Friday Thoughts
The "Trade after the Trade" / Central Bank Reaction Functions
The war continues. Unabated and, to some extent, with heightened escalation. What I thought would be a sense of calm prevailing ahead of important central bank meetings proved short-lived. Wednesday was a beautiful, sunny spring day in London, and the world felt peaceful. As I walked back to my office after having a coffee with a friend, the markets had suddenly turned. New bombings had begun, this time targeting natural gas fields.
Having studied shocks in this week’s edition of ATW, I have come to the conclusion that I have to assume shocks for the foreseeable future, both positive and negative ones. In addition, my analysis (see the post below) of the reaction functions of the major central banks gave me confidence that the current situation would leave them little leeway to adopt a dovish stance. This was true across the board as some front-ends came under renewed pressure this week.
Having built a resilient portfolio, I was ready for the shocks to come and for the beatings to continue. Wednesday and Thursday were instrumental in giving a glimpse of what is likely to unfold next. Gold started to roll over, and thanks to my momentum model, I took a short position. Gold’s lack of enthusiasm in both bullish and bearish market environments got me thinking. Is there a position puke coming, or is it telling us more about what to expect further down the road?
My mind kept going. Yes, there were rumours of global central banks selling gold to support their currencies, but this might or might not be true. What if Gold is trying to tell us something about the trade after the trade?
I will share more observations behind the paywall. For now, the resilience approach in portfolio construction is doing exactly what it says on the tin. We can continue playing for upside with appropriate hedges in place. Still up nearly 9% YTD.
Below, Macro D is giving his in-depth analysis of this week’s central bank meetings. There were a few. He is disentangling the RBA, BoC, BoJ, SNB, ECB, FOMC and BoE. He has been a busy man.
Let’s now dig deeper. Again, a reminder that the full chart book and dashboard will be made available over the weekend with Friday’s closing prices.
Bring on the chaos and stay nimble.
