Adam Parry – Get some steepeners on for the second coming
Can you believe that the Christmas that never was was a month ago? Doesn’t time fly when you are having fun!
But cast your mind back to the week before Christmas and a very unusual astronomical event. The great conjunction of Jupiter and Saturn.
The 2020 conjunction was a very rare event indeed. The two planets had not been as close together on the earth’s sky dome since 1623. And it was the closest observable since 1226. At least we won’t have to wait too long for the next one, which is due on March 15, 2080.
The conjunction was also purported to be the mythical Star of Bethlehem, which guided the Three Wise men to the Messiah.
Now I am going to go a bit Omen on you. For those of you that do not know, the Omen was a 1976 film starring Gregory Peck about the arrival on earth of the Antichrist and spawned two sequels charting the life of Damien Thorne.
In the first film, Damien is adopted by the Ambassador to the Court of St James, and goes on to account for several horrific deaths. It is revealed that there was a conjunction seen in Europe on June 6 at 6am and that the boy carries the mark of the Beast on his head. 666.
In the second film, a teenage Damien continues to create havoc. In the third film, Damien is appointed Ambassador to Great Britain, thus entering the sphere of politics.
According to the third film, a conjunction was seen on March 24 1981, generating what is described as the second Star of Bethlehem. Damien realises that it is a sign of Christ’s second coming and orders his followers to kill all boys born in England on the morning of March 24.
See where I am going here?
Since that conjunction on December 21, the global scenario has certainly been looking increasingly apocalyptic. We have seen new strains of the coronavirus, accelerating the rate of transmission, overwhelming health services across the globe and resulting in record daily deaths in the UK and other countries this week.
Across the pond, we have seen the Capitol, that bastion of Western democracy, stormed by demonstrators.
We have seen floods in many parts of the United Kingdom on Christmas Eve and again this week, while in Japan, over 100 people died this week in a snowstorm.
You have to say that it feels as though Armageddon is upon us.
But do we have reason to believe that the conjunction on December 21 heralds a second coming on March 24?
Maybe. In terms of the virus, vaccination programmes are ramping up around the globe, even if some regions are slower than others. There is even the faint possibility that an old fool like me might have received it by March 24.
Meanwhile, across the pond, a person many across the globe thought to be the Antichrist has been replaced in the Oval office this week and disappeared to the fiery furnace of Florida.
All of which gives us all the hope of returning to something approaching normality in the second half of 2021.
But will the markets join suit and return to some semblance of normality. Nah. Course not.
Last week we focused on what might be seen as one of the biggest bubbles in history. Bitcoin.
But a few of you good folks brought some other bubbles to my attention. There is the electric vehicle bubble in the US, fuelled – excuse the pun – by the performance of Tesla’s stock price over the last twelve months. You know you are entering bubble territory when a chef friend of mine – with literally no market experience – asks you if it’s worth putting some money into Chinese firm Nio. And many of these are also connected to our old friend the SPAC.
By far my favourite, though, is the Goldman Sachs constructed index of non-profitable US listed firms. Yes, you heard me correctly. Non-profitable. Having trundled along quite merrily for a few years that index rose from 82 in January 2020 to nearly 400 last week. You really could not make it up.
As we said last week, being a part of those bubbles is great if you got in early doors. To believe that the market can never go down again is tantamount to financial suicide.
So where is an honest Joe going to make an honest buck? Well it’s very tricky.
We have been banging on about buying cheap out of the money puts on equity markets – especially US equity markets – for months, and all we would have achieved would be to give our premium back to the option market makers. And while I still fervently believe that those puts will come to fruition eventually, it is a frustrating exercise.
It’s a similar story in credit. You might get lucky and get a decent allocation on a hot deal that you can churn easily. But you don’t want to be holding too much paper with spreads as tight as they are.
You could always try and bank a few ticks on the net basis trades we talked about at the beginning of December. Oil is always worth a punt but is inherently risky. You could ship in a few Krugerands if you think things really are going to go belly up.
