EVOTF - Portfolio Update: Next Trades

2023-11-05 12:17:29 ET

Summary

• The UST yield curve has steepened and this could provide an opportunity to buy US banking stocks on weakness in a no-recession scenario.
• Japan and Eurozone exporters can benefit from a global downturn due to easier central bank policies depreciating the yen and euro while providing a lift to their respective stock indices.
• Current positioning update and watch list are provided.

It looks like the inversion on 10’s - 2’s bottomed in March of this year around a 107 basis point spread. I called this steepening or closing of the inversion since then nearly perfectly. At that point back in March I anticipated a shift upward of the whole curve with the back end rising faster than the front thereby steepening the curve.

The reasoning was front end yield to maturities had become enticing and T-bill yields had already or were reaching escape velocity, meaning yields were high enough to offset duration risk especially compared to the back end and bond investors would reposition to the front end versus the back. I continued to believe markets were underpricing Fed tightening and commitment to holding and not cutting so front end yields would rise albeit less so than the 10Y+ UST yield.

Quantitative tightening meaning less Fed demand for treasuries combined with increased government issuance due to rebuilding the Treasury General Account or TGA after the debt ceiling standoff would create a supply and demand mismatch or gap for treasuries pushing prices lower and yields higher. I also continued to predict a no recession scenario for the US which the data has backed up.

As for the FOMC I’m calling for a December hike as warranted and likelier than market participants expect.

The trajectory of the economy and strong data such as a 4.9% annualized Q3 US GDP growth rate , supports a higher neutral Fed funds rate in my opinion. Treasury market volatility caused a pause at the last meeting.

Higher US Treasury yields are supposedly doing the work for the Fed so as financial conditions loosened (weaker dollar, yields fall, credit spreads narrow, stocks up) on a “weak” jobs report (much due to auto worker strikes) shouldn’t monetary policy expectations reprice higher, not lower?

I plan on buying Japan and European auto, pharma and electronics exporters on weakness. The way I see it, it is a one way trade. Either the global economy gets worse and a strong dollar environment continues. In that case a weak euro or yen boosts export competitiveness and provides a currency tailwind to profits earned abroad especially those companies heavily exporting to the United States. Also a more dovish Bank of Japan and ECB in response to a continued global slowing would boost their respective stock indexes.

Or, the global economy improves in which case, what does well? Almost everything in including global demand for autos, electronics, pharmaceuticals and risk assets generally.

I still like US banks on higher US rates, steepening yield curve and no US recession outlook. I am mostly positioned the same as 2022 when running Tri-Macro Research with the largest positions being short gold and emerging markets with a long tanker position.

I provided a list of stocks below I am waiting on an entry point for the above ideas on either persistent EUR and JPY currency weakness leading to an export and profit tailwind along with easier central bank policy or a risk on upturn across the board.

• DXJ
• HEDJ
• Sony
• Roche
• Takeda
• Nissan
• Opko Health
• Toyota
• J.P Morgan
• Bank of America
• Fifth Third Bank
• Fresnius
• Sanofi
• Honda
• Bayer
• Merck
• Novartis
• Panasonic
• Bridgestone
• L’Oréal
• Michelin
• Sumitomo
• Electrolux
• Subaru
• Yaskawa
• Fanuc
• Siemens
• BMW
• Mercedes
• Porsche
• Novo Nordisk
• Airbus
• Air France
• ASML holdings
• Lufthansa
• ABB
• Michelin
• Astella Pharma
• Nidec
• Mazda
• Lasertec
• Sysmex
• Mynaric
• Evotec
• Biontech
• Canon

For further details see: