TRACKRECORD DAILY
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TRACKRECORD DAILY

The Calm before the Storm

The market is likely to be in a holding pattern while it awaits the US Federal Reserve’s policy meeting on Wednesday.

The market is likely to be in a holding pattern while it awaits the US Federal Reserve’s policy meeting on Wednesday. Being in a holding pattern lets us see what the underlying bias for the market is when there’s headlines to drive the market either way.

New highs are being made in the US stock markets every other day. The Fed will really need to surprise with a hawkish message to change the trajectory and that is unlikely to happen because Fed Chair Powell is up for reappointment.

With his fate not yet decided, there’s no good reason for him to start being hawkish and rock the market. If he truly wants to be hawkish, it’s better for him to wait till it is certain he will be around to follow through with actions. He needs markets to continue to be stable (for most politicians, it means going up) to keep his chances high for now.

TRADING TIP

What can go wrong?

This is the question that sets apart the good traders from the rest. When all seems to be going well, some traders tend to be laxed in their trading process and start to be overly optimistic in their judgement. However, it is at these moments where some start to miss out on crucial details or even start to ignore signals that are clearly warning signs that their trades may start to underperform.

When a trade starts to do well, it can eventually get oversubscribed and thus the profit potential in the trade starts to diminish. Sometimes, the trade may even be overleveraged (think Bill Hwang and the implosion of his 20 billion dollar hedge fund within days), resulting in a quick reversal in market sentiment should the cracks start to form.

Trading is an endeavour that is heavily focused on risk management. As such, it is important to ensure that the risks are all properly accounted for and that one should remain abreast of the potential wing risk in their thesis.

So even when and in fact, especially when, things are going well, you should be constantly asking yourself, “What are the things that can start going wrong?”

DAY AHEAD

The RBA will have its monetary policy meeting today. Some form of taper is expected to be announced. Additionally, it would be interesting to see if they continue reiterating that no rate hike is likely to occur before 2024.

TRADING PLAN

1. Currencies:
Keep short USD and long NZD, & CNH. Snoozefest in the world of FX. Trading will likely be subdued while the market awaits the conclusion of the Federal Reserve policy meeting later this week. Stay short usd for now.

2. Commodities: Uranium & Energy — Stay invested.

Key risks: Higher US bond yields, and stock market price action.

3. Equities:

Equity Index: Long Nasdaq futures. New highs beckons but you’ve already heard us say this many times. Stay long.

Single Stocks: TrackRecord Model Portfolio themes are well underway. Get involved and stay involved. `

Key risks : Higher US bond yields, and stock market price action.

WHAT HAPPENED YESTERDAY

Market movements as of New York Close 1 Nov 2021
  • In Washington, Congressional Progressive Caucus leader Jayapal (D-WA) said progressives will support both infrastructure bills with the addition of several other items, but Senator Manchin (D-WV) said he won’t support the budget reconciliation bill without further clarity on its economic impacts. The market is getting used to their antics and hence, there was no reaction to this.
  • US October ISM Manufacturing Index checked in at 60.8% (expected 60.5%), down from 61.1% in September. A number above 50.0% is indicative of expansion. October marked the 17th straight month of expansion for the manufacturing sector. Demand is strong, but manufacturers and suppliers continue to struggle to meet increasing demand levels due to a range of factors that includes record-long raw material lead times, shortages of basic materials, transportation difficulties, worker absenteeism, and difficulty filling positions as evidenced by the acceleration of the measure of prices paid by manufacturer to 85.7 (vs 81.4 expected) from a reading of 81.2 in September. Additionally, the ISM survey’s forward-looking new orders sub-index dropped to 59.8 (vs 65 expected), the lowest reading since June 2020 which is possibly due to the inability of manufacturers to accept new orders given the backlog they have from supply constraints..
  • The U.S. Dollar Index fell -0.28% to 93.93. The Dollar hovered below recent highs on Tuesday as traders waited for the Reserve Bank of Australia, who meets later today, to lead a handful of central bank meetings set to define the rates outlook this week.
  • US 2-year Treasury Bond yield increased two 2 basis points to 0.50%, and the 10-yr yield increased 3 basis points to 1.58%.
  • S&P 500 (+0.18%), Nasdaq (+0.35%), and Dow Jones Industrial Average (+0.26%) rose modestly on Monday and all set record closing highs.
  • The muted price action in the S&P 500 was largely due to weakness in Apple (AAPL 148.96, -0.84, -0.6%), Microsoft (MSFT 329.37, -2.25, -0.7%), Amazon.com (AMZN 3318.11, -54.32, -1.6%), and Alphabet (GOOG 2875.48, -89.93, -3.0%), which account for approximately 20.5% of the S&P 500’s market capitalization.

