Axis Tactics 12th January, 2025 - Recap on Recent Positions & Strategy Update
A Comment on FX & Bond Markets and our Upcoming Overseas Visit Schedule
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Swift Recap on Some Recent Recommendations
We expressed our reservations about Novo Nordisk and Eli Lilly in our Newsletter of 15th October 2024 (“The Problem with Ubiquity”).
Since then, Novo Nordisk has fallen over 30%.
Eli Lilly has fallen over 15%.
EUR/USD has fallen over 250 ticks since our Tactical Short Recommendation on 12th December 2024.
The S&P 500 Index did not re-claim its upwardly trajectory after its decisive downside break of 6000 c.18th December 2024. Our expectation for further weakness (19th December “The Morning after the Fed”), in that event, has become a reality, with any rallies being hit with further selling.
Both momentum and sentiment are indicating further weakness to come. Irrespective of the short term direction, we have conviction that Q1 and Q2 volatility (For all of : Stock Options, FX, Equity Price Swing Volatility and Index VIX volatility) will be markedly higher than the same time last year.
Should this view resonate with yours in any way, your actionable plans can range from (i) Hedging, Shorting or Reducing Risk (ii) Taking Selective Profits (iii) Preparing to take advantage of upcoming medium to longer term buying opportunities.
The UK : GBP, Debt Markets and a Treasury that’s Mathematically challenged…
The unforeseen (only by the Chancellor) but strikingly obvious (to everyone else) consequences to this Chancellor’s first Budget are pervasive.
Businesses instantly froze hiring. Capex was held back. Financing for many SME commercial transactions is under review.
There are no policy levers being pulled that will encourage growth across the UK, at the moment. With 5 Year Swap rates back to 4.25% and trading with a bias to higher levels still - all structured financing costs, inclusive of domestic mortgages, are approaching the sort of troubling heights that will stymie deal-making and investment.
GDP is likely to bounce around near to zero and the double-header of a falling Sterling and rising Gilt Yields are symptomatic of a decline in the UK’s perceived attractiveness for international capital.
Compared to almost all prior Treasury functions where there was a solid team of competent Civil Servants and as well as strong Economic & Financial Advisers to the Treasury with a receptive Chancellor (From Kenneth Clarke all the way to Jeremy Hunt, minus Kwasi Kwarteng and Nadhim Zahawi - who was hardly there so we cannot include him on this) we surmise that one of two things is going wrong here:
(i) Political Intransigence. This would augur more of a headache as the odds here of a repeat “Truss/Kwarteng” car crash, are significantly raised. Lack of insight into consequences, little regard for market dynamics and a shaky backroom team that isn’t up to the job could lead to numerous and successive poor policy decisions. Likelihood in our view : 30%
(ii) Chancellor and her Treasury advisers are just not very good at this, at all. Relying on ~GBP 10bn of headroom and making all those promises? Moaning about a black hole for months? Well, that was always going to end badly. Likelihood in our view : 70%.
Where does this view lead us next?
To prepare a contingency plan for a likely higher 5 Year Swap Rate, perhaps 50bp higher than current levels (so higher mortgage rates and financing costs). And to judge the risk of a return to Truss levels at >5.4% as being possible but still unlikely.
A return to Truss-like levels would almost certainly require some severe global contagion factors, the most probable source being Trump-related chaos (Inflationary Tariffs, More Wars).
The other risk factor here is the continued decline of Sterling.
Even if you don’t trade Derivatives and have no interest in ever doing so, the derivatives markets can inform us on where market positioning and sentiment lies.
Readers will recall how effective such analysis was, ahead of the S&P 500’s sharp fall, and the VIX’s explosive rise, in our piece from 19th December (“The Morning After the Fed”).
This graphic, prepared on Bloomberg, illustrates the range of expected future prices for GBP/USD - Between $1.12 and $1.20. These are not precise forecasts, simply a strong indication that the bias for GBP/USD remains to the downside. And this, coupled with Gilt Yields that might yet push a little higher, is quite a toxic combination.
All such things do blow over - and we would suggest that longer term buyers (of bonds, currency or stocks) take this opportunity to pre-emptively develop a shopping list of what suits your investment objectives.
Upcoming Travel Schedule
If we are coming to your part of the world, please be welcome to get in touch:-
Dubai/Abu Dhabi : 19-24 Jan 2025
Dubai : 7-9 Feb 2025
Johannesburg, Capetown & Durban : Early Q2 2025
New York : End June 2025
Tokyo & Naha : July 2025
Dubai : July 2025
Some Bonds (GBP, USD and Shariah-compliant USD Sukuks) that we watch and like, are below. Stocks and FX tactical trades to follow…
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