SP500 LDN TRADING UPDATE 20/01/25
WEEKLY BULL BEAR ZONE 6070/80
WEEKLY RANGE RES 6119 SUP 5945
DAILY BULL BEAR ZONE 5995/85
DAILY RANGE RES 6070 RANGE SUP 5968
WEEKLY ACTION AREAS & PRICE OBJECTIVE VIDEO TO FOLLOW - NOTE: NO CASH TRADING SESSION IN NY TODAY
GOLDMAN SACHS TRADING DESK VIEWS
As a trader, my primary requirement is a reduction in Fixed income volatility. I believe that increased real yields lead to higher equity valuations.
The risk premia in bonds does not translate into equity risk premia, making it difficult for me to connect it to peak EPS.
We are currently in a state of Excess Liquidity. What if the $6 trillion in liquidity causes the entire PE distribution to shift higher? I believe we can comfortably trade at 24x.
I don't observe peak EPS, and liquidity is significantly above the baseline. Therefore, until I witness central bankers acting contrary to Waller's actions, I remain optimistic about risk assets. Excess liquidity supports all assets, and this trend is likely to persist. Equities declined in December due to a negative liquidity effect (year-end withdrawal from RRP) and some hawkish signals from the Fed, but this situation has now been somewhat mitigated.
The crowd is reintroducing risk in delta and purchasing VIX call spreads to protect against unexpected tariff developments.
Following the robust risk parity rally, we can expect volatility next week. YES, but my main perspective is that hedge funds will experience FOMO after the FOMC meeting and pursue higher risk. BTC at 105k.
When considering a trade, my first thought is always about the potential downside. So, what are the risks associated with positive risk parity/short volatility strategies heading into next week?
Well, it could be quite significant. Will TRUMP decide to forgo tariffs ahead of time, or will he announce them and then panic, only to reverse course after equities decline first?
Equities plummeted in Q4 2018, with the Nasdaq finishing the year down 15%. Despite numerous pre-warnings, Trump proceeded regardless, and the Fed had to intervene. HOWEVER, this time is different....
1. There is no fiscal space available, unlike in 2017. Inflation is currently above target rather than below. The Fed did not promptly account for the risk-off impact on equities, which appears to be their current position (refer to SEP).
2. If Trump waits for the market's response, we are likely to witness a tightening of financial conditions.
Thus, the only constraint on Trump/Fed is the decline of equities occurring after the fact, not beforehand.
3. If the Fed maintains a hawkish stance, liquidity conditions will matter less, and we will require another substantial risk correction to alter that.
If your strategy involves a long position on volatility and a short position on equities, then a long position on inflation and commodities could be beneficial in both scenarios. However, this isn't my primary outlook because I believe that:
1. If he intensifies tariffs, it suggests he will also implement significant fiscal tax cuts or incentives domestically, which would draw growth from the rest of the world into the US. Conversely, if he takes a softer approach on tariffs, it would result in lower revenue and consequently less fiscal capacity, leading to a negative impact on global growth and a less favorable outcome for US growth, which would also result in a sell-off in US equities. Therefore, even with increased tariffs, I anticipate a rise in tariff revenue, providing him with more resources to allocate, or at least establishing a higher baseline, which is advantageous for US equities. In this scenario, a long position on the S&P 500 and a long position on the US dollar would be appropriate.
1. Equities can endure higher real interest rates, provided that long-term term premiums remain stable. Rising prices for core goods, food, and gas contribute to a favorable inflation narrative in the second half of the year, but this does not imply a central bank rate hike.
2. Indeed, equities are sensitive to changes in real yields, but the impact is relatively limited. Currently, higher real yields indicate potential growth and productivity, along with increased non-farm payrolls and a non-hawkish central bank stance.
3. Overall, if there is a significant dislocation. TIPS, CNH, USD, and US 210-year bonds have shown a strong correlation leading up to the election, but that correlation has now diverged. This indicates that the inflation market and CNH may not be reflecting the same re-acceleration risks that are priced into the US 210-year bonds and the performance of the US dollar.
The question at hand is whether the growth positivity we've observed in SPX, USD, and US 210s should translate into increased inflation expectations in the TIPS market for 2025. If you consider that to be the base scenario, then the short end of the commodities curves appears quite appealing, unless TRUMP disrupts the equity market by imposing higher tariffs than what is currently anticipated. I still perceive SPX and bonds operating within a low volatility environment. It's a delicate balance, but it's sufficient for the time being.
Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
Past performance is not indicative of future results.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 75% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Futures and Options: Trading futures and options on margin carries a high degree of risk and may result in losses exceeding your initial investment. These products are not suitable for all investors. Ensure you fully understand the risks and take appropriate care to manage your risk.
Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!