All of the above could come in and you will be wearing diamonds by the summer. But sometimes you just have to go back to the very basics and look at the rate markets and expectations surrounding various global economies.
So here are a couple of trade ideas to look at going forward.
As we said in our predictions for the year a couple of weeks ago, I like steepeners in the government curves. With the front ends anchored for a couple of years as the impact of the lockdown measures on the economy continues to play out, it will be further down the curve that we could see a sell-off if the vaccines work.
But what is the best play? Well a lot of funds will look at steepeners in the Eurodollar, Euribor and short sterling curves, but I think we need to go a bit further out, so I would look at 2/10’s trades. And what currency works best? If you look at the various economies before the crisis struck, you would have to say that the US looks most likely to bounce back much quicker than Euro land and a little quicker than the UK. And that may be something that becomes more apparent after Wednesday’s FOMC press conference.
The other ploy could also take advantage of that via a cross market spread. You could sell CT10 to buy 10yr Bunds or Gilts. But again, that trade is a little risky and your P/L will whip around. So to mitigate that risk, do the swap box, hedging both sides with bank credit. You may not make as much as if you just had the cross currency, but it does give you more of a chance to accrue profits over a longer period of time.
Now with today being Burns Night I should be giving you a recipe for Haggis, neeps and tatties. But I am quite sure all fears of the Antichrist have made you long for something hot and spicy. So this week’s recipe is Tandoori Chicken with homemade naan bread and a kachumber salad.
First the chicken. Take a breast of chicken per person and marinate overnight in plain, natural yoghurt, a jar of tandoori paste and lemon juice.
To make 10 naan breads, mix together in a jug 5g baking powder with 8g sugar, 150ml milk, 135ml water and a large egg. Take 560g plain flour and make a well in the centre. Pour in the liquid and make a soft dough. Rest for a few minutes and then knead in 1tbsp vegetable oil. Bring the dough into a ball, cover with a damp tea towel and rest for 2 hours.
Once rested take 70g of the dough and roll into a neat ball. Repeat with the remaining dough and rest for 30 mins.
For the kachumber, mix together tomatoes, cucumber, red onion, lime juice, coriander and salt and leave to stand for 10 mins before serving.
To cook the naan, turn your grill onto its highest setting and place the grill rack so that your frying pan will be as close to the heat source as possible. Heat a large heavy pan on your hob with the temperature as high as it will go. Roll out your dough balls into naan shapes. Place your naan in the hot pan and count for 20 seconds. Then place under the grill for about 30 seconds until the bread puffs up and browns. Remove from the pan and wrap in a tea towel for about a minute so that it softens a bit in its own steam.
The chicken is best cooked over charcoal on a Big Green Egg. But if you haven’t yet invested in one and ordinary barbecue, a grill or a griddle pan over the stove will work just as well. Serve with a yoghurt, mint and turmeric dip and away you go.
Enjoy and have a good a week as possible in these times of Armageddon.
On the Agenda:
- Wednesday: FOMC Meeting at 19:00 GMT. Rates expected to be on hold at 0.00%-0.25%; Eurodollars indicate a 5.2% probability of a 0.25% cut.
- Monday: Lagarde speaks at conference on Green Banking; participates in high-level leadership panel during virtual Davos Agenda Week.
- Monday: Bailey a panellist at Davos.
- Monday: CFNAM.
- Tuesday: FHFA House Price index; Richmond Fed.
- Wednesday: Durable Goods.
- Thursday: GDP; Initial Jobless Claims; Wholesale Inventories.
- Friday: Employment Cost Index; Pending Home Sales; Michigan Confidence.
- Monday: German IFO.
- Wednesday: GfK Consumer Confidence; French Consumer Confidence.
- Thursday: German CPI; Italian Consumer Confidence; Area Wide Consumer Confidence.
- Friday: French GDP; German Trade Balance; German GDP; French PPI; Italian PPI.
- Tuesday: Unemployment.