The Week Ahead (1st November 2021)

OK... deep breath Luke... it's a massive week ahead. 

This week we're going to have the RBA (sorry no preview), Fed (preview Tuesday), BOE (preview Wednesday), Payrolls (Preview Thursday), Norges Bank (maybe a preview if I'm feeling generous) and a raft of economic data. Yes... it's going to be a messy week ahead. 

All eyes on the Fed this week 

For markets though, expect the first couple of days to be fairly sleepy in the run up to the Fed. I would be very surprised to see major market moves on the back of any data etc given the importance of the Fed decision. The question is going to be... is the Fed announcing a taper, and if so, what is the likely timeline? 

The first part of the question, to me at least, should be a definitive yes. Sure, there is some hesitation given the miss on payrolls in the October report, but Powell himself said at the last minute that he didn't need to see a blowout jobs report in order to mark the start of the taper. The second part of the question is less clear. I would anticipate a tapering of 10bn to ABS and 5bn to MBS per month for the next 8 months. This way both parts of the program will wind down simultaneously. 

However, it is of course possible the Fed looks at the mortgage market, is comfortable with current rates, and decides to end that part of the purchase program more quickly. 

Lots of attention will also be paid to dissenters and those who think a faster pace of tightening is deserved. Money markets are currently pointing toward a tapering by mid 2022 and then hikes starting almost immediately after the taper. 2 full hikes are basically priced in now for 2022. I would not be surprised at all to see a big Powell pushback on this given their current guidance on AIT over the medium-term. 

But anyway, that's enough on the Fed for now... I will post a full primer on Tuesday evening / Wednesday morning ready for the decision on WEDNESDAY AT 6PM. Note the time change due to the UK clock shift. 

Earnings I'll be watching: 

In the week ahead the earnings season really continues for those names which are not financials or tech. Semiconductor manufacturer NXP reports Monday, along with Ryanair. 

Tuesday: We see a range of stocks reporting from Ralph Lauren to Caesars Entertainment and BP to Pfizer. 

Wednesday: Qualcomm, CVS and Hyatt. 

Thursday: Moderna, Toyata, Credit Suisse, Barrick Gold

Friday: Goodyear tires, Embraer. 

SATURDAY: Berkshire Hathaway

Payrolls Friday: 

Obviously this will be watched closely, and could be a queue for the Fed to adjust the pace of the taper at the next meeting. It's a bit early for a consensus number worth anything for the report... but I expect to see around 450k - this would be commensurate with additional Christmas hiring. 

Other stuff:

COP26 is going to be a focus no doubt for the ESG watchers... BoJo warning today that the whole thing is close to failure with lack of agreement everywhere. 

I'll be closely monitoring Treasury yields this week. Expect interesting action as the Fed draws and passes, I wouldn't be surprised to see a bit of steepening in the curve as Powell pushes back against money market action while inflation expectations continue to build. 

Non-Sequitur: 

I watched the Wizards v the Celtics over the weekend and the game went to double overtime as neither NBA side could pull out a lead at the end of normal play / the first overtime. 

This made me wonder... what's the longest an NBA game has ever gone on for? 

The longest NBA game occurred in 1951, between the Olympians and the Royals. Indianapolis beat Rocherster 75-73 after 6 overtimes!!

Geoff Burke for USA Today Sports 

The October Reading List

 It's halloween, and another month has flown by, so I present to you the October Reading List. 

Unfortunately, for over a solid week I was out with flu so didn't really have much energy to do a lot of reading (especially of some of the more academic works I'd hoped to read this month), so there have been a few swapsies... and a little more fiction. 

As always, please do reach out with your recommendations and favourites. Always happy to have a chat and read some new stuff! 

My Favourite Book on the Reading Lists so Far: 

Bold claim I know (given there have been around 30+ books on my reading lists this year so far), but Kahneman's Thinking Fast and Slow is an absolute must read. 

Thinking Fast and Slow - Daniel Kahneman

I think this book is critical reading for everyone, regardless of discipline. It certainly helps paint a world where you can slow down the "system 1" (reactionary) part of your brain and use your "system 2" (thinking) part of your brain. 

To illustrate why this is so important... here's a simple problem. 

The price of Fish & Chips is £1.10. The Fish cost £1 more than the Chips. How much do the Chips Cost? 

I'll give you a few lines to think...

The rapid part of the brain quickly answers £0.10. This seems right, £1 + £0.10 = £1.10 right. But on second reading, the question says it costs £1 more. This makes £0.10 incorrect. Obviously, now, the answer is £0.05. 

