long or short?

Tough few weeks.

Horrible downside marred now with chop.

Trying to grab a trend in this market is nigh on impossible.

There have been a few standouts in our trend system however, most notably HSBC, Verisign and BBVA…

Financials have been doing so, so well (which is why we shouted Deustche Bank in the Discord the other day).

Why?

Well it’s because of Japan and Europe.

Japan has been experiencing inflation, giving a lift to interest rate expectations there, while the German debt brake lift has raised Eurozone bond yields VERY rapidly.

This is all excellent for financials.

See, banks make money from net interest margin, effectively the difference between how much they can borrow money from the central bank and then lend it to consumers and businesses.

If inflation expectations are elevated, then the expectations for interest rates are also heightened, meaning the spread increases (net interest margin goes up, brrrr).

So in single stocks, we have a good sector bias with being long banks (and probably more specifically, Japanese banks which I’ll come onto in a sec) and also being short XXXJPY (and in my view, AUDJPY is the preference here).

Onto reasoning…

The BoJ STILL has a tightening bias, and the last inflation print was at 4%.

There is still a hell of a lot of carry in JPYXXX pairs that could be available to unwind as other central banks loosen while the BoJ tightens.

There is an expectations they will perhaps lift rates in May’s meeting…

Which IMO would be disastrous.

However, this is a factor leaning into more of a ‘risk off’ bias.

I hate that word because risk being off implies people just stop trading, yet other assets other than equities benefit (such as being long yen!).

Anyway, how we are looking at this market is a view of a slow macroeconomic breakdown over the next few months, as well as retaining higher implied volatility across the equity vol curve (which is not good for risk).

This is reminiscent of Trump’s first term.

In this scenario though, it would be correct to think currencies like AUD would fall off — AUD is a higher beta ccy that performs very well during periods of equity bullishness but not so well during equity bearishness.

Couple that with yen strength from a risk of perspective AND higher interest rate perspective in Japan and you have a perfect storm of price divergence.

Remember, take one factor of the market.

Take an already trending asset and that’s something tradable.

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