Current positions 6/9

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Short June 2023 euribor futures and German 2 yr Schatz futures

I mentioned in my last post how the ECB would be forced into turned more hawkish to fight inflation. During tonight’s meeting they didn’t quite out-hawk the market, and committed to only 25 bp in July (less than market pricing). Nevertheless, front end rates moved to price in more rate hikes as today’s complacency will result in more inflation and more hikes down the road. I went short on Monday and so far it’s looking good.

Long WTI futures (from around 110)

There are some worries out there that slowing growth will create demand destruction and result in the oil bull market reversing lower. We are far from that point. Energy is a smaller share of total consumer spending than it was in the 80’s, and in inflation-adjusted terms, it’s not yet at the levels where it has historically induced inflation. Not yet at least.

We can see from the chart above that in previous contractions where ISM fell below 50, oil stayed elevated or continued higher. ISM today is at 56.1 so we are far from the point where we need to worry about the oil bull market turning into a bear.

Long 10 yr Treasury bond puts (115.00 strike, Sep exp).

I bought these puts yesterday, as I’m getting a vibe from the market that we will see new highs in 10y yields, and maybe 4% within the year. The market is deeply divided on whether the slowdown in growth signals the top in yields, or whether persistent inflation will force more hikes from the Fed. I’m now leaning towards the latter.

We can get some hints from the USD/JPY chart, as it’s the currency pair closest correlated to US yields. It completed a head and shoulders topping pattern last month, but then broke back above neckline support at 128. The failure to stay below the neckline was a bad sign for bears. Then it broke above the high of the head, confirming the continuation of the uptrend. This is a powerful pattern because the initial neckline break cleared out long positioning while sucking in fresh shorts. As the uptrend reasserted itself, bulls were forced to chase it back up, while shorts had to cover.

The 10y yield is showing a similar pattern.

Yesterday we saw the RBA out-hawk the market, and today a complacent ECB was met with a hawkish response by the market. Tomorrow we get US CPI, and next week the FOMC. Last night’s 10y Treasury bond auction was a bit soft, indicating that the market hasn’t yet priced in quantitative tightening. I’m also seeing data that Japanese institutions have resumed selling government bonds after going on a buying spree in April. A lot of things point to higher yields from here.

Short SPX futures and Long Nasdaq puts (11k strike, Sep expiry)

With the VIX back at 25, buying Nasdaq puts to add to my SPX shorts felt like an opportunity too good to pass up.

Long soybean futures and nat gas futures

These are smaller and longer term positions to pad my exposure to food and energy inflation.

Short ETH/BTC cross

While BTC remains choppy, I think ETH will underperform.

Not a pretty chart of ETH/USD

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