But the book does not stick to simple puzzles like that one. And Kahneman has been deeply involved within shaping modern behavioural finance and challenging issues like why people are loss averse in fair gambles. 

For example, (queue: The St Petersburg Paradox) consider a game where you flip a coin and if it comes up heads you double your money and can flip the coin again, and if it comes up tails you lose. 

You should be prepared to pay an infinite amount of money to participate in this game according to economic theory. Because there is a probability which says you could win infinity money at a small probability. Standard economic theory says consumers should pay any amount less than infinity to play the game. Clearly, this is BS, and you'd be reluctant to pay more than few £'s in reality. 

Lots of paradoxes like this are presented in the game, and I was quite happy to find it actually is a significant part of one of my modules this semester, but this is the book of the year so far, and I consider it critical reading for everyone to better understand the way the brain works. 

Dominion: The Making of the Western Mind

This was the book I started reading just before I was hit hard by illness, so I read with quite a gap between the first half and second half. 

I quite enjoyed this book since it takes a massive look at religion and shifting religious views across the millennia. It's a little bit of a tricky read for someone like me at the start where many of the characters (be they Greeks, Romans, or Anglo Saxons) are quite unfamiliar. If I were to criticise, I would also say the author places an extreme emphasis on these periods. My issue with history like this is that it almost suggests that the lay person on the street was seriously considering all different kinds of philosophical questions and the evolution of the western mind in civilisations occurred concurrently. 

That said, the second part of the book, once we get past the invention of the printing press, is much more coherent and highly enjoyable. Tom Holland touches on a wide variety of the various social and political movements as well which all played into the modern psyche of the West. 

The scope of this book is phenomenal, and it covers most of known history, so if you're looking for something broad, this is definitely the book for you. 

What I like most about this book though is that it is a little bit provocative. Most modern scholars have thrown out the view that we owe all our mindset to the traditional "Christian values" but this book really does come back to the notion that most of our ideals are based upon these values. I'm not sure I agree with this broad take, but there's certainly something there. 

The spy who came in from the cold - John Le Carré

I'm extremely long overdue in reading some of the great spy novelist's works. Especially given how Le Carré passed away at the end of last year. So I thought, why not start with the best known work. 

This might be one of the most gripping novels I've ever read. It's short, to the point, and deeply exciting. I'm not going to give any spoilers, but the tale of Alex Leamas is gripping and poignant. What I think is especially great about the novel is the way it blurs the lines of good and evil. The political commentary on the likeness in method between the Western spy forces and those of the East is quite apt. 

For a quick read (I got through it in 3 hours) this is a fantastic novel. I recommend it to everyone. 

Apologies again that there are only three books this month. All being well we'll be back to five for the November Reading List. 

Next month, I'll be returning to some of the books I was supposed to be reading this month! I'll be reading Dan Jones' new hardback on medieval powers and thrones, William Dalrymple on the East India Company, a bit more fiction with The Passenger by Ulrich Alexander Boschwitz, On Tyranny by Timothy Snyder, and something else which I haven't quite decided/bought yet :) 

The Mega Cap Tech Earnings Recap (or do I mean MetaCap...)

We're in the middle of Q3 earnings season and we've seen a few of the big names out in the last week particularly from the mega cap tech space. 

Yes, I know it's Saturday night and I should have much better things to be doing, but the clocks change in the UK tonight so you might say I've been burning the 11pm oil. 

(Yes, I've waited 6 months to make that joke). 

And I know I don't usually write on equities but I thought it was worth a bit of a dive into the Apple and Amazon earnings since they were the big misses and at least for Apple, a lot of this was down to supply chain issues. 

Of course, we also have the big news that in terms of market cap, MSFT is now the king once more, having overtaken Apple following the Apple earnings release. 

Source: CNBC

It's been a battle for the ages... but Apple's lost the crown. 

Let's start with the good news - Microsoft: 

Well when we look at the breakdown, basically every sector of the business has reported double digit revenue growth - LinkedIn and Azure Cloud grew more than 40% YoY. This is absolutely insane growth. 

Growth for the entire company came in at a stinking 22% YoY.

• EPS at $2.27, versus $2.07 expected by analysts 
• Revenue at $45bn vs $44bn expected. 
• Total revenue climbed 22% YoY
• Reported $20.5bn in net income - up 48%. 
• Guidance for next quarter at $50-51bn, above estimates for $58bn. 

