I read your article exactly one week after publishing, so, with the benefit of hindsight on my end, I have to say: spot on!
Truly great takes here, specially on the equity side. The market always has a way of going towards the max pain, right? It is truly amazing.
I think you are also very brave in calling out the lack of drivers for EUR rally, and last week's price action clearly aligns with your view, momentum is slowing and "the end of the USD" seems to be taking a breath. Could flows persist against the greenback? Maybe, I don't know. Maybe there's a secular decline that brings the USD lower, which I wouldn't necessary say its a bad thing for the US economy. But on a shorter term, it seems to be exhausted and you called it.
Regarding oil, although SPX and WTI have been correlated as you point out, last week's correlation seem to drop, with stocks rallying and oil tanking further. Opec announced yesterday to extra 411k bpd coming in June, I'll be sure to check price action tonight/tomorrow to see if there's a news failure and oil doesn't go much lower than this, any thoughts?
Also, though I know you don't normally trade in relative value, wouldn't you think that Oil and SPX seem to be pricing a divergent economic landscape? I get lower oil could reflexively push stocks higher as there's less inflation, higher real wages and stronger economic conditions, but that should also, in turn, push oil higher. Haven't done proper math on it, but it seems to be that SPX/USO is overbought technically and, fundamentally, I can't reconcile both price actions; if SPX is correct about economic strength, Oil should get a bid close to this level, IMHO.
Would love your thoughts here.
Thanks once more for sharing your knowledge and thoughts, it is greatly appreciated.
Hey Valentino, thank you for the comment - I appreciate it!
With regards to oil, I will remain on the sidelines for now. The news flow around Saudi Arabia, OPEC+ and output increases is negative and the market is trading poorly. Should the US dollar strengthen from here, it would likely also be marginally bad for oil. Positioning is getting more and more short - I can see it getting even more extreme though. I am monitoring the market closely for a reversal. It could take one week, two weeks, four weeks or even longer to play out. We will see.
I am not sure if oil is actually pricing in a weaker economic landscape. I think the poor price action is mainly related to news around output increases. But I agree, ultimately, lower oil prices would be positive for the economy because energy prices fall and inflationary pressures decrease, which might even imply lower interest rates. You could look at RV trades between SPX & oil, but keep in mind that the correlation is unstable.
Dear Mr. Repo,
Thank you for once again sharing a great piece.
I read your article exactly one week after publishing, so, with the benefit of hindsight on my end, I have to say: spot on!
Truly great takes here, specially on the equity side. The market always has a way of going towards the max pain, right? It is truly amazing.
I think you are also very brave in calling out the lack of drivers for EUR rally, and last week's price action clearly aligns with your view, momentum is slowing and "the end of the USD" seems to be taking a breath. Could flows persist against the greenback? Maybe, I don't know. Maybe there's a secular decline that brings the USD lower, which I wouldn't necessary say its a bad thing for the US economy. But on a shorter term, it seems to be exhausted and you called it.
Regarding oil, although SPX and WTI have been correlated as you point out, last week's correlation seem to drop, with stocks rallying and oil tanking further. Opec announced yesterday to extra 411k bpd coming in June, I'll be sure to check price action tonight/tomorrow to see if there's a news failure and oil doesn't go much lower than this, any thoughts?
Also, though I know you don't normally trade in relative value, wouldn't you think that Oil and SPX seem to be pricing a divergent economic landscape? I get lower oil could reflexively push stocks higher as there's less inflation, higher real wages and stronger economic conditions, but that should also, in turn, push oil higher. Haven't done proper math on it, but it seems to be that SPX/USO is overbought technically and, fundamentally, I can't reconcile both price actions; if SPX is correct about economic strength, Oil should get a bid close to this level, IMHO.
Would love your thoughts here.
Thanks once more for sharing your knowledge and thoughts, it is greatly appreciated.
Best,
Valentino
Hey Valentino, thank you for the comment - I appreciate it!
With regards to oil, I will remain on the sidelines for now. The news flow around Saudi Arabia, OPEC+ and output increases is negative and the market is trading poorly. Should the US dollar strengthen from here, it would likely also be marginally bad for oil. Positioning is getting more and more short - I can see it getting even more extreme though. I am monitoring the market closely for a reversal. It could take one week, two weeks, four weeks or even longer to play out. We will see.
I am not sure if oil is actually pricing in a weaker economic landscape. I think the poor price action is mainly related to news around output increases. But I agree, ultimately, lower oil prices would be positive for the economy because energy prices fall and inflationary pressures decrease, which might even imply lower interest rates. You could look at RV trades between SPX & oil, but keep in mind that the correlation is unstable.
Hope this helps!
Thank you Mr. Repo.
You clearly point to the risks of the RV trade as correlations could switch and the USD being bid would hurt oil.
Might be wrong, but I do believe Oil is pricing in more than supply factors, and that equities seem to price stronger econ ahead.
Appreciate your takes! Will dive into your piece from today.
Thank you!