Weekly Edge 20-24th January
Stormy Headlines Ahead
It is inauguration day on Monday, 20th January in what is otherwise a light week for data. Going into this week, data risk is low but announcement risk is high. And not only because Trump is picking up the keys to the White House; keen eyes are also on BOJ and likely rate hikes in Japan.
Market Recap: A Tale of Momentum and Reactions
Before we dive into inauguration and the BOJ, let us first review the week that was. A quick note about how I measure momentum; I measure relative strength at multiple timeframes and scale the result by volatility at each time scale. Regardless of timeframe or asset class, the momentum values in this table remain comparable. However, when it comes to taking a position you need to do your own work scaling position size according to asset volatility.
Equities
As I covered in A Tale of Two Reports, the market oscillated from selling (strong than expected jobs data on Friday, 10th January) to ripping on Wednesday 15th, January (weaker than expected CPI). Looking at the price action in the hour prior to CPI release, it is not unreasonable to suspect the data leaked as both bonds and stocks began to rally into the number.
Stocks held their gains throughout the week through Retail Sales (MOM) which came in softer than expected (0.4% vs 0.6% expected) and Housing Starts (1.499M vs 1.32M) and Permits (1.483 vs 1.6M) both beat expectations.
Momentum Summary:
Strong positive momentum across all indices (e.g., ES, NQ, YM) in hourly, 4-hour, and daily timeframes.
Smaller-cap index (RTY) has positive but more subdued momentum compared to large-cap counterparts (ES, YM).
Implication:
Equities are benefiting from risk-on sentiment, likely driven by favorable liquidity conditions or easing near-term fears around monetary policy.
The disparity between RTY and large-cap indices suggests rotation out of higher-beta, smaller-cap names, favoring established, liquid stocks.
Trading Note: Watch for resistance in these indices as momentum approaches overbought territory.
Fixed Income
Bonds and stocks were back to moving in lock step, and it was a strong week for fixed income, with the whole curve lifting. We opened on the lows and rallied all week.
Momentum Summary:
Consistently negative momentum across Treasury instruments (ZT, ZN, ZB) in longer timeframes, though slightly mixed in the 1-hour window.
Longer-duration instruments (ZB) show steeper declines compared to shorter-duration (ZT, ZN), reflecting steepening pressure.
Implication:
Bonds remain under pressure as term premiums expand and yields rise. This indicates persistent concerns about inflation and supply-demand imbalances.
Flattening in shorter timeframes could suggest stabilization attempts or position squaring.
Trading Note: Avoid long positions in bonds. For nimble traders on a shorter timeframes, you can trade inevitable relief rallies but don’t overstay your welcome.
Foreign Exchange (FX)
The US Dollar was flat to down, with relative outperformance by JPY notable.
Momentum Summary:
Broad weakness in EUR, GBP, AUD, and JPY across all timeframes, with GBP and AUD showing the steepest declines.
Implication:
The USD remains the dominant force, driven by relative strength in US yields and hawkish Federal Reserve policy.
The weakness in high-beta currencies like AUD suggests a risk-off tone in the currency market, possibly offset by equity strength.
Trading Note: Keep an eye on JPY and the BOJ meeting this week. Also, expecting AUD to turn bid if the commodity rally continues.
Commodities & Bitcoin
Gold and Bitcoin were strong from start to finish
Copper started strong and finished weak.
Crude Oil had the contract roll, and was mostly flat to down.
Momentum Summary:
Bitcoin (BTC) shows robust momentum across all timeframes, with particularly strong short-term readings.
Crude oil (CL) shows moderate upward momentum in 4-hour and daily windows, reflecting supply concerns and seasonal demand.
Copper (HG) is showing mixed signals, with slight gains in longer timeframes, suggesting optimism tied to China’s fiscal stimulus.
Gold (GC) demonstrates strong positive momentum across all timeframes, likely driven by safe-haven demand amid inflationary pressures.
Implication:
Bitcoin is capturing speculative inflows, likely from the broader risk-on sentiment reflected in equities. The movement could also be tied to regulatory developments or increasing institutional interest.
Gold is the standout performer, reflecting investor hedging against macroeconomic uncertainty and persistent inflation.
Oil’s strength is more cyclical, with limited structural drivers, while copper indicates optimism around industrial recovery.
Trading Note: Gold offers the most attractive asymmetric setup for continued upside. Crude oil positions should be treated as shorter-term tactical trades, and copper can be approached cautiously given its reliance on Chinese demand recovery.
Final Takeaways
The market environment is characterized by competing forces of risk-on sentiment in equities and BTC, against inflationary pressures and rising yields. Focus on high-conviction trades in strong momentum assets like gold and equities, while managing downside risk through hedges in FX and fixed income.
Risk-On Sentiment Dominance: Strength in equities and BTC suggests that traders are embracing risk, while weakness in FX pairs like AUD underscores divergence between asset classes.
Inflation and Yield Dynamics: Fixed-income markets are pricing in a more hawkish tone, while gold and crude oil offer complementary hedges for inflationary concerns.
Tactical Opportunities:
Go long on equities and gold.
Short FX pairs like GBP/USD and AUD/USD.
Avoid longer-duration Treasuries in the near term.
The Week Ahead
Presidential Impact: Trump’s First 90 Days
The first 90 days of a U.S. presidential term are often seen as a critical period for setting the tone and priorities of an administration. This timeframe is typically used by a president to demonstrate leadership, build momentum, and lay the groundwork for achieving key goals.
Will Trump enter the ring like Mike Tyson, looking to drop trade adversaries in the first round with steep “Day 1 tariffs”, or like Tyson Fury will he dance a little and find his range before landing killer blows. We don’t have to wait long to find out!
Stay alert for surprise announcements and key legislative progress, as these will drive near-term risk and opportunity. Other headlines traders should watch for include:
Policy Announcements: Expect market volatility around new tax, trade, or regulatory policies, especially impacting energy, tech, and financial sectors.
Geopolitical Moves: Potential re-escalation of U.S.-China tensions or shifts in foreign policy could impact commodities, currencies, and equities.
Fiscal Stimulus: Any major spending plans could influence bond yields and equity markets, particularly in infrastructure and defense.
Regulatory Changes: Deregulation or policy reversals in key industries may create sector-specific opportunities.
Market Sentiment: Political uncertainty could increase volatility in equities, while safe-haven assets (gold, USD, treasuries) may see inflows.
BOJ in Focus: Japan's Monetary Turning Point
Japanese inflation data drops on Thursday along with the BOJ interest rate decision. The BOJ is expected (betting markets pricing?) to hike interest rates to combat sticky inflation; real wages continue to decline in Japan and there is mounting pressure on the BOJ to act to preserve the purchasing power of Japanese workers and savers.
The Yen has been a relative outperformer vs. the USD, and if the BOJ delivers a medium to long-term bottom might well be in for the Yen.
Expected response across global macro assets include:
Strengthening JPY currency, which could pressure Japanese exporters and be a drag on the Nikkei;
Rising global bond yields as Japanese investor repatriate capital, putting pressure back on US yields;
Higher bond yields could weight on global equity markets, particularly high-valuation rate-sensitive sectors like tech;
Stronger JPY and rising yields would typically put downward pressure on gold, but it seems bulletproof at the moment with central banks on the bid;
Finally, a BOJ hike could re-activate the “higher for longer” narrative, leading to increased volatility across asset classes as markets reassess risk premia.
Trading Opportunities on My Radar
I’m looking for the following opportunities this week
Long VIX: looking to tactically hold VIX exposure to profit from headline risks expected during Trump’s first 90 days; most likely I will structure these as OTM Call Spreads.
Long JPY: I already have a small and tentative long JPY position via options. If BOJ hikes, I’ll be adding delta as JPY has been a clear outperformer..
Long AUD: It is not going up yet, so too early for me to take a position. But there is divergence between what commodities and AUD is doing. If commodities continue rallying, I expect this to divergence to resolve even if the RBA remains soft on rates.
Long S&P 500: We are set to open the week at the top of the 4 week channel, so I am looking for a pullback but not trading short. I want to attempt a long around 5,920.
Short 10Y and 30Y: I think we are in a relief rally right now after the weaker than expected CPI. I think rates continue to go higher and no, I don’t know when it stops. Higher rates will continue to surprise all.
Long Copper: pulled back almost 2% on Friday; now I’m just waiting for it to start moving up again before buying.
Short Crude: Patiently waiting for a tactical spot to short crude if/when momentum flips. Not looking to add longs at current prices. If it just congests sideways, I’ll leave it alone.
Short Canadian Dollar (or 2Y Note spread): I am looking for Canadian monetary policy to weaken and am looking at either doing something in FX or a pairs trade on the short-end of the fixed income market.