Basically, this was a blowout report. The stock climbed on the news dramatically, and pushed Microsoft to new all-time highs. 

In terms of owning the shares, I don't have a position, but these earnings were beautiful and I also find it interesting how successful Azure has been... if this an AMZN killer? 

And a little more good news with Alphabet: 

Google also smashed its way to another record high with Alphabet shares jumping almost 5% after earnings. Google reported a 43% increase in advertising revenues to $53.1bn. 

EPS of $27.99 smashed analyst expectations for $23.48 too. It's no surprise then that the shares surged, and it seems the company wasn't too badly affected by some of the changes to privacy brought in by Apple (unlike another big tech company... Facebook (or do I say Meta now??????). 

There was a warning though from Google, who say they now expect growth rates to dramatically slow given most of the Covid impact has now been accounted for. We'll also have to see whether any supply chain issues start to take a toll. What's the point of advertising if you don't have any stock to sell??

Onto the bad news - AMZN: 

Ok I'll confess from the outset... I'm a little bit of an AMZN hater. Don't get me wrong... I'm not like a mad Bezos hater, I just don't like the stock. It's expensive, the company struggles to generate actual profits without the juggernaut that is AWS, and I think it will bear a lot of the brunt of regulatory scrutiny in the next decade. 

`Source: Refinitiv Datastream

As the chart above shows, the stock took a pretty aggressive hit right after earnings... sure the bullishness of Friday helped it claw a bit back, but still a way from its highs. 

What I also find interesting about Amazon this year is the lacklustre YTD performance - the S&P500 is up a cushy 19%, but AMZN is up a mere 3.55%. I'd be pretty disappointed if I was an AMZN investor this year. 

• Earnings: $6.12 versus $8.92 expected. 
• Revenue: $110.81bn versus $111.6bn expected. 
• Two nasty misses there in what has generally been a beating market. 

But the real shocker was guidance for the Q4: 

• Analysts had expected $140bn+ and AMZN only guided for 130bn-140bn. 

The other issues was costs. We all know about supply chain disruptions this year, but the cost increases have been pretty dramatic for Amazon (which obviously uses a lot of delivery drivers who are in short supply, and also ships a lot of goods so is vulnerable to fuel costs... shipping etc), and the CEO said "several billion dollars" of extra costs could be incurred this year. OUCH. 

Just in the US, Amazon has had to make massive hiring, at higher wages, with better benefits. Obviously this will increase costs.

I'm more than happy to disclose my position in this stock - it's zero shares. And I think you'd have to be mad to buy for the next year or so. Supply chain issues are just too great. 

The other interesting thing from Amazon was that for the first time in its history, Amazon services revenue (AWS) exceeded its goods revenue. This is insane and a massive compliment to the entrenchment of AWS. But what is also interesting is that Amazon would have made a loss without the margin power of AWS in the latest quarter. 

Supply chain issues at AAPL: 

No-one who has read my blogs / known me for a while will be surprised to hear that, as always, I'm bullish Apple. These issues relating to disruption in my opinion are a hiccup but not a catastrophe for Apple. AAPL is a stock which you should just buy... and hold... ad infinitum. 

• Earnings Highlights: 
• EPS: $1.24 in-line 
• Revenue: $83.4bn versus $84.9bn expected 
• iPhone Revenue (note this will not yet properly include 13) $39bn versus $41.5bn 
• Services Revenue: $18.3bn versus $17.6bn. 

Now for me, the services revenue continues to be critical. Obviously in an era of chip shortages we want to see growing revenues elsewhere, and that is what services continues to deliver. We also know that margins are absolutely massive (possibly around 70% for services as a whole). 

The iPhone miss was disappointing, but it's not the end of the world for now. 

The question is... if shortages continue and iPhone delivery times get pushed further and further back, does this mean people delay upgrades to iPhone 14? 

For me, the answer to this question is no. At least in the initial period. The expectation from Tim Cook is that shortages will cost Apple about USD6bn in revenue total - this is obviously bad, but it's not the end of the world. 

The good news is that Cook expects "solid" YoY revenue growth in December despite the issues. This means we could continue to see the massive revenue growth which Apple has delivered in recent quarters. 

Basically, I still like AAPL as a stock to own, and it is better positioned than rivals like Samsung to weather chip shortages given its own dominant position in manufacturing its own chips. This means it can dictate order sizes to suppliers and should be first in line for chips when they become available. 

Facebook (Meta): 

I wouldn't own FB shares in a million years given all the regulatory scrutiny. 

