In this week's Macro Insight I discussed...
After another 1 day sell-off, markets staged a strong recovery across all asset classes as COVID concerns subsided.
China are cracking down on ed-tech companies and saying they need to be non-profit if they teach the school curriculum. Also forbidding raising capital in IPOs triggering a collapse in stocks of around 80% in the sector. The broad China indices have also seen massive liquidation and we are yet to see any intervention from authorities. The question remains whether or not this leads to weakness in western markets that are dependant on China.
Global PMIs have been stalling as the recovery slows, inflation however could remain sticky. With goods prices coming down with commodities, we could see rent prices take up the baton next year as they lag house prices. Inflation breakevens are stabilising while nominal yields have collapsed which has taken real yields to record lows at -1.10%. Goldmans lowers 2022 growth forecasts as service sector weakness due to remote working is becoming the norm and hurting the office adjacent economy.
The main event this week will be mega cap tech earnings reports. Despite strong price action into earnings season, there is still room for these stocks to rally due to easy comps from last year Q2 and the safe haven property of these stocks compared to more cyclical sectors which may be more impacted from the growth slowdown. On the macro side, FOMC on Wednesday and GDP and PCE Inflation data later in the week, but expect these to take a back seat to the earnings reports.
The dollar so far seems to have stalled at 93 in DXY but we see potential for movement given the FOMC, Jackson Hole and general economic volatility in coming weeks. EURUSD mid-Sep implied vol is at 5.40% which we think sets up well for long straddle or strangle positions given we are at a potential inflection point in FED policy.
Both Oil and Copper have had strong bounces from the recent lows suggesting reflation may not be dead yet. Gold on the other hand has lagged badly, especially given real yields at record lows and a softer dollar.
Filmed on on Tuesday 27th July 2021.
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