Thursday, 23 January 2025
After Hours Note
It was a dour outlook for risk during the pre-market, with stocks, bonds, commodities and crypto all flashing red. Only the US dollar, VIX and crude were green. Sentiment shifted during the cash session; the most notable news was Trump’s speech to the World Economic Forum in Davos.
Trump’s policy agenda is continuing to take shape, and we will provide running commentary as further details materialize. We will publish an executive summary of the Davos speech to your inbox later today.
Momentum Snapshot
US Dollar has broadly weakened on the short 1h timeframe.
Treasuries have rolled over, and momentum is negative on all maturities and timeframes.
Stocks are short-term overbought, and expected to correct or congest.
Crude rally is done in our view. Momentum is negative on all timeframes and fundamental drivers (excess capacity / Trump policy) are bearish.
Gold continues to be a preferred destination for investors worried about inflation, and central banks worried about their FX reserves.
Copper scared out the weak longs (and aggressive dip buyers) but now shows positive momentum again on all timeframes.
Equities
Equities strutted higher again, with momentum readings showing the S&P 500, Nasdaq, Dow, and Russell all pushing further into positive territory. The bullish tone in stocks suggests traders continue to lean into the idea of resilient economic growth, shrugging off any lingering rate jitters.
Going into this week, the S&P was in a broad 7 day downtrend which was reversed on inauguration day. If we project a new 7 day trend, calculated from 16-22 January, we observe a steep uptrend with narrow dispersion.
On an hourly basis, S&P momentum currently registers +7.39, which is historically a zone for reversal or sideways consolidation (see chart below). The steepness and narrowness of the linear trend is also notable.
A linear trend channel is not a forecast but an encapsulation or description of the expectations of market participants, as best as we can tell from price alone. Price change history on a chart shows nothing more than the evolution of expectations; an uptrend indicates incremental marginal improvements to expectations, and a downtrend shows shows the opposite i.e. incrementally deterioration of expectations.
When the slope of a trend is excessively steep, or when dispersion from trend is excessively narrow, we can infer that expectations are sensitive to disappointment. Such extremes provide nimble traders with opportunity.
In the short-term, we maintain the view that:
now is an opportune moment to lighten up on risk or buy hedges; however,
risk-on mania will not collapse on itself, so do not short this market; a catalyst is needed to break the fever; and
likely catalysts include (i) hawkish FOMC that puts hikes back on the agenda, (ii) a proper bond market rout, like the LDI debacle, or (iii) a grey swan geopolitical event that ignited by Trumpian policy.
Treasuries
Pro-growth optimism was less friendly to Treasuries, where yields pressed higher and momentum flipped more decisively negative across the curve. The 10-year and 30-year futures remain under pressure, hinting that bond traders see less reason to hide in duration.
Bonds demonstrate negative momentum on 1h (-1.06), 4h (-2.84) and daily (-3.26) timeframes. Stocks are not paying attention, yet.
A weak close today might see us finish back within the weekly linear channel. Don’t destroy your capital trying to catch this falling knife. Bonds will rally (yields will fall) when the economy is cooling, not when it is heating up.
Commodities
Crude slipped meaningfully in the near-term timeframes, reflecting ongoing Trump rhetoric and policy to bring down oil prices to alleviate inflation. Most recently, newswires today alert to potential dealings with the Kingdom of Saudi Arabia to encourage utilization of their spare capacity; rumor is US may trade security guarantees (or some other geopolitical valuable) in exchange for economic cooperation. In our view, the rally is over and was always in no small part driven by short covering by offside hedge funds. Those positions are out of the market now, and price can again go down.
Meanwhile, metals shone today. Copper extended its uptrend, consistent with the pro-cyclical tilt in risk assets. There was two false momentum flips on the 4h chart which materialized as good buying opportunities.
Our calls on Copper and Crude published in the Weekly Edge 20-24th January proved prescient. We hope you succeeded in getting the right position on.
Copper (HG) is showing mixed signals, with slight gains in longer timeframes, suggesting optimism tied to China’s fiscal stimulus.
Oil’s strength is more cyclical, with limited structural drivers, while copper indicates optimism around industrial recovery.
Gold also maintained a firm bid, underscoring lingering safe-haven or inflation-hedge demand. We standby our call on Gold, which is that it continues to demonstrate strong positive momentum across all timeframes, likely driven by safe-haven demand amid inflationary pressures. It is the standout performer, reflecting investor hedging against macroeconomic uncertainty and persistent inflation.
Foreign Exchange
In currencies, short-term flips in the euro and Aussie point to mild dollar softness at the margin, but the yen continued to fade on larger timeframes, reflecting its role as a funding currency in a risk-on environment. Bitcoin’s longer-term momentum remains positive, though intraday action has been choppier.
AUD is our favoured long pair against the USD, with CAD and EUR least favoured. Our long delta in AUD is structured conservatively and will payout provided AUD remains above 60c. Duration on our CAD options position is approx 6 months, as we need time for the consequences of US trade policy & indebted Canadian consumers to culminate in sufficient economic weakness to drive BOC to cut rates.
Summary
Overall, it was another session dominated by “risk on” appetite in equities and cyclical metals, coupled with fresh selling in bonds and a break lower in crude. Investors appear comfortable rotating out of defensive pockets, pushing yields higher and fueling the equity engine into late January.
The next FOMC meeting is scheduled for 28-29 January, which we are expecting to catalyze volatility (along with options expiry) into the close of the month.