But, for completeness... it's here in this review. Basically, EPS was a touch better than expected, revenue misses, and daily active users was in-line with expectations. 

We've also obviously had a total rebrand for the company, which is nothing but an attempt to evade regulatory scrutiny and confuse congressional representatives even more. 

Given the EPS beat, the stock rose in after-hours, but was absolutely hammered in Tuesday trading. 

That came despite a USD50bn share buyback so it was probably the revenue miss which raised eyebrows, as well as circling reports that the company was really struggling to retain interest on the key Facebook platform. 

The internet remains undefeated.

NET NET: 

In this busy week of tech earnings, the message for me is that those most exposed to supply chain issues should be taken with a pinch of salt - notably AMZN, but also to some degree AAPL. My view at the moment is also that we could continue to see a push higher in US Treasury yields into year-end - particularly around the 10y point of the curve. If this is the case, this could add pressure to tech, and so general caution is warranted. 

MSFT though was fantastic, and I'd be looking to add here on any dips. 

CONTACT: 

If you have anything to add on the earnings story, please do not hesitate to reach me via the link at the top of the page. I'd love to discuss big tech and have a bit of a debate on the future of these given regulatory scrutiny etc. 

ECB Primer - October Meeting

 So it's the ECB meeting tomorrow and while inflation is running hot in the Eurozone, it seems likely we are going to have some significant pushback from the ECB (especially Lagarde) as they are determined to try and continue to support the recovery. 

To start with, I think it's interesting to just have a quick look at EURUSD performance over the last few days. The chart below shows EURUSD since the start of the month and you can see we are basically in the middle of those recent ranges - hovering around the 1.16 mark with no real decisive moves in either direction. 

This certainly seems like the market is waiting for something, and that thing could well be the ECB meeting tomorrow. 

What does the market expect? 

Well inflation continues to be the topic on everybody's mind, so if the ECB is to maintain its credibility it will at least need to talk about what this higher level of inflation means for the Central Bank. I have flagged a couple of times a chart from John Authers in a BBG newsletter (below) which shows how inflation in Germany at least is presenting a real challenge for the ECB. 

But in reality, despite the inflation conundrum, we all know the ECB is going to do nothing except keep its foot hard down on the gas pedal. Last month, Lagarde said the ECB is "pretty far away" from raising rates and it seems likely that this narrative will persist (the cynical among us probably agree that the ECB will never hike rates again...) 

But perhaps this overlooks the fact that Eurozone inflation is expected to come in at a 13-year high of 3.7% in October. Wowza. 

How does this all intermingle with the new framework? 

You'll remember that a couple of months ago the ECB announced a new policy framework where it would now target 2% inflation more symmetrically than previously. To me, the dovish shift means that there will be even higher criteria to be met before the ECB even considers talking about raising rates. Likewise, with the still "transitory" nature of inflation largely concerning global supply chains and energy costs, it seems to me that the ECB will be able to look through this inflation easily since it is powerless to do anything about it. 

What will be more interesting will be to see if there are any signs of dissent among council members. Several members at last month's meeting started to become a bit more hawkish and began to expect higher inflation than what ECB forecasts officially suggest. The question is, does this minority start to develop into a more hawkish group. It is easy to imagine a situation when some members (especially those inflation-wary Germans...) start to adopt a more hawkish stance. 

In fact, looking over the last few months there has been a clear trend in the direction of Schatz (2y German bonds) yields... higher. In my view, the market here might just be getting a little ahead of itself on the prospect for any kind of ECB tapering. 

In doing my due diligence for the meeting tomorrow, I came across a nice piece from ING. 

A graphic I particularly want to flag is the one below as it outlines a few nice scenarios which I broadly agree with. The base case is that Lagarde will acknowledge, and only acknowledge higher inflation with a view that it will fall later on in 2022. The risks to the economy remain, and there will be no change to any of the policy tools. 

My one main concern about the base case, and perhaps only disagreement with the graph, is that the EUR has become markedly weaker in recent months, so this could perhaps further play into the inflation story. Nonetheless, I doubt Lagarde will make explicit comment on the currency tomorrow anyway. 

The only slight disagreement I have is on the hawkish side - where I think these levels are too bullish for the commentary likely. If we get the "hawkish talk" I'd expect a 1.168 level, and for the "very hawkish" I'd see a 1.175. 

Either way, I agree with the general thesis the risk for EURUSD is to the downside, but I maintain my general view for the medium term for EUR to trade between a 1.15 and 1.17 for the rest of the year. 