HEADLINES & MARKET IMPACT

In blow to Biden, Joe Manchin will not commit to backing $1.75 trillion spending bill

Notable Snippet: President Joe Biden’s domestic agenda suffered a major setback on Monday when Democratic Senator Joe Manchin said he would not commit to supporting a $1.75 trillion framework on social spending and climate change unveiled last week.

“While I’ve worked hard to find a path to compromise, it’s obvious: Compromise is not good enough for a lot of my colleagues in Congress. It’s all or nothing, and their position doesn’t seem to change unless we agree to everything,” Manchin told a news conference.

THEMATIC CONTEXT: “As mentioned, we suspect that Biden’s best work will be executed over the coming month prior to the midterm elections and you don’t want to miss out on the rise in asset prices we are foreseeing. Stay in the game as we help you separate signals from noise, in which case the topic on taxes is almost “noise” at this point in time.” — 10th June 2021

WHAT WE THINK: With US/Debt to GDP at record levels of 130% and US expenses costing more than tax receipts, the government will have to choose between defaulting on its obligations or printing more money, and we strongly believe that the US government will opt for the latter. Any attempts to curtail easy money will kill the patient and send the Fed right back into money printing panic mode. In addition, fiscal policy has a direct impact on GDP, solving for that factor (boosting GDP) will bring the Debt/GDP equation down to a more palatable level where a wider range of policies can be enacted without killing the patient.

For more actionable content with our levels and views, sign up for our Membership to get the full length version of our Dailies.

Biden tells leaders U.S. will meet climate goals, while his agenda falters at home

Notable Snippet: President Joe Biden on Monday sought to assure world leaders the United States would fulfill its promise to slash greenhouse gas emissions in half by the end of the decade, but a setback at home heightened uncertainty about his ability to follow through.

Biden joined leaders from over 100 countries in Glasgow for the start of the COP26 climate conference, which kicked off on the heels of the G20 summit in Rome that concluded with a statement that urged “meaningful and effective” action on climate change but left huge work for negotiators to ensure an ambitious outcome.

THEMATIC CONTEXT: “Traditional energy is here to stay and the ESG “dream” of having the world run on Solar, Wind and Hydro is far fetched from a practical point of view. The only energy source that can truly sustain such large energy demands while remaining “Green” is nuclear power and for that reason, we believe uranium to be the most mispriced/underpriced asset in the coming supercycle. In the meantime, traditional energy supply/demand imbalance will only be brought forward, leading to an interim bull (years) market in the traditional energy space. We remain heavily invested in this theme.” — 16th Feb 2021

WHAT WE THINK: This will lead to a record squeeze in time to come, politicians are trying to decarbonize supply faster than they can decarbonize demand. In order for prices to fall, demand needs to be destroyed, which leads to a growth problem well before anyone gets a chance to raise rates.

For more actionable content with our levels and views, sign up for our Membership to get the full length version of our Dailies.

‘Time for action’, Queen Elizabeth tells climate change summit

Notable Snippet: Britain’s Queen Elizabeth told the United Nations climate change summit on Monday that “the time for words has now moved to the time for action”, as she urged world leaders to think of future generations when negotiating a deal to limit global warming.

In a video message on the first day of the conference in Scotland, the queen urged leaders to rise above “the politics of the moment” and said the legacy of a successful summit would help “our children’s children”.

THEMATIC CONTEXT: “What has Prince Charles got to worry about inflation? He doesn’t, and the longer oligarchs and virtue signalling governments pursue the ESG pipedream, the higher the squeeze on energy — good for those long the asset, bad for mainstreet.” — 25th Oct 2021

WHAT WE THINK: What more to say than what is said in the aforementioned in the thematic context, what has Queen Elizabeth got to worry about (Global food prices shot up nearly 33% in September 2021 compared with the same period the year before. That’s according to the UN Food and Agriculture Organisation (FAO)’s monthly Food Price Index)? It’s easy to talk about the need to decarbonise without actually understanding that there is a price to pay.

For more actionable content with our levels and views, sign up for our Membership to get the full length version of our Dailies.

SENTIMENT

FX

STOCK INDICES

Best,
Phan Vee Leung
CIO & Founder, TrackRecord

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