Dollar Strength, Trade Wars And The Macro Ops CollectiveAlex
Tyler here with this week’s Macro Musings.
As always, if you come across something cool during the week, shoot me an email at [email protected] and I’ll share it with the group.
Macro Ops Collective Now Open For A Limited Time!
Thanks to everyone who came out to the special event last night. I’m glad these post-mortem trade reviews are as helpful for you guys as they are for our own trading.
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Now for the Macro Musings….
Recent Articles/Videos —
Semiconductors — A review of the semi sector and the plays we’re looking at.
Dalio’s Principles — Dalio reviews the principles he used to build his investment strategy.
The Business Of Trading — AK and Tyler chop it up about the realities of being a professional trader.
Articles I’m reading —
There’s a lot of tension between the US and China right now. The “impending” trade war has been the mainstream media’s excuse for weak equities. Chinese stocks have now entered into a bear market, and US stocks have been experiencing steady selling over the last 3-weeks.
But I think this softness has less to do with trade wars and more to do with what’s going on in the dollar. In recent years, Chinese companies have turned to borrowing in USD because of crackdowns on shadow financing. Here’s some more color from Bloomberg (full article here):
Chinese builders, faced with bond payments of $77.4 billion in the domestic and overseas markets through 2019, have been reeling from tightened liquidity at home induced by a clampdown on shadow financing. That’s prompted them to sell debt in the offshore market, with dollar bond sales reaching a record $27.5 billion this year.
But now, with the greenback rallying, these Chinese companies are having a tough time paying back this debt. The Chinese government has taken notice of the problem and in response has started to slow approvals for offshore bonds. But that just creates another problem — it reduces financing options for these over indebted cash strapped Chinese companies. So they’re really just trading one problem for another.
This will be the important macro narrative to track going forward. Not trade wars. If you want even more on this story I suggest checking out this Zerohedge article.
Video(s) I’m watching —
John Oliver’s Last Week Tonight Episode about Xi Jinping caught my attention. First, because China is the single greatest driver of our current macro situation, but more so because the Chinese government retaliated by blocking HBO’s website in mainland China.
It’s actually a pretty good history lesson on Xi Jinping and how he has been running the country over the last 5-years. Worth a watch.
Chart I’m looking at —
The rising dollar has been wreaking havoc on EMs. But those negative effects haven’t materialized in the US. Despite higher interest rates in the US, liquidity conditions have remained loose. The US economy is strong enough to counteract the recent tightening from the Fed. That’s why we’ve seen US equities outperform the rest of the world by so much this year.
If the dollar continues it’s rally, a likely scenario in our view, then it will pay to focus on US equities over anything else in the world. We’re already positioned that way, and we’ve even been toying with the idea of offsetting some of our US long exposure with shorts in foreign stocks.
Trade I’m looking at —
I originally saw this idea from @pat_hennessy on Twitter. If you’re into vol definitely give him a follow.
The Bloomy chart below has one month IV plotted in white and 20-day HV plotted in orange. IV is the market’s prediction of future volatility over the next month. And HV is what actually played out in the SPX last month. The sub chart plots the spread between the two.
You can see at the beginning of the year IV rallied and SPX followed close behind resulting in a deep negative value for the spread. In that case higher option prices were justified.
But now we see IV rallying without the SPX following through. The spread has drifted positive. This tells me traders are overly worried about the trade war and paying too much to hedge.
It’s possible to take advantage of this fear by selling vol (in a risk defined way) on the SPX. I’m taking a look at shorting the 2600/2460 put spread expiring in August.
Quote I’m pondering —
War, battles, and conflicts of all kinds (including poker) set in motion forces that quickly become unpredictable. Small defects or problems that are present at the beginning can quickly spiral out of control. And if small problems can do this, think what starting out with large problems means. ~ Zen and The Art of Poker
The first loss is always the best loss. Never forget that!
That’s it for this week’s Macro Musings.
Article by Macro Ops