As always, hit me up with any questions / ideas / trades. 

I won't be in EURUSD before the meeting, but I might put a trade on after. I'll keep the email distribution list members updated first - so if you'd like to be added... please use the form up on the top right. 

Good luck all. 

GBPUSD - Hawkish Harping Not Credible

In recent weeks, there has been a dramatic shift in the narrative at one central bank... yes it's our very own Bank of England. They've moved pretty quickly from an "Inflation is transitory" to a much more sinister we're gonna hike and hike fast. 

In fact, money markets have now priced in a BoE rate of 1% by the end of 2022 - for reference that's way higher than the pre-Covid levels and the highest since the financial crisis. 

GBP 1y swap rates have moved fast!

Source: Refinitiv

But for me, the question is, why? Sure, the BoE has taken a bit more of a hawkish stance but I think we have to be real here - the BoE is not going to suffocate the economy. Inflation has been elevated but there is still room for them to say it is transitory. 

When we actually break down where the inflation is coming from, most of it is in energy prices and global supply chain issues - and if the BoE believes a hike would have the power to bring these down, it is being desperately naive. 

Rather, I suspect that we will see one hike in the near-term to take the rate back to a more post-financial crisis "normal" of 0.25%, and from there we might get another hike by end-22 to 0.5%. 

So what's the trade? 

Well looking at GBP over the last few weeks, we've moved pretty far and very fast. 

Source: Refinitiv

And to me, this move is overblown. I suspect the rates situation will calm down as money market traders regain their heads. It would, in my view, be a major mistake for the BoE to try and curtail inflation over which it has no control. So in reality, I expect these money market rates to come back down. In turn, this will lead to a weaker GBP. I'd like to think this would happen over the next 2 months or so, but it could be a longer waiting game - particularly if CPI numbers come in hot over the next couple of readings. 

Nonetheless, GBP looks pretty exhausted at these levels now (as seen in the chart below), and we have a couple of nice technicals marked up. The double-top in GBP looks pretty bearish, then we also have some nice Fibonacci levels to target which are labelled in the chart. Please email me if you would like the charts in a much bigger and clearer form. 

Source: FXPro MT5

TRADE IDEA: SELL GBP-USD at 1.377, TP at 1.368 and 1.363 in extension. SL at 1.385. 

Regular readers will know I don't usually like putting on an outright USD trade, but this time I think it's justified since GBP just looks like it's sat too high. Likewise, with an increasingly hawkish Fed I think the USD side of the equation looks poised for more strength rather than weakness, so on balance this is the trade to go for. 

 

Sell CHF-JPY - Reversal ahead?

 It's been a pretty monstrous few weeks for CHFJPY with the pair climbing aggressively higher. This is hardly surprising given how we have seen both a significant strengthening of the CHF (for reasons which still baffle me slightly) and a rise in US yield... which has consequently led the JPY to sell-off. 

Looking at the daily chart above, the relentless rise is really put into perspective, and with the RSI now looking heavily overbought I think it's worth a short. 

SELL CHF-JPY: TP at 122.6, SL at 124.6. ENTRY: Current market (123.6). 

I know a lot of my readers don't like 1:1 Win/Loss but in this case I think it's worth it since a lot of factors are now pointing to the downside in my view. The 10y US yield has moved pretty rapidly and a further climb higher in the immediate term seems unlikely to me - if anything a pullback to the 1.50 mark might seem more likely in the very near-term. 

Then, we have the CHF, which as I have outlined numerous times is reaching points where the SNB is becoming increasingly unhappy with the strength of the currency - particularly against EUR. SNB interventions have been growing in the past months ( Chart below). 

So with my slightly bullish bias on JPY, and very bearish bias on CHF, it seems sensible to short CHFJPY overall. 

Happy Trading All. 

The Week Ahead

 Hi Everyone. I'm pleased to report... I'm back! Last week I was felled by a pretty nasty bout of flu so spent most of the week trying to recover a bit in bed - many thanks to those of you who sent out search parties looking for me. 

The good news is, I'm back this week, and it doesn't stop there - since I now also have access to a Refinitiv account, so I should be able to also start being a bit quicker with getting you news / sending over some nice charts. 

I'm still trying to get back into the swing of things though, so will keep this week ahead very brief. 

Basically, the main thing I will be watching is the continued expansion of the inflation / taper narrative. Looking to Canada, we have the BoC decision on Wednesday and they have generally been reasonably hawkish so this will be one to keep an eye on. On Thursday, we have the ECB monetary policy decision as well. This will definitely be interesting to see if we get any more guidance on what the ECB will plan to do with its pandemic purchase programme (PEPP) after the expiry of the current envelope due in March. 

