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Macro

Rareview - The Convergence Trade and Consensus Positioning is at Risk


The primary catalyst for why the US dollar broke its multi-month sideways range is related to economic data, or a slowdown in the “convergence trade.” Put another way, yesterday, sentiment took a big step forward that the breakdown in the “synchronized global growth” narrative became official.

The flash manufacturing PMI for April, as released by Markit, saw the US ahead of the European gauge for the first time since 2015. To put that into perspective, the last time the spread was near zero, the EUR/USD cross was around ~1.10.

After five days of higher prices and the break of a 4-month rectangle, one of the strongest technical patterns, professionals are asking if US dollar strength has legs.

The view of a stronger dollar has received support technically, fundamentally, and operationally.

Technically, the Dollar-Yen (USD/JPY) through 108.00 was the first step. The key resistance levels are 109.35 and the 110.61, the 200-day moving average. However, for a more sustained USD rally, a break of EUR/USD support at 1.2150 is required.

Fundamentally, following recent central bank meetings or softer-than-expected economic data, rate hike expectations for the Bank of Canada (BoC), Bank of England (BoE), and Reserve bank of Australia (RBA) have come down. Additionally, policymakers at each respective central bank have expressed more dovish rhetoric. As a result, the ECB meeting this Thursday is expected to now delay their signal regarding tapering bond purchases to at least July, back from June.

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To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

Rareview - Soybeans - Get Up To Speed With Why They Matter


In the March 26th edition of Sight Beyond Sight, we provided supporting evidence that tariffs on soybeans would be an important escalation signal because it would be a direct imposition on farming states. Worded differently, this is how you go after President Trump’s support base.

Secondly, we wrote that China imports ~60% of soybeans traded worldwide, Brazil accounts for more than 50% of China's soybean imports, and the US accounts for ~34%. Therefore, Brazil would stand to gain the most.

Here are the next set of talking points:

  • Chinese soybean trades at 3828 CNY/MT
  • US soybean trades at 2308 CNY/MT
  • Brazil soybean trades at 2600 CNY/MT

The first key point is that China can hardly substitute it. The US price is 60% the Chinese one and the US price is 26% cheaper than the Brazilian one. (Note: that does not include transportation costs)

What is confounding to professionals is why China would target soybeans as China is import-dependent and US-dependent. Three months from now, markets will adjust, whereby the Chinese importer will bear the burden of incremental duties.

This interpretation is leading some investors to believe this is a "negotiation" tactic, not a real threat, to bring both sides to the table. Put another way, professionals continue to take a “glass half full” approach to trade protectionism.

Regarding why Brazil stands to benefit the most, US bean prices will initially decline, and Brazil will increase their prices by as much as XX%, or double-digits.

Regarding trading, here are the salient points.

Currencies: This is another positive catalyst for those looking to buy the Brazilian real (BRL) and sell the Mexican peso (MXN) who believe MXN needs to start pricing in more aggressively the June elections.

Equities: We expect pairs trading in agricultural machinery to be violent today (i.e., DE vs. CNHI, BG vs. ADM, etc.).

Commodities: Soybean futures positioning is at extreme lengths. Any long position established in the last 30-days is caught off-sides. Many believed that soybeans were the “nuclear” option and would be left alone, especially after the announcement earlier in the week that tariffs were confined to pork. The same setup exists in corn and wheat futures regarding being off-sides.

Inflation & Fed: The last price on the Bloomberg Commodity Index (BCOM) is 85.95. The 200-day moving average is 85.62, or one trade away from breaking. Remember, the +8% commodity index rise in December and January led to part of the inflationary impulse in the market. This event adds to a retracement in inflation expectations.

