WEEKLY MACRO NOTE - Dirty Dancing

Read time: 5 mins

Earlier in October, I was cautioning against taking any trade in Oil, as no clear trend was evident.

I was not sure.

On the one hand, you had the well-known supply shortage, while on the other the Biden administration's SPR release and determination to get the price of gasoline down. Meanwhile, energy stocks were still making new highs, buoyed by strong earnings.

4 weeks ago things became clearer, and I went categorically bearish on both Oil and Energy stocks when I shared the following charts.

WTI then

WTI now -15%

XLE then

XLE now -12%

Everyone was long Energy, and that is rarely a good sign!The divergence between the price of Oil and XLE was unprecedented and on top of that, it became obvious to me that recession fears and demand destruction would outway supply concerns. That has turned out to be very much the case.

What's next?

Now I move back into the I'm not sure camp, on the one hand, I think Oil at $70 is a pretty fair price, on the other Energy stocks still have plenty of fluff to burn through.While a correction in a bullish trend is something you buy, a breakdown like XLE has just had is most certainly not!

The divergence which I pointed out a few weeks ago still has some reconciling to do.So while Oil may stabilise, Energy stocks can continue to decline.

WTI vs XLE

TABLE OF CONTENTS

• WEEKLY WRAP UP

• SENTIMENT

• ECONOMIC CALENDAR

• A BUSY WEEK AHEAD

WEEKLY WRAP UP

The tides turned this week, with many of the latest trends slamming into reverse.Bears are cheeky buggers, they take the bulls dancing just before tripping them up.

Global equities declined, led by the USSPY -3.25%NDX -3.59%DJI -2.77%RUT -5.08%

SX5E -0.89%SSEX -1.09%AUS -1.19%

China was one of the few green spots, with a combination of reopening, liquidity injection and chasing keeping the rally going.

A key thing which I am looking at is Bonds.Bond market volatility has remained high and rising despite the rally in fixed income.

MOVE INDEX

I suspect interest rates will rise once more over the coming weeks before truly breaking down and a bull market in Bonds getting underway in early 2023.

US10Y +2.75% to 3.58%UK 10Y +1.37% to 3.18%DE 10Y +5.26% to 1.94%CH 10Y +13% to 1.18%

The Dollar rose +0.41%.It was particularly strong against the Yen, USD/JPY +1.69%

The Canadian Dollar has been one of the worst performing currencies these past few months, declining, while everyone else continued to rally against the dollar.

SENTIMENT

AAII investor sentiment remains pretty much unchanged

NAAIIM exposure index meanwhile registered a decline

After the big down day on Friday the Fear and Greed index retreated somewhat, but still remains elevated.

CFTC Futures and Options positioning is back to being published on schedule, and the timing could not be better.

Investors bought the dip and increased their longer equities and short dollar by Tuesday.The net long position in the EUR has grown to its highest yet, and the net short position on the GBP has shrunk to its smallest in a long time.I remain bearish on both of these and the set-up could not be better.

Investors have also gone net long Tech again, the most since late August!Positioning speaks for itself, investors are highly exposed to long equities and short the dollar heading into 2023. This is likely to turn out to be a major mistake.

ECONOMIC CALENDAR

The main events of the week are obviously US CPI on Tuesday and Fed interest rate decision on Wed. More on how I think these will move the market in a bit.With regards to Wed FOMC, it is not so much the rate hike which matters, +50bps is pretty much confirmed, but the tone Powell sets at the conference!

It is worth noting that no less than 20 central banks are scheduled to update interest rate policy this week, with at least 17/20 expected to hike rates.

THE WEEK AHEAD

Markets sold off into the close on Friday which suggests a continuation into early Monday morning trading.

After that, the inflation print comes into play.Many bears fear a repeat of Nov, where the S&P rallied +5.5% after better-than-expected inflation data, but is another outsized move of this magnitude really likely?

Forecasts are for about 7.3% CPI, and I suspect that's about right. PPI this week was certainly not promising.The base effects for Nov are less steep than in Oct, +0.60% instead of +0.80% and then get meaningfully smaller from Dec.

Another point worth noting is that the price of Oil was down -20% in Nov 2021, which on a comparative basis will not help the inflation number come down as quickly this month.

So unless there is a 6 in front of the inflation number I expect any excitement to be short-lived.

After that, on Wednesday it will be Powell's turn, and I expect him to strike a hard tone, especially if inflation comes in above 7%.The next Fed meeting is not scheduled until February, and this may be the last chance he gets to talk big. By February the economy and the market may have deteriorated so much that the Fed will be lucky to get one more rate hike in, so it is now or never in the fight again higher prices.

With the S&P close to $4000, inflation still above 7% and a tight labour market, Powell has full leeway to stay hawkish.

Don't forget that this week is OPEX, Quad Witching no less, with almost 400B of put&call delta expiring, so that could amplify any move into Friday.

Crypto remains bearish with Bitcoin now running on fumes at 17K.The next stop for BTC is likely to be in the 12/13K range.Meanwhile, MSTR at $200 is about to get a rude awakening and I expect it to close the gap at $120, or -40% downside from here, by early 2023.

I would be watching the USDT Tether peg closely as I think it is getting frailer and frailer by the day.

Don't let the bear trip you up.

Thank you for reading,Antonio

I am not a Financial Advisor & this is not financial advice None of the information or content shared via the Strictly Macro Newsletter constitutes investment, trading or other advice, nor an endorsement or recommendation of any financial instrument whatsoever. Investing and trading of any kind involves risk with no guarantee of return. This newsletter is for general information purposes only and is not tailored to any individuals’ personal needs or risk parameters. Reference to a security’s past performance should not be construed as guarantee of future returns. Unless otherwise stated all views are those of the author at the time of writing and can be subject to change without notice. Reasonable care has been taken to ensure that all information provided is true and reliable, however Strictly Macro does not assume responsibility for any error or omission. None of the authors of this newsletter are registered as securities broker-dealers or investment advisors either with the FCA, the SEC, CFTC or with any other regulatory authority. Do your own research and seek professional consultation before making any investment decision.