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The relentless march higher…

The temptation to take profits will be high

As we pointed out last week, explosive price growth for the energy sector is inevitable given the demand and supply dynamics and the state of the world. Yesterday, Natural Gas prices hit the highest level last seen in 2008 and though some commentators are saying that it is overbought, the demand and supply imbalance will not be resolved anytime soon.

With many policymakers being fixated on green initiatives and geopolitics, this situation is unlikely to change in the near future. The temptation to take profits will be high, but the trend is nowhere close to ending.

Stay onboard!

TRADING TIP

Things are never quite what they seem

Markets can be confusing. News flows that are thought to be weighing on risk sentiment can suddenly not leave a mark on markets or even improve risk sentiment in the markets. Take for example the inflation numbers last week. Despite hitting new highs, markets welcomed the data release with relief just because the core Consumer Price Index (CPI) number came in lower than expected.

This is because markets are adaptive. Having seen high inflation for the past few prints, markets have come to terms that inflation is no longer going to go down for the time being. However the failure to meet expectations in the core CPI was surprising as the market is now used to it overshooting expectations.

A trader must learn to adapt to varying market conditions and be aware that the market moves not because of actual outcomes but rather because of what actual outcomes are relative to expected outcomes.

DAY AHEAD

Nothing noteworthy on the horizon today.

TRADING PLAN

1. Currencies:
CNH — Keep short USD against CNH. Stay patient.

EUR — Short the EUR. EUR continues to drift lower. Stay short.

2. Commodities: Uranium & Energy — Natural Gas prices are hitting the highest level since 2008, stay long.

3. Stocks:

US Stock Index: Energy stocks staying strong while tech stocks are still stuck in a range.

Single Stocks: TrackRecord Model Portfolio likely to continue outperforming despite the broader market staying in a range.

Key risks: Comments from Fed officials on inflation and the pace of future rate hikes is the primary focus. The Ukraine-Russia war rages on, but the market impact is limited for now.

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WHAT HAPPENED YESTERDAY

Market Movement As of New York Close 18 Apr 2022
  • The US 2 year Treasury Bond yield fell -0.01% while the 10 year bond yield increased +0.02%.
  • The US stock market had a minor whipsaw within the day but finished the day relatively unchanged. The S&P 500 inched lower by -0.02% (intraday high: +0.40%, intraday low: -0.51%), the Dow Jones dipped by -0.11% (intraday high: +0.48%, intraday low: -0.49%) while the Nasdaq rose +0.13% (intraday high: +0.75%, intraday low: -0.74%).
  • The crypto markets finished higher yesterday on a day with little movement in US bond yields with Bitcoin and Ether closing more than 2% higher. However, it should be noted that Bitcoin touched a 5-week low of around 38,600 yesterday before going higher.

HEADLINES & MARKET IMPACT

U.S. Treasury Secretary Yellen to meet with top finance ministers to address global food crisis

Notable Snippet: “Secretary Yellen is deeply concerned about impacts that Russia’s reckless war are having on the global economy, including the risk rising food insecurity in emerging market and developing countries around the world, particularly as which are still struggling to recover from the pandemic,” a senior Treasury official told reporters Monday morning.

The U.N. memo also noted that Russia and Ukraine produce about 30% of the Earth’s wheat and barley and provide the majority of the wheat bought by 36 countries. Many of those include some of the poorest nations on Earth, the report said.

Russia and its ally, Belarus, also export roughly 20% of the world’s fertilizers, threatening the globe’s agricultural production.

Thanks to the war and supply-chain pressures caused by the Covid-19 pandemic, food prices are at the highest levels ever recorded by the United Nations Food and Agriculture Organization, up 34% from this time last year.

WHAT WE THINK: Policymakers are finally waking up to the higher prices in agriculture wrought by the war but nothing can be done in the short-term. Inflation on this front will persist in the short term as the world leaders seek to attempt to solve this problem.

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U.S. to start training Ukrainians on howitzers in coming days -official

Notable Snippet: Last week, U.S. President Joe Biden announced an additional $800 million in military assistance to Ukraine, expanding the aid to include heavy artillery ahead of a wider Russian assault expected in eastern Ukraine.

The official, speaking on condition of anonymity, said the howitzer training would take place outside Ukraine.

The United States is planning on teaching Ukrainian trainers on how to use some of the new batch of weapons such as howitzers and radars and then for the trainers to instruct their colleagues inside Ukraine.

The United States has previously trained Ukrainian forces on Switchblade drones.

WHAT WE THINK: The US will continue to supply arms to the Ukrainian and the war will persist as long as no deal is made between Ukraine and Russia. The unexpected war, which was supposed to last a short time, is now turning into a protracted conflict and the implications on the energy and agricultural sectors will be inflationary.

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

Commentary: Finland and Sweden joining NATO is a greater security dilemma than solution

Notable Snippet: The Kremlin has issued an ominous warning to the North Atlantic Treaty Organization (NATO) about the consequences for the Baltic if it allows Sweden and Finland to join the alliance, as has been widely reported.

Dmitry Medvedev, a former president and a close ally of Russian President Vladimir Putin, said: ”There can be no more talk of any nuclear-free status for the Baltic — the balance must be restored. Until today, Russia has not taken such measures and was not going to”.

But the move to join NATO carries risks for both states, which have maintained a delicate balance of sitting with the West while not antagonising their powerful neighbour. Indeed, the two Scandinavian countries joining NATO provides more of a security dilemma than it does a security solution.

The idea of a “security dilemma” was identified by American Cold War scholar John Herz in 1951. When weaker states seek to increase their power to balance a stronger state, as the Scandinavians are planning to by joining NATO, the stronger state (Russia in this case) will likely consider this a threat and then respond accordingly.

WHAT WE THINK: The strongman politics in Russia may lead Putin to do the unthinkable. This is something to keep watch on.

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SENTIMENT

FX

STOCK INDICES

Best,
Phan Vee Leung
CIO & Founder, TrackRecord

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