It is possible we start to see a bit more of a roll into the Asset Purchase Programme, but more details will be awaited. Something else I thought worth flagging was the chart below from John Authers - it's been a long time since the ECB had to deal with German inflation running above 4%... could this feature into the narrative? 

I will, of course, strive to get you an ECB primer before EOD on Wednesday ready for the Thursday rate announcement at 1245 London. 

Also worth a watch will be US GDP data coming Thursday. This could be interesting just to see how much of an impact delta might have had on the numbers. From my perspective, earnings season has seemed pretty solid so far, so if there's any read across from that, I wouldn't be surprised to see some decent numbers for GDP. Then we get the commensurate data for Europe Friday. 

As promised, I've kept this brief. More to follow tomorrow. Trade idea wise, my AUDUSD longs took profit while I was ill, so the only one I'm left in is long EURCHF, and I still think this is my high conviction trade... despite the way the market keeps moving against me. 

Good luck and happy trading. 

CPI - A touch higher than expected... and other news!

The data:

headline beat at 5.4 v/s 5.3 expected, 5.3 last month

core in-line, 4.0 v/s 4.0 expected, 4.0 last month

Interesting to see these CPI numbers a touch higher than expected - looks like the USD has taken a bit of a lift here on the back of these numbers.

Interesting to see MoM numbers at 0.4% for standard CPI against estimates of 0.3%. Core was in-line.

Basically, this doesn’t change anything. The Fed already sees the inflation objective as met so the taper is still coming most likely - we had ok jobs so I don’t think this dramatically changes anything.

Also interesting to see some of the previously “transitory” components like used car prices trending down (used car prices down 0.7%)

Not really worth putting any trades on here on the back of this... think this is a status quo number and well within expectations.

JPM Earnings:

This was much more interesting to me... and it was relatively in-line but Investment Banking Revenues beat expectations pretty dramatically.

What was also interesting to see was a significant increase in hiring. This means that clearly we have a bull market on for labour and wage increases could well continue. That said, this is the typical cycle with banks hiring in the boom and making redundancies in the bust.

Also a significant reduction in provision for losses with over 2 billion released.

All-in-all, these results are great and JPM is doing ok in the pre-market, up 0.5% or so. It’s a great company and think this is good for the stock. We’re seeing some moves in yield curves and hopefully we’ll start to see even higher bank profitability in quarters to come.

(Disclaimer: I am quite long the stock :) ).

Amazon in trouble?

Saw a report about an hour ago which had some bad news for Amazon on the regulatory front as it showed it basically copied competitors products and boosted its own products in search results.

I’m not sure who’s surprised about this, and the market doesn’t seem too bothered, but certainly doesn’t help the big regulatory picture for their mega cap tech space.

Anyway that’s all for now. Any questions let me know.

CPI today!

Good morning everyone. Today is US CPI data and it’ll be the event everyone is looking for. 

I was going to write a more formal primer on the blog for this but never found the time and it’s not going to be as important for policy as you might think… here’s why.

Basically the Fed is on track to taper regardless of todays number. If the number is big, they’ll taper anyway, if the number is small, they probably breathe a sigh of relief and taper anyway. 

The main implications will likely come from the devils in the detail. If there is evidence of more persistent inflationary pressures, I would have a lot more concern about when we will see the first rate hikes. This could be pretty bad for equities. 

If, however, most of the pressure is still coming from transitory factors, like natural gas or cad prices, then there is likely to be less pressure on equities.

What’s expected?

Well for the standard CPI measure it’s expected to be in-line with last month at 5.3% YoY. 

Core is a similar story: in-line with august at 4%

Core is the measure which the fed cares about, and obviously the MoM are also important too.

What’s the trade?

It’s the USD all the way for me. If the number beats (on a wide number of metrics) get long, if we see a big miss, get short. 

What else is going on? 

We’ve seen yesterday that Apple is scaling back iPhone 13 production due to chip shortages... yet another company which is seeing pain and this is the company which supposedly has the best deals with manufacturers... not even Apple is immune. 

The other thing to watch is JPM earnings - they’ll be released before the market open. Sure we have some other banks reporting too, but last time (don’t quote me on this) I think JPM was one of the first and basically served as a barometer for the rest. Black rock also reporting today. Other earnings of interest include Delta Airline - let’s see how well some of these pandemic recovery sectors are actually doing! 

