Friday Paper Round
Happy Friday my fellow financial travellers. As we turn into June sharper focus is given to the overall liquidity condition with TGA drawdown in play.
It should be pretty much consensus by now that the TGA (Treasury General Account) build-up, TLTRO repayments and QT will reduce liquidity substantially over the coming few months. TGA alone, according to GS research, should reduce reserves by the tune of 7-8%, while June ECB TLTRO repayments should reduce equivalent reserves at the ECB by 12%. TGA rebuild impact also hinges on how this is funded. It is assumed that roughly half of the rebuild is funded via RRP.
This would reduce G4 overall liquidity by 5% over June/July with the previous tightening of such magnitude (6.6% in April 2022) resulting in NQ and S&P dropping 9 and 8% respectively with the Dollar strengthening around 3% over the same time frame.
Here is a handy chart showing the historic G4 liquidity build.
GS also summarised the previous liquidity withdrawal market impacts in the below table. I leave this without additional comments as it should be self-explanatory.
As this liquidity withdrawal is rather well-telegraphed, markets, however, are exhibiting none of the nervousness you would expect at this juncture.
VIX, for example, doesn’t show any indication of worry as of yet.
SKEW, meanwhile, is picking up, indicating a higher perceived tail-risk probability in the making. This, however, has historically been a relatively bad indicator of forward-looking returns.
Now, let’s have a look at what the model is telling us about possible setups elsewhere.
As mentioned, I am in the process of progressing the model into a portfolio which will be updated regularly. This will allow you to track the performance of the signals. Every little helps.
ES, the model has bravely taken another long this week. Taking the recent observations over the past few weeks together, we had an overbought signal at 4225 which then had a pullback tagging the 50-day average just to bounce and pass to new recent highs.
NQ, similarly to SPX the model highlighted overbought conditions a week or so ago but didn’t take profit on the long. It also added another long this week while we have another overbought condition signal flagging. Caution is warranted.
Russell is also feeling some love. The model, while choppy recently, triggered another buy signal today. Are we breaking out of the recent lull? Possibly but I wouldn’t hold my breath.
DAX, the model triggered also a long today after it nicely struck out its long at recent highs.
CAC-40, while the model is trading this short, there are oversold conditions currently in play which could trigger a reversal, so keep an eye out on this puppy.
Nikkei, strong action post the oversold condition. Needless to say that the model is long.
Hang-Seng, while the model is short surely has been flagging the oversold features over the past few trading sessions which have now finally resulted in a strong rebound. Also, note that TD counts were flashing at the same time. TDs while useful are always just a supporting tool in my framework.
2-year US futures, the reversal signal hit nicely but as often stated this does not necessarily negate the underlying trend. Payrolls have smashed that rebound today so let’s see whether the previous trend resumes.
30-year ultra US bond futures, nice 4-point rally since the reversal has been flashing. The next few trading sessions will show the way in terms of the near-term trend while the model is still short.
US 5-30s curve is holding the 200-day average for now. The model wants this to flatten further.
BTP’S have found new love with the overall risk bounce. The model has triggered a new long so let’s see whether we can break out of the recent very long-lasting range.
Gold, has retraced to the level where the model started shorting a few weeks back. A similar pattern is emerging as 20 & 50-day averages are converging which last time led to another leap higher.
Crude, the model is still short with a strong bounce in play over the past 2 sessions following a quick test of some key levels.
BTC/USD, sorry coiners but the model doesn’t like Bitcoin here, in fact, it wants it lower. After it closed the recent short it has now re-entered the short. Is this the only market where receding liquidity conditions are being felt?
EUR/USD, while the model is still short it has shown good support on the 200-day average while oversold conditions were flagging.
AUD/JPY, ouch model, closed the AUD/JPY last time I commented and then bang. Let’s see how long until another signal gets triggered.
As outlined above, Paper is working on getting a bunch of signals into a portfolio context so bear with me. I am also exploring systematising the signals which are daily into an alert. That should incorporate a whole spectrum of assets. Excited? I am.
Stay tuned!
Your,
Paper Alfa
Music
As a tribute to today’s new Foo Fighter album release, below is one of their best but yet somewhat underappreciated songs in my opinion.
The lyrics are also worth a listen.
“One of these days, your heart will stop and play its' final beat
But it's alright
Easy for you to say
Your heart has never been broken
Your pride has never been stolen
Not yet, not yet”
good deal-owe you 1 for Dust Bowl
Hi Paper, been following your work for awhile now, Will u be doing a post on the indicators you're using and how to set them up on Tradingview? if it's proprietary maybe charge a small fee? Thanks!