Two tweets and the tariffs increased

When the word “constructive” gets abused, and UBER goes public.

12 minutes read report, 8 pages

To help speed reading blue is used for new arguments, forecasts are underlined and found at the beginning of each page, hyperlinks are marked.

How the forecasts did:

The last Saturday, while I was writing the past report, I could not have imagined the Trump’s tweet, that was sent 24hours later and turned things upside down. Given that the presented forecasts played well, a charlatan could have go as far as saying that his decision making process is so resilient that contains the unpredictable, market moving, US President. I am worse than that 🙂 and actively ask you to read the disclaimer. New paragraphs have been added.

For the record, the short EURJPY, EURUSD and GBPUSD forecasts were not triggered. All positions that have been triggered are in the green (long AUDUSD, long USDCAD, long USDindex) and it is worth noting that the long AUDUSD at 0,6965 hit bull’s eye.

The new increased tariffs are now a reality and global economy needs to adjust, as economy is always adjusting and as the world has always been the sum of contradicting and aligned interests. I am searching to take risk-on rebound trades this week.

Major events of last week:

Geopolitics: Pompeo visited Iraq. Japan and Russia talked on their territory disputes. North Korea started testing short-range missiles that are the clone or exactly the same with the Russian Iskander system. Diplomats from 8 countries including the USA, China and Russia met in Finland to discus policies governing the polar region.
USA-China: The prospect of a deal being finalized at the next G20 summit in Osaka on June seems far away. Tariffs on Chinese products have been raised on Friday, China is set to retaliate and both sides feel the need to manage market expectations and avoid the perception of a full breakdown.
Venezuela: The first arrest of Venezuelan MP by the Maduro regime has already happened, against the Reuter’s article on Tuesday that Mike Pence was incentivising the Venezuelan military to ditch Maduro.
Iran: Officials from the UK, Farnce, Germany and China met in Brussels to update the 2015 agreement with Iran (the one from which the USA have dropped out). Iran signaled that they would re-commence nuclear activity, unless EU succeeds in helping them within the next 1 month. The EU rejected the Iranian ultimatum.
Turkey: Turkeys Central Bank intervened as USDTRY tested the 6.2443 level.
Norway: Norges Bank kept rates unchanged at 1.0% and clearly communicated that they will raise rates on the next meeting on June.
Equities: Significant drop fueled by the new round of tariffs. UBER went public on Friday and dropped by 7%.
Cryptos: Another week in a row of increasing market cap. $204.5bn, +10.2% w/w, -75.2% from last year’s $821bn peak

Major events of next week:

By the middle of May, the investigation report that would allow (or not allow) Trump to set tariffs on EU and Japanese autos is expected to be released.
Tuesday’s OPEC monthly report.
1Q19 earnings Calendar: Navios Maritime earnings have been re-scheduled for Monday, Tilray on Tuesday, Alibaba and Cisco on Wednesday, Baidu and Walmart on Thursday

JPY

Long EURJPY at 123.14 and 122.74

Strengths of JPY:

Domestic demand is expected to pick up due to increased government spending and the current monetary policy. Yet, economy needs to overcome the upcoming consumption tax hike, scheduled to be imposed on October.
improving macro readings: GDP (yet, it is expected to decrease in 2019), inflation, retail sales, trade balance, M2, current account, manufacturing PMI (crossed 50), average cash earnings, capital spending, household spending, industries activity (but remains negative for 4^th month in a row), housing starts, consumer sentiment, bank lending

Weaknesses of JPY:

The source of concern are the exports due to the moderate global growth. Indeed, the trade balance fell.
deteriorating macro readings: unemployment, trade balance, Services PMI, industrial production, monetary base, consumer confidence

Watch / New Releases:

bank lending, current account, economy watchers sentiment, M2, machine tool orders, PPI
next Monetary Meeting of the Bank of Japan on 20 June.