Clearly though, the main focus will be CPI, so watch out for that most of all... at 13:30 UKT. Happy Trading!

Tuesday 12th Morning Comments - UK focussed

 Good morning everyone. Welcome to the usual rundown of morning comments - I've tended to only share these via email before, but I will try to also occasionally share to the blog too. 

If you'd like to be added to the distro list, do let me know. 

What's moving this morning? 

Looking across the markets, seems like the USD is broadly stronger with the EUR dropping below the 1.156 level I've had my eye on and GBP also making an aggressive move to the downside - those gains from hawkish bets didn't last for long!

The S&P500 has been on the downtrend recently too. I have my eye on the marked trend lines below which I think has been quite interesting. Look for resistance again now around 4360. For now, I continue to favour shorts but watch those lows for a couple of opportunities. 

I've already mentioned GBP once, but Bloomberg is reporting the downturn is as a result of expected policy error from the BOE. With traders ramping up their short bets. 

Money markets are pricing in a hike at the BOE by year-end and another 50bps of policy tightening to come pretty quickly after that. With this backdrop, I am a touch surprised that the £ is falling on the "possibility" the BOE is about to make a mistake. I wonder if the broader narrative here is just a USD backstory more than anything else. But nonetheless, there could be upside for the £ if the inflation narrative globally turns out to be permanent, which would mean the BOE was ahead of the rest when it comes to hikes. 

Also from the UK, we had a payrolls report which showed continuous recoveries (increase of 207k - actually above US...) in the economy with payrolls above pre-covid levels with record hiring. At the same time, vacancies rose to a record 1.2m, which indicates this labour market is still very tight and could prove to be further inflationary. The unemployment rate dropped to 4.5%. 

Finally from the UK, and this is a fairly long-term point: reports suggesting the UK's budget could be £15bn worse-off as rates increase debt repayments. This with the Chancellor's Autumn budget coming up could signal less room for further accommodation and pullbacks on the size of some programs. 

In Europe, in ESG, they are set to issue the largest ever green bond today - at 12bn EUR. This will be one to watch to see how the market handles the appetite for green on such a large issue. 

Final thing: LVMH is due to report sales figures today - this will be important for the rest of luxury as it will indicate whether there has been any difficulties for LVMH in the quarter. 

What's coming today? 

Survey data in the form of the ZEWs. This is actually my least favourite data since it's a survey of investors and truth be told we're rather schizophrenic folk so it's not particularly insightful in my view, but we move. 

In the US, we have JOLTs data at 3pm, and speeches from Clarida. A reminder, Clarida is in the middle of the hawk-dove O-meter, so this could be an interesting one. We also have a USD58bn auction today for 3y bonds and USD38bn for 10y bonds, so it'll also be interesting to see how the market swallows such a large auction. 

That's all for today - happy trading everyone. 

Still long EURCHF - even looking to load up more.

 A couple of weeks ago, I wrote a fairly in-depth piece on why I am long EURCHF. So far, this trade hasn't gone particularly well, but I'm still confident in the trade and choose to remain long. 

As outlined in the original piece, the main reason why I'm bullish EURCHF is because the SNB will not tolerate excessive FX strength. Previously, we have seen aggressive selling of CHF when we get below 1.07. This is likely to continue in my view, so with CHF where it is now I am confident to maintain my long positions. Likewise, if we have a look at the long-term trends (since the start of the year) below, it is pretty clear that we are near the bottom of the range, and I'd expect a bounce higher. 

Source: FXPro (MT5)

(Yes, I'm aware the overall trend is still down and usually the trend is your friend, but my lesson has always been don't fight the central bank).

For me, with other central banks of the world turning increasingly hawkish on the back of inflation, the comparatively dovish SNB does not represent a good place to put your money. Sure, the CHF is a safe-haven, and this likely explains some of the recent strength, but the currency is looking extremely over-valued in my view. 

What I also find quite interesting is how quickly CHF has appreciated against the other G10 safe-haven: the JPY (see below). This levels of appreciation at such pace is really quite surprising. Sure, we've seen about a 30bps increase in CHF 10y yields, and this is significantly more than what we have seen in the JPY compression. But my question is, how much higher can CHF 10y yields go? The SNB has rates at -0.75%, and the economy is fundamentally deflationary. 

I personally don't see a reason for the SNB to hike before 2026 assuming current inflation is largely transitory worldwide. They certainly won't move before the ECB and are committed to easy money. Sure, their definition of price stability is a bit different to others - seeking CPI below 2%, but we are still nowhere near that level. 

