The Trump Trade: PEACE?

Market's mean reversion into FOMC. The election in Japan this weekend. And what if... Russian sanctions are removed. What's the trade? Also, a warning on precious metals.

Market Vibes ~ Election Wobble?

»CLUB/EDGE client post October 24th

Before getting into some potential "Macro Trump Trades", I wanted to remind you that market breadth is still gently falling, as net volume gently continues to sell under the surface, and as VIX is hugging my 19.29 bull/bear Maginot Line. Not such a surprise with the election a mere 8 trading days away - and FOMC in 10! Vol is bid, but for it to move strongly higher, we need a macro trigger. And no, earnings don't count as macro.

But this does:

BREAKING: Qatar Airways suspends commercial flights to and from Iran, Iraq and Lebanon

With that weekend risk, I offer up a friendly reminder to keep your portfolio hedges on during geopolitical and election uncertainty, while expecting market to climb the proverbial wall-of-worry into year-end.

Here are the guardrails I offered up earlier for clients:

“VIX needs to get/stay > 19.29 to really press market shorts intraday and 23.76 to get really in play (ala early August redux).
But for that, we would most likely need above 4.36% on 10Y yield.”

Market vibe to me is more mean-reversion for indices & stocks back to their 10W EMA from extended levels, where I expect we get defended.
Again, unless we get a macro trigger.

Japan Election Surprise?

The Sunday night elections in Japan may have some worried about BOJ rate hike odds or yen carry trade unwind.
I think falling oil and US yields are bigger triggers for yen carry trade unwind, and neither are threatening at this moment in time.

In the meantime, I already discussed how US bonds & yen should get bid once USDJPY falls back below major resistance of 152.
That may have started today.

As for the elections in Japan, it does bear watching:

When Ishiba dissolved parliament on Oct. 9 and called a snap election to be held on Oct. 27, many analysts expected the ruling coalition to comfortably win a majority and give the new premier a freer hand on policy.

"Extraordinary monetary policy cannot cure Japan's ills," Ishiba wrote in [his] book, blaming Abenomics and ultra-low rates for causing excessive yen falls, hurting commercial banks' profits and eroding fiscal discipline.

Yes, Ishiba is a yen hawk, but how much power can he really assert to roll back "Abenomics" given US has the bigger power?

As a result, I do not expect BOJ to hike this year or even next.
Enacting tighter fiscal policy in Japan while ROW is loosening is simply not priced in because it is improbable.
If it does, then yen carry trade unwind will very likely trigger a derisking of US equities.

Until then, let's talk about Trump.

The Trump Macro Trade

I wrote about Trump back in January with a lens on his policy potential to be inflationary. Much of this analysis still applies, except the “cost of energy” part. I turned strongly bearish oil in April.

Then last month I told clients my “Unpopular Election Prediction”…
(before the 60 Minute interview or Vegas odds put Trump ahead of Harris)

“I predict Trump will win.”

I posted this BRICS news on X today with the caption: "What's the trade?"

Russian President Putin says he welcomes discussions with Donald Trump that seek to end Russia's war with Ukraine.

So many good answers, but one really got the point of my tease:

Trump said he will remove all sanctions on Russia!

That's correct. Should Trump win the 2024 election, one trade we can bet on now is peace.

By that, if Trump removes sanctions on Russia, its the end of the Ukraine War - how land is divided, what concessions are made, personal opinion on the matter... that's is not my point.

My focus is to consider how best to tactically be positioned in our portfolios should Trump win and Russian sanctions be removed.

1. Peace leads to relief for Europe and much rebuilding of infrastructure. Euro rises at first.

2. Peace leads to less war funding by US, which means less printing of dollars and less fiscal strain.

3. Peace leads to geo-political risk premium getting removed from the price of oil, gold, wheat and related commodities.

4. Peace leads to less demand and production of war materials by US defense contractors (RTX, LMT, GD etc).

5. Peace leads to falling US dollar (especially relative to Euro) and US yields (especially if Russian-seized assets by US Treasury are returned).

6. Peace leads to falling inflation from falling food and energy prices which helps consumers which acts as small boost to economic stimulus.

7. Peace leads to falling yields which results in more normalization of rate cuts. This is net bullish for US bonds.

Precious Metal Bulls: Careful

As I posted yday in #swing-ideas as follow up to our very profitable gold, silver & miner trades since March/April, peace is a time to protect precious metal longs.

As Geoffrey reminds,

"End of war [is] usually not good for Soft and PM commodities."

Caveat: Even if Gold and Silver fall on Trump getting elected on prospects of him removing sanctions on Russia, precious metals are still a viable trend long on other macro considerations - China selling USD to buy Gold in Yuan, for example, or US proliferate spending.

Anyway, after the initial precious metal sell-off, as the USD falls, gold & silver likely get bid back up.

Geoffrey sold all his gold, silver + miners of late after recommending strongly early this year. He said he would go back in on "a big war relief plunge".

And why would the US dollar fall on peace?

Geoffrey again:

"Wars are currency destroyers in all records I can see.. ALL OF THEM."

Often times US dollar and yields travel together, but magnitude matters.

• For yields to really deflate, we need either a fiscal plan or a recession pulled forward.

• For dollar to really deflate, US govt quasi-fiscal deficits just need to keep rising.

The trend, after all - even with peace in Ukraine and/or Middle East - is still a morass of US money printing that has caused USD & UST to be worth less big picture. And why I keep repeating the mantra since summer of 2020 of investing in THINGS OVER PAPER.

If it happens, sanctions removal on Russia is a short on WW3 - a trade I'm sure many of us would like to make.

But first Trump has to win; otherwise, we continue our "crack-up boom" on equities run, and “bonds are trash” trend.

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Friday Live Trading Room Note

I'm traveling Friday but my live trading room is open! Thank you @Mikey Bot @archnakj @Rithika @Nel for covering!

Macro-to-Micro Options Power Hour

Here is the recording that #options-mentor-hans and I did Wednesday that covered lots of option education & open trades including that beautiful TSLA Nov 200P/200C risk reversal I suggested Tues & Wed that cost $2 to make $20! Congrats Tesla longs into earnings!!

Macro-To-Micro Options Power Hour / Oct 23, 2024

Hans and I will meet up in #chase-live-huddle with clients next Tuesday at 2PM - instead of 1PM as I have an interview just before - then we are back live Wednesday after the close for our next weekly installment of Macro-to-Micro Options Power Hour. You are all invited to both!!

Have a great weekend and see you Monday in my trading room!!