5y5y inflation forwards are just above 2%, the only ECB-mandated objective in their book.

Despite cutting, the European bond market got walloped as some of the faster pace expectations were killed. The German 5-year yield in the chart below is now back above the 2% mark.

Any washout provides opportunities. While markets now price the ECB to gradually return to 2% neutral over time, that rate seems to be too high. It is likely that further economic headwinds will reach European shores next year. There is asymmetry at that current pricing as it is the least likely to be realised.

The EUR is also at an interesting juncture where you could argue a lot of bad news is priced in. Could we go to parity amid tariffs and worse economic news? Sure thing, but the recent market reaction shows quite a bit of stickiness around the 1.05 mark.

A handy Bloomberg page is OMST, which summarises the reported option expires in certain FX crosses. It still shows some sizeable OTM puts being struck by year's end. While these are only reported positions, the larger OTC FX options market probably has more exotic barriers and digital options in place. That was one of the reasons for the sharp EURUSD move a few weeks ago as we approached those barriers.

We are now in silly Christmas trading with many cross-currents and noise appearing in day-to-day trading. Avoid getting sucked into the noise and try to look at great risk-reward setups as we approach the New Year. Stay nimble.

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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.