AUD

Long AUDUSD at 0.6968

Strengths:

Parliamentary Elections on Sunday
the fact that RBA kept rate unchanged while the Central Bank of New Zealand proceeded with a rate cut.
rising Chinese inflation. (The only favoring macroeconomic release.)
Australian is currently having the first surplus budget of the decade.
improving macro readings: current account, home loans, unemployment, M1, service PMI (crossed above 50), private sector credit, private capital expenditure, AIG manufacturing index, household consumption, consumer’s sentiment, wage price index

Weaknesses:

Latest Manufacturing and Non-manufacturing PMI releases from China are still above the 50 threshold but they are decreasing. China further disappointed with the latest trade balance, new loans and M2 reading.
GDP latest reading was unexpectedly lower, unemployment increased and inflation fell.
Westpac, one of the top four Australian banks, is expecting two rate cuts, in August and November 2019.
deteriorating macro readings: GDP, inflation gauge, unemployment, job advertisements, inflation expectations, retail sales, trade balance, manufacturing PMI, home sales, building approvals, AIG construction index, company operating profits, decreasing capital expenditure, business confidence

Watch / New Releases:

home loans, wage price index, unemployment
Next monetary meeting of the RBA on June 4

CAD

Short USDCAD at 1.3528 and 1.3580

Strengths of CAD:

decreasing US crude oil inventories
housing market is expected to pick up in 2H19, following the stabilization in Toronto and Vancouver.
Iranian oil is supposed to be out of the market, pressing prices upwards.
improving macro readings: unemployment, inflation near the BOC’s target, Ivey PMI, retail sales, employment change, current account, trade balance, wholesale sales, housing starts, building permits

Weakness of CAD:

downward revision of expected GDP growth from the BOC and negative m/m GDP.
fiscal policy expected to have a -0.2% net effect in GDP growth.
weak government until the upcoming elections on October.
deteriorating macro readings: GDP (negative m/m number), wholesale sales, labor productivity, capacity utilization, Manufacturing PMI (bellow 50), Ivey PMI, corporate profits,foreign securities purchases, manufacturing sales

Watch / New Releases:

inflation, manufacturing sales
Tuesday’s OPEC monthly report.
Next Monetary meeting of the Bank of Canada on 29 May.

USD

Long USindex at 96.74$

Strengths of USD – Risk off points:

GDP q/q growth at 3.2%, way higher than the expected 2.1~2.8% range, resilient job market
Geopolitical risk is rising again in North Korea,Taiwan, Iran and Venezuela.
Improving macro readings: GDP, inflation expectations, personal spending, trade balance, unemployment, retail sales, wholesale inventories moving lower, consumer confidence, consumer sentiment, optimism, unit labor cost, durable goods orders, manufacturing Index, manufacturing PMI, services PMI, industrial production moving lower, new home sales, vehicles sales

Weaknesses of USD –Risk on points:

Economy is experiencing zero inflationary pressure with home prices increasing at a slower pace and unit labor costs decreasing.
Deteriorating macro readings: inflation, unit labor cost, core PCE, PPI, factory orders, current account, trade balance, Non-manufacturing PMI, consumer credit, construction spending, existing home sales

Watch / New Releases:

retail sales, capacity utilization rate, industrial production, business inventories, housing starts, building permits, consumer sentiment, inflation expectations
Next Monetary Meeting of the FED on 19 June.

EUR

Long EURUSD at 1.1173 and 1.1117

Strengths of EURUSD:

New polls on EU elections suggest that the shift of power in EU will not be significant.

Source: Financial Times

improving macro readings: GDP, inflation, trade balance, unemployment, M3, German GDP, German Trade balance, Manufacturing PMI (bellow 50),German Manufacturing PMI (way bellow 50), German factory orders, service PMI, wage growth, industrial production, economic sentiment, German economic sentiment, business climate, investor confidence

Weaknesses of EURUSD:

EU-USA trade relations will be the next point of focus.
deteriorating macro readings: inflation, retail sales, current account, private loans, PPI, consumer confidence, German industrial production, German retail sales, European industrial production

Watch / New Releases:

economic sentiment, industrial production, GDP, trade, balance, inflation
Next monetary meeting of the ECB on 6 June.

