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Macro

Rareview Macro - Gold/Silver Ratio Says Something Important is Happening


Like the 200-day moving average (200-DMAVG), we find long-term Linear Regression Channels can be a reliable technical indicator.

For those not familiar with Linear Regression Lines, it is a line that best fits all the data points of interest and consists of three parts:

  1. Upper Channel Line: A line that runs parallel to the Linear Regression Line and is usually one to two standard deviations above the Linear Regression Line.
  1. Lower Channel Line: This line runs parallel to the Linear Regression Line and is usually one to two standard deviations below the Linear Regression Line.
  1. The Upper and Lower Channel Lines contain between themselves either 68% of all prices (if 1 standard deviation is used) or 95% of all prices (if 2 standard deviations are used).

When prices break outside of the channels, it tells you either that there are buy or sell opportunities or else that the prior trend could be ending.

When long-term ratios, as defined by a "monthly" period, are beyond the 2 standard deviations (2-SD) threshold we believe an opportunity presents itself, and the past trend is ending.

Over the years, we track the Gold/Silver ratio for the predictive signal to sell gold and buy silver.

The key observation is that the long-term trend tends to reverse around historic economic or geopolitical events.

For example, in the last case, crude oil bottomed out in 2016 when the XAU/XAG ratio was trading at the 2-standard deviation line.

Here is an updated “monthly” chart going back 30 years.

It is too early to label today’s extreme, but we guess that it will fall into one of these categories: bond bear market, unwind of QE, protectionism, populism, North Korea peace deal, Presidential impeachment, 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.

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 Macro - Fed Closer To Being Done


We continue to track anecdotes that historically illustrate that the interest rate market is beginning to formally price in the “end of cycle” dynamics. For example, the forward interest rate curves are already at zero or inverted. Today, we add another one for those keeping score.

What occurs towards the very end of a tightening cycle is to discount only the closest meetings as high probabilities of raising interest rates, but discount anything beyond what is perceived to be “neutral.”

Over the last week, the unconditional probability for the June 2019 meeting has dropped by 27% (i.e., 49 – 36 / 49). As you can see, the bars on the May and June 2019 FOMC meetings have reversed, whereas the bars between now and March 2019 have increased in probabilities.

This observation argues that the interest rate market thinks that the Fed is less able to get to 2.75% Fed Funds rate (i.e., four more hikes) or beyond it.

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 Macro - What Is Fixed Income Saying?


Here is the market’s decision tree regarding the current path of higher interest rate policy for the remainder of 2018.

 

This decision tree shows that Fed Chair Powell, former Vice-Chair Stan Fischer, and the market are in sync – that is, they share the following script:

The Go June / Maybe Once / Maybe Twice by December Scenario

So, if the scenario is – go June, and even odds (i.e., 49% or same as 50/50) of going once or twice more by December – where do you think December Eurodollar future (EDZ8) should be trading currently?

We will give you a hint – the EDZ8 futures contract price is 97.35, or 2.65%.

In the blue box to the right of the decision tree, the “Go Sep + Maybe Dec” price shows 97.34. Worded differently, the market is priced perfectly for this outcome.

Here is all that is left:

  1. If the Fed does not hike in December, the Fed will have raised interest rates three-times in 2018, or what their “dot plot” shows.
  1. If you do not have a strong view whether the Fed raises interest rates two or three more times this year, neither does the current market pricing, which means there is no trade in fixed income.
  1. If you do have a strong view, there is the potential to make ~13 bps in either direction.
  1. If you think the Fed skips the September meeting and the fixed income market prices the Fed as done forever, we would point you towards the Eurodollar Midcurve strategy in the Tracking Portfolio that would profit handsomely if the Fed skipped September. It can be currently entered for a credit.

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 - 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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Disclosures

We appreciate your feedback. If you have any questions or comments about IB Traders' Insight please contact ibti@ibkr.com.

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.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

Any information provided by third parties has been obtained from sources believed to be reliable and accurate; however, IB does not warrant its accuracy and assumes no responsibility for any errors or omissions.

Any information posted by employees of IB or an affiliated company is based upon information that is believed to be reliable. However, neither IB nor its affiliates warrant its completeness, accuracy or adequacy. IB does not make any representations or warranties concerning the past or future performance of any financial instrument. By posting material on IB Traders' Insight, IB is not representing that any particular financial instrument or trading strategy is appropriate for you.