HomeResearch and NewsNegative yields are not forever: debt market bubble will explode someday
Alexey Golubovich CIO, Chief Strategist, Managing Direcor

Negative yields are not forever: debt market bubble will explode someday

EQUITIES The start of the bear market is not far away, but now the market is only forming the top

  • Trade S&P500 equity index at 2100-2250 range with short position and put options purchase priority.

  • Short Russian equity index / ETF (RTS, RSX) and the most liquid single stocks (Sberbank, Yandex) with RTS target of 750-800 points.

  • Short country-specific ETFs on «Fragile Five» states and weak emerging markets, such as TUR (Turkey), EWZ (Brazil) and EZA (South Africa).

  • Long oil and oil-service single stocks and industry-specific ETFs, such as XOP, OIH, MRO, RIG in a case of Brent crude oil price drop to $40 per bbl.

  • Short overvalued Metals & Mining stocks (FMG.AX, AAL.L, XME, ABX, VALE) to buy them 20-25% lower (Chinese demand deterioration, large inventories and speculative long positions liquidation).

  • Short China-specific ETFs and Chinese single stocks with high liquidity on US stock exchanges (ASHR, CHAD and ADRs: BIDU, BABA, WUBA, CTRP, LFC).

  • Long / short speculative trade: buy deeps in MU, M, CNX, FSLR in the USA and in Magnit, etalon and VIP in Russia, short strengths in FB, Amazon, Netflix, Google, Tesla and large US banks.

CURRENCIES A break in US dollar strengthening is close to the end, Euro further weakening is highly probable

  • Short EUR/USD at 1.13-1.14 with a target of 1.08 and 1.05.

  • Short USD/JPY at 108-110 with a target of 90-95 (disappointment in «Abenomics» and BOJ actions).

  • Trade AUD/USD at 0.73-0.80 range and GBP/USD at 1.25-1.33 range.

COMMODITIES The worst is over, but large inventories and sluggish demand will determine volatile side trading

  • Short silver above $19.0 with a target of $17.0. Long gold below $1200 with a target of $1400.

  • Long wheat and corn long-dated futures, e.g. Jul and Dec (La Niña will result in droughts and poor crops harvest in 2017).

FIXED INCOME The market undervalues a probability of Fed’s rate raise as well as European debt bubble problem

  • Short long-dated European sovereigns (Germany, Italy) with a target price 6-8% lower, short Japan sovereigns at yield below -0.2% with a target yield of 0.2% and short 10-year US Treasuries at yield of 1.55-1.60% with a target yield of 2.0-2.25%.

  • Short long-dated emerging markets Eurobonds (Turkey, Kazakhstan, Russia) with a target of YTD lows.

  • Long short-dated Russian Eurobonds (Russia-20, Russia-23, Lukoil-19) at yields above 3.5-4.0% to reduce a cost of carry produced by other short positions in fixed income instruments.

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US banks outperformed the broad market on MoM basis, after two consecutive months of underperformance, but banks declined significantly in absolute terms in October. Moreover, BKX index underperformed S&P 500 index in four months over the last 6. In October, US banks decreased by 5.7% MoM vs -6.9% of SPX index.

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US banks again underperformed the broad market on MoM basis, the forth month of the last five. But, in fact, US banks were relatively flat over the last 5 months, trading in a narrow range of 103-111 points on BKX index. In September, US banks decreased by 4.8% MoM vs +0.4% of SPX index.

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Report Oil Market Report - September 2018 Vitaly Gromadin

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