France, China, rich/poor

EUR

First, I have taken profit on the USDCAD trade. That was a successful good news/bad price trade as the bullish USD news (bad Canadian data, strong US CPI, etc.) created many bangs of the head against the 1.43 ceiling and then a steady trend lower. I am happy to be out here. Symmetry suggests 1.38 is possible, but I’m open to the idea of a bounce now as the BoC is overpriced and risky assets are wobbling.

The accepted dynamic in the market right now is: stocks down = bonds up = USD down, but the market is at risk of getting caught the wrong way here as there is also the French dynamic unfolding and that story is EUR-negative and potentially even USD positive. When French spreads go wild, there is euro selling and some of that money will end up in the USA, even if the NASDAQ is mid-crumple.

New correlation regimes do not always come in one day and remain clean from thereafter. We are probably in a messy transition where correlations of FX vs. NASDAQ are unstable and when liquidity fears rise, the USD rallies. Plus, you have oil moving higher, Middle East fears ramping into the weekend, temperatures falling in Europe (energy crisis possibly imminent, still).

Here’s EURUSD vs. rate differentials and French spreads.

I was playing EURUSD for a correction higher, and part of me wants to go straight back to the short side. Liquidity is not plentiful. When the NASDAQ sells off by itself, that’s bearish USD, but when global assets sell off in tandem like this, it’s more likely to be a buy USD event in the short term.

So on paper, I like short EURUSD here, but I am not going to pull the trigger as it feels a bit too much like chasing price action. Plus, the unstable nature of USD vs. NASDAQ correlations is making me hesitate.

BTW, today is the first day since the Eurozone crisis that French 10-year yields are above those of the U.S. See chart.

To be clear on how I see correlations from here:

• AI Capex fears in the U.S. on their own = bearish NASDAQ, bullish bonds, bearish USD.
• AI Capex fears plus global stocks melting and gold and silver weak = liquidity suction = bullish USD.
• Oil to new highs = downward pressure on bonds, in theory, but becoming a growth scare story more than an inflation story so the net result is confusing. Bearish euro due to rising risks of a winter energy crisis.

This is a complicated framework to trade, but I think it’s the most useful one. You can’t just say risk off = sell USD (or vice versa). And as usual, USDJPY is backwards because the repatriation story remains valid and the market won’t buy USD above 158.50 or so because there is still some belief that Japan and the U.S. won’t tolerate anything above 160.00.

Asset liquidation

This information would have been more useful two days ago, but the market is currently running with a story about Chinese tax obligations. Hard to say if it’s true, but it does ring somewhat true as we have seen similar selloffs in risky assets around the April 15 Tax Day in the United States. This tweet explains it and here is a short story from Hubbis, an Asian wealth management website (via Tim Power).

The gist is that there was a tax trick people were using and now it’s being retroactively bonked on the head and anyone using the loophole now owes a ton of tax and that tax was due today. This creates an interesting scenario where you could argue:

• Acute phase of the payment window has now closed. Anyone with remaining tax owing is already subject to penalty so now there’s no rush.
• This would suggest peak fear in Asian markets like HSI and/or CS300.
• China National Team likely to come in tonight.
• Long ASHR here with a $1 stop loss and a short leash as a tactical trade could work on a rebound. A bounce to $32 or something is all I am talking about here, nothing major.

If you have diamond hands and the trade works out initially, you could even consider holding it into November as China’s NPC meets from 02NOV to 06NOV and there is always the chance of the bullish China fiscal stimulus we have been on guard for since Wuhan was in the news on a daily basis.

So, the trade idea, which is not investment advice because you should always trade your own view, is to buy ASHR around the close of NY trading today, looking for a rebound towards $32.00 or so. And if you’ve got a bullish view on Chinese NPC, and the trade works tonight, you can move your stop loss up and pray for fiscal rain. Or, you could buy 20NOV $31.00 calls.

Fact of the Day

Today’s nonsequitur made me wonder if the upmarket company stocks shown have outperformed the downmarket ones. It would be extremely surprising if they did not, given the k-shaped economy post-GFC, but I was curious. Here’s a basket of those companies above the zero line vs. those below, back to 1990. The index adds new companies as they are born and deletes those that are bankrupt or bought out.

Kind of makes sense that the beat of upmarket firms matches overall stock market performance, mostly. The wealth effect of a stronger stock market drives rich people to spend more money on Apple products and then in a recession companies like Dollar General prosper while Bloomberg Terminal Bros switch from Wolfgang’s to Burger King and Stepford Wives cut back on LULU and Pilates. In case you’re curious, I have provided the companies in the index and the best and worst performers since 2010. If we go into recession, you know which companies to short!

Upmarket in Tiffany blue and downmarket in DG yellow.

Major chains ranked by their proximity to expensive and low-priced homes.

Relative to baseline. Thanks Chuck!

good luck ⇅ be nimble