I suppose... you could make the argument that the CHF economy is doing very well, and therefore it's a good place to invest with low inflation etc, but I'm still not that convinced by this argument. 

Ultimately, most of my view on CHF comes from the fact that the SNB simply is not going to allow much more currency strength - here's a chart of their foreign exchange reserves (which are acquired by selling CHF) and the SNB has repeatedly intervened to affect the FX rate. 

SNB reserves are well in excess of Swiss GDP, and this shows they do have the power to significantly influence the economy. Back in 2015, they promised to sell unlimited amounts of CHF in order to keep the exchange rate from being too strong - and I wonder if we might see something similar again before too long. 

Basically, get long CHF. I don't actually think we need a SL since I'd be amazed if we got anywhere close to 1.05, but TP anywhere you like - I'm targeting 1.10 over the next couple of months. 

The Open and The Week Ahead

 Good morning everyone. I'm hoping this week we will return to a bit more regularity in my posting since there's a lot of interesting events ahead and I'm expecting some relatively big market moves. 

The Open: 

Looking across the markets this morning, a few interesting dynamics with the EUR looking like it had climbed in the Asian session but then fell with Europe at the open. S&P500 looks a little weaker around a 4380 level, and I'd probably have more of a bearish bias today - looks like we are in a consolidating pattern for the tine being. Breaking back above 4400 probably a little more bullish. 

The big FX mover of interest is GBP - there's been a lot of muttering from BoE officials that they are deeply concerned about rising inflation - with Bailey being at the forefront suggesting that a sustained increase in inflation expectations would be catastrophic. What this is leading to is FX traders expecting a rate hike from the BoE this year in what would be a dramatic repricing of hawkish expectations - the £ is naturally higher on the back of this. 

From Bloomberg: Michael Saunders, one of the most hawkish members of the Monetary Policy Committee, suggested in remarks published Saturday that investors were right to bring forward bets on rate hikes. Hours earlier, Governor Andrew Bailey warned of a potentially “very damaging” period of inflation unless policy makers take action.

But at the same time, GBP isn't performing quite as well as you might expect given the noise in the background over the NI-EU border. Brexit negotiator Frost is trying to pressure the EU given that the ECJ has say over any changes to the NI Protocol. Basically, this is setting the stage for a potential trade war in the long-term with dramatic possible ramifications in Ireland. 

Regular readers will know of course that I am a persistent Sterling bear. Does this change my view? 

Not yet - it's possible a rate hike just means an increase to 25bps, which wouldn't actually make the UK any more interesting than a number of other G10 nations, so I don't think "carry trades" will become important yet. But it's worth watching, if the BOE is suddenly one of the most hawkish and aggressive central banks this could be a reason for a significant repricing of GBP higher. 

What else is going on? 

All eyes on the commodities space - I'm watching WTI Crude oil climbing above USD80/bbl in what marks a continuation of the relentless push higher in commodity prices. Beyond that, I think the broader commodity index story of continuous rises is interesting. At some point this must be reflected in margin pressures for businesses! Costs cannot continue to be passed on to consumers forever. 

And it's the same story in the "core commodities" group which covers a broad range of inputs like "lean hogs" and "cotton". I think it's a better measure overall since it's less weighted to oil etc. 

Other than that, there's no story which has particularly lured my attention. So what's going on in the week ahead? 

Well the key event of the week is US CPI data as this will likely drive the narrative over the scale of a potential Fed tapering. If we get a big number here, don't be surprised to see a quicker winding down of asset purchases at the November meeting of the FOMC. If it's a lower number, then it's a win for the doves. I will be doing a full CPI primer later in the week. 

Other than that, we have a lot of central bank speakers from the ECB - with Lane and Elderson speaking today. We get a lot of survey data from Europe too tomorrow. 

In the UK, tomorrow we have the labour force data where we are expecting to see a downtick in unemployment from 4.6% to 4.5%. Yes the furlough scheme has now ended, but it is probably too early to see this reflected in the data. 

In the US, we also have the FOMC minutes on Wednesday. It will be interesting to see how they have accounted for the "all but met" clause of Powell's latest speech. Then to end the week we have US Retail Sales data as well as a couple of other pieces of survey data. 

Last but not least, it's Q3 earnings season baby! So this should provide some interest - we kick off with many of the bank stocks reporting including JPM, BofA, WFC, MS. 

Happy trading all. I will also try to provide a few trade ideas this week - some interesting set-ups starting to form.