week #25 - 2024
Market Insights: signals
gm folks,
It's time to provide a comprehensive update on signals, markets, and fiscal matters.
With respect to macro, nothing has really changed. We wait for PMIs later in the week, for now, we were positioned long Z5 and 60/40. The latter is working well, while we took profits in Z5 and shorted Z4 on Friday. We are pretty much trading the range and probabilities of cuts into year-end. Today, we will have retail sales data from the US, while just 30 minutes ago, the ZEW was released, coming in below expectations, as you can see below. I bought the dip in BTPs against Bunds and am carrying Spain+Italy / France.
The next couple of days are quite interesting with the BoE. I'm holding a SONIA flattening position.
Before we continue, a little disclosure: I've been working on signals and made some changes. The signals remain the same, namely: trend, convergence, breakout, implied positioning, and acceleration. However, the methodology is slightly different. With that said, let's jump into it.
Looking at signals, we have the following in fixed income: noteworthy, trend followers liquidated big-time long positions in BTPs, as we see in the trend signal as well as acceleration, especially in the medium-term trend (16,64).
An extreme case in OATs, which were the true asset under pressure. Safe assets got bid. Bunds saw massive covering in the fast-trend, +0.64 in acceleration in the fast window. Now we don't have a big risk of mean-reversion by looking at the breakout signal, but it's better to keep an eye on it. Such fast moves can be useful to get exposure as things calm down. The idea in the trading plan is to get long BTPs against Bunds. Treasuries recovered nicely, and it was on our radar. We expected weakness in economic data, especially CPI, while positioning was quite biased on the hawkish side. Trend on Ultra is now slightly bullish, neutral on 10y, and still bearish on 2s. The convergence signal is still not supportive.
Looking globally, Gilts, JGBs, and Canadian government bonds are flashing green lights for longs according to signals. On the other hand, the front-end in EA is still a biased short. I would argue that this is more linked to risk premia and US monetary policy.
On a factor basis, an equal weight signal is simply saying: long BTPs, Gilts, Canadian bonds, and US 10y paper. Short OATs, Bunds, and JGBs.
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