A 2023 Global Macro Outlook
In this episode, Alf, CEO and Founder of Macro Compass, and Andreas Larsen, CEO of Steno Research, talk about best trades of the year, business cycles, equity markets, liquidity cycle and more.
Read our notes below to learn more.
2022: A year in review
People, even smart investors, had a very hard time adapting to the Fed raising interest rates because they thought the Fed is going to have their back.
There was a lot of recency bias which people tend to want to extrapolate from their last observation and last period.
A lot were surprised when Putin decided to invade Ukraine.
Global macro outlook
An overall driver of asset allocation in 2023 will be the mere fact that the European business cycle, also in inflation terms, lacks the business cycle of the U.S. between 5 and 7 months.
For the first half of 2023, it will look ugly in inflation terms in Europe.
Considering allocation to fixed incomes within the next 6 to 9 months.
China’s reopening is actually happening and will go ahead full steam.
When it comes to asset allocation, positioning is extreme heading into 2023 in many ways.
An extreme outlier is $EUR/$USD in positioning terms at +40% of net open interest means that the market is net long to $EUR vs. $USD.
The market is net short 77% in NASDAQ.
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It’s very rare to have extreme bearishness in equities and at the same time, have optimism around euro vs. dollar.
The big picture is that the economy will keep slowing down pretty aggressively and if it doesn’t, central bankers are going to make it slow down.
There will be a lot of pull forces in the meantime and one of them is China’s reopening which means nominal spending is going to go up which also means there will be some supply chain bottlenecks again.
One thing for macro investors is how to navigate the time horizon and risk management around this push and pull.
The euro can appreciate in the 1st stage but what happens when credit spreads in Italy and starts to become a problem.
In a global slowdown, the Japanese Yen generally performs and now, Japan is making sure that domestic players are rewarded more for holding cash within the country.
Most people are forgetting emerging market central bankers which have done most of the tough work in 2021.
The U.S. and European Business Cycles
They looked at European shortened interest rates as a lacking function of the U.S. core inflation and curvature of the yield curve and what they got was a model predicting 2-year German shots at 5.25% in roughly 180 trading days from today.
It’s interesting to see how sensitive the Euro swap curve is to core inflation relative to what happened to the swap curve in dollar terms when core inflation rallied in the U.S.
Expect the sensitivity in curvature terms to be even larger in Europe.
Gear up for -250 basis points and spread between tens and twos.
100 basis points move into rates is gigantic in standard deviation terms in Europe and this would flatten the Euro yield curve very aggressively.
The rapid rise in basis point terms in 30 year rates is going to cause some issues to European Pension Funds.
Short-term correlations between Italy to German spread vs. EUR/USD widening already points to EUR/USD fair values around one again.
If a person is sitting on European soil, it actually makes sense to add some equity risk in $USD on a naked ethics basis since you have an extreme positioning looking for a weakening $USD at the same time, have an extreme positioning looking for a weakening of U.S. equities.
The forex and equity exposure might have set each other and you might want to capture some risk premium in the meantime; something to consider for next year.
If there’s another strong labor market report in January, the terminal rates will rise higher and the carry will be wiped out very quickly by the negative mark to market.
Equity Markets in 2023
There’s one sector that looks outright cheap on forward P/E’s relative to history and that’s energy.
Energy is still in single digit territory on forward P/E’s.
All other sectors are still in the close to 20 territory in forward P/E’s which is not cheap in historical context.
South America has clearly some of the lowest valuations in P/E terms also relative to its own history.
The problem with equity valuations is that they’re going to compete next year with risk-free rates even in Europe at 3% and in the U.S. at 4.5%.
Earnings and valuations almost never bottom at the same time.
Liquidity Cycle in 2023
January and February look relatively positive on liquidity.
We have the debt ceiling looming in the U.S. which means that the U.S. treasury will have to empty the treasury general account ahead of the crossover date.
The dollar liquidity will increase to a magnitude of roughly $6.3tn which is an increase of a little more than $300bn in a matter of a couple of months that is probably enough to lift S&P500 to just maybe above $4,000.
In a double whammy liquidity perspective, as the U.S. treasury will rebuild a sketchbook cash buffer withdrawing liquidity from the rest of us while the Fed will likely do QT, it is enough to bring liquidity to around $5.25tn which means S&P500 will go around $3,300.
A more macro assessment of portfolio and risk management is important to make sure that your purchasing power is protected.
When inflation in the U.S. goes down, it is ideal to have a basket of long utilities like health care and staples vs. short energy discretionary and financials.
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TODAY’S EDITION IS BROUGHT TO YOU BY TREZOR HARDWARE WALLET
Navigating the waters of crypto is risky; even the biggest CEXs & stable coins can have huge risks…
Act now, click the link below & become your own bank via self-custody.