The Observatory
Reducing Commodities Exposures
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The Observatory is how we systematically track the evolution of financial markets and the US economy in real-time. Without further ado, let’s dive into what our systems are telling us:
Markets: Yesterday was a tough day for those managing equity risk, as equities continued falling in unison. Dispersion within equity sectors has reduced, as absolute returns have all converged, with the notable exception of the Energy sector, which continues to benefit from the dominance of a firm (+) G (+) I regime. On the short side, Communications stands out as an outperformer, as the best-performing equity sector short position on a year-to-date basis. Opportunities within Commodities remain abundant, with our preferred exposures generally in the green; however, these moves have also triggered signals to reduce exposure across the board. Meanwhile, Treasuries continue to be regime-supported exposures across the curve; however, signal strength has moderated, and therefore, our systems have not flagged attractive entry points.
To summarize our systems' current assessment: Our Market Regime Monitors show that we have started the week once again in (+) G (+) I; however, the odds of (-) G (+) I have accelerated significantly. Our Momentum Monitors that US Equity Momentum continues to struggle. Similarly, Treasuries remain extremely weak; however, they will likely bounce from their current 2% Momentum Score as they have deviated significantly from our regime expectations. Consequently, our systems tell us that the best opportunities are Long: Bonds, Gold, Cotton, Lean Hogs, Live Cattle & Sugar, and Short: Communications. However, our Risk Management Monitors indicate that we can ADD to LONG: Bonds & Cotton. We can REDUCE our LONG: Gold, Lean Hogs, Live Cattle & Sugar, and SHORT: Communications. Our Expected Return Strategy is LONG: Cotton & Sugar.
Macro: Yesterday's Markit PMI showed both sequential strength and surprising consensus expectations, resulting in significantly higher Economic Momentum. These shifts in PMI survey data are potentially due to a month-on-month post-Omicron bounce in economic activity. Additionally, FHFA home price data was also sequentially stronger and higher than expected, sustaining inflationary pressures. Nonetheless, these sequential improvements are within a downtrend in data.
To summarize our systems' current assessment: Our GDP Nowcast and Economic Momentum measures have diverged over the last week, with our GDP Nowcast roughly unchanged, but our Economic Momentum turned higher. This divergence is likely driven by a material repricing of growth expectations lower. However, our systematic forecasts for growth tell us that there is material deceleration ahead of us during the March-April period. Our Liquidity Monitor shows that Repo activity slowed in January, alongside flows into Money Market Funds. These suggest tightening private liquidity for financial markets.
The future is dynamic, and our systems adjust as new information is available. Our bias is to allocate for the existing regime while trying to peek around the corner to what the future may hold. Finally, we optimize these views to minimize portfolio risk, resulting in our trading signals. We show all this in the document below.
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