GBP

No forecast for GBPUSD

Strengths:

Upward revision of GDP growth from the BOE (1.2% February’s expectation, 1.5% May’s expectation) coupled with Carney’s comment that “it will require more, and more frequent interest rate increases, than the market currently expects”. His comment is valid, provided that there is a bounce in investments and hiring
Unemployment is expected to further fall to 3.5% by 2022.
improving macro releases: GDP, retail sales, unemployment, industrial production, construction PMI, Service PMI, average earnings and wages, trade balance, increasing public sector net borrowing, high street lending, lending to individuals, home prices

Weaknesses:

polls for the EU elections are presenting the unblushing Nigel Farage in the first place
property values predicted to fall by 1,25% within 2019, according to the BOE
deteriorating macro releases: consumer’s confidence, current account, M4, Business Investments, Manufacturing PMI, construction output, manufacturing production, industrial order expectations

Watch / New Releases:

average earnings, unemployment
Next Monetary Meeting of the Bank of England on 20 June.

Disclaimer

Issued by Labis Michalopoulos, CFA

labis@quantomental.com

https://quantomental.com/

https://dxml.wordpress.com/

For the readers of the report:

Redistribution is allowed as long as the author and his contact details are referenced.

This material is for Qualified Investors and Professional Clients only and should not be relied upon by any other person.

Past performance or past accurate forecasts is not a guide to future performance and the accuracy of future forecasts and should not be the sole factor of consideration. All financial investment decisions involve an element of risk.

This report is for information purposes only and does not constitute an offer or invitation to anyone to invest or trade and has not been prepared in connection with any such offer.

Any research in this document has been independently produced by Labis Michalopoulos, CFA for his own purpose. The views expressed do not constitute investment or any other advice and are subject to change. The author has an interest in the currency pairs, indexes and any other security disclosed in this report, as he is an active trader.

Reliance upon information in this material is at the sole discretion of the reader.

Opinions expressed in the report do not represent the opinion of Zulutrade and do not constitute an offer or invitation to anyone to invest or trade.

For qualified perspective clients of the advisory service:

GIPS standards are all about full, fair, consistent and comparable presentation of actual returns of the past. No models, no back-testing, no promises. I am doing that. I am publishing in real time, via a 3^rd party, my actual returns since inception where one can see the most strict, comparable, revealing metric of the industry: the monthly Sharpe ratio.

My current monthly Sharpe ratio stands at 0.27 as can be found at www.forexfactory.com/dxmix

My current annual Sharpe ratio is 0.27 multiplied by √12 = 0.27 x 3.46=0.93 Annual Sharpe Ratio

The numbers used to stand at 0.5 monthly Sharpe ratio and 1.73 annual Sharpe ratio up until the August of 2019 for 45 consecutive months. On 24 August 2018, I mistakenly ordered to open a position 10 times bigger that I am used to. My equity level is currently back on track, but my statistics are no longer as impressive as they used to be. My 54 months, since inception, monthly Sharpe Ratio (that includes the leveraged AUDUSD trade) stands at 0.27, equal to 0.93 Annual Sharpe Ratio.

I cannot claim that I will be performing with the return of my best months, but I can tell that I will hover around my average returns. Claiming with a 95% confidence, that my next month* return will be within my average monthly return ± 2 standard deviations is a well educated statement I can make anytime.

My average monthly* return ± 2 standard deviations is from -16.54% up to 20.49%

My average monthly* return ± 2 stadard deviations becomes -5.74% up to 9.47% , excluding the 4 months effect of the one time mistake trade.

* the monthly returns are the actual returns within a month. They are not presented on annualized basis.