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

Rareview - Crude Oil- Year-End Upside Mispriced


Here is President Trump’s foreign policy team:

  • Secretary of State: Mike Pompeo (Senate needs to confirm)
  • National Security Advisor: John Bolton
  • CIA Director: Gina Haspel (Senate needs to confirm)
  • UN Ambassador: Nikki Haley

Worded differently, foreign policy is now driven by “hardliners.” Here is what Ian Bremmer had to say:

The next step is for paid forecasters to increase their probabilities for the Iran nuclear deal to be either torn up or renegotiated. Should this fail, and sanctions become part of the narrative, so does crude oil supply (~1m b/d) being removed from the market.

Above is a bar chart showing the overnight losses in industrial commodities, including the multiple standard-deviation moves. Since January, Iron Ore has lost 22%. Copper has lost 8% since February despite production capacity constraints. Add in the last two months of weak than expected global manufacturing PMI data in China and Europe and the bellwethers of global economic confidence are suggesting that demand concerns have turned into a driver of commodity prices. Worded differently, the fact that crude oil and gold are up and diverged from industrial metals argues a new geopolitical risk premium is being discounted.

In the context that crude oil supply dropped below its 5-year average this week, or went into “deficit”, an Iran-related supply-shock would be significant.

Finally, regarding lower than expected supply, we would note that others are coming around to the fact that shale oil is about capital discipline, a slower rate of growth, on-the-ground structural issues, land prices being too expensive to purchase for new drilling, etc.

Here is what Tudor, Pickering, Holt & Co., the noted research-house, had to say yesterday:

"Investors remained focused on US growth and we feel some of the more bullish supply estimates on the street (+1.5m b/d) will ultimately disappoint". The bank's view is 1.1-1.2m b/d.

Here is what the Saudi Energy Minister said yesterday: “do not assume U.S.shale production will continue at 2017 pace.” (Source: Reuters)

Conclusion: Year-end upside in the barrel is mispriced.

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

Rareview - This Made Noise Yesterday


Yesterday, UBS economist and former Undersecretary at the Treasury, Seth Carpenter, said:

"We suspect that Powell will make a shift to press conferences at each meeting, perhaps announcing the change next week".

"There is great value to doing so -- clear communication will become more important as the Fed attempts a "soft landing".

The potential change to having a press conference meeting would increase the risk of “every meeting is live.”

The result is that the interest rate market will price a higher probability of interest rate hikes earlier in the curve, and flatten longer-dated spreads as the path to get to the terminal rate could happen at a faster pace.

For example, the amount of potential interest rate hikes by June or September of this year would rise to 50% at each meeting (or 100% per quarter), but the potential interest rate hikes beyond September would decline. Said differently, the EDM8/EDZ8/EDM9 butterfly would rise as the fore leg steepened and the aft leg flattened.

This outcome is not terribly different from what is priced into the market, with the potential exception of the fourth quarter of this year. The new mechanism would be that a hike could occur at any meeting, not just quarterly meetings, and probabilities would need to be redistributed in Fed funds calendar spreads accordingly (i.e., 12.5 bps per spread).

Finally, to be frank, Mr. Carpenter’s commentary highlights a “soft landing” by the Fed – i.e. not hawkish – so we do not see the reason why his commentary should be instantly viewed as a hawkish event for interest rates when it comes to raising the terminal rate, or raising the dots, etc.

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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Macro

Italy's Elections Are a Non-Event


While the election result is negative on the margin and this was another step forward for European populists, this is not new information for the market.

Heading into the weekend Election, the option straddle for this week on the Italian FTSE MIB Index priced in a 4-5% move. The index is down ~1% today, or significantly less than what market-makers were looking for.

Also, the euro exchange rate (EUR/USD) has been up or down 0.10% relative to its 1-day Sigma of 0.45%.

At best, you can point to higher yields in BTP’s (3-6 bps), or a minor risk premium being discounted on long-term concerns.

All this means is that the linkage between Italian politics and either the euro or local risk assets is very weak.

Worded differently, the ECB reaction function has not changed, and until the ECB walks away from QE this summer, it is hard to see why Italian elections are on the front-page of a newspaper after today.

 

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


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The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

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