Welcome to the FXDD Research: On the Daily newsletter. This publication provides readers with a sliver of our research process to help contextualize daily economic and market developments across the globe. We designed FXDD’s research process to be intuitive and actionable; therefore, you can expect regular call-outs on risk-reward scenarios we think are lucrative. We typically follow global macro markets, particularly the US, UK, EU, Japan, China, alongside the aggregate World economy. We also follow global assets, i.e., stocks, currencies, commodities, and fixed income (though to a lesser extent). We quantitatively do all this; therefore, you can expect most of our analysis to be standardized, consistent, and repeatable. Finally, while we will offer some call-outs and trading signals, we reserve our most granular work for our clients, so if you like what you see, please head over to our website (click here)to gain access to the arsenal of tools we have built.
Before we dive into our updates, here’s a sneak peek into our quantitative portfolio allocation model. Our model allocated exceptionally well over the last month and has been up considerably due to its allocations to risk-on assets:
Our portfolio strategy was up this morning, 1.4%, somewhat mitigating yesterday’s down day, taking the one-month performance to 5.3%. We continue to think the quantitative strategy is well-allocated to the current market trend, i.e., INFLATION. Here are the most recent developments in global macro:
Global Economic Momentum: Global economic strength increased, following increased economic momentum out of both the UK and US. In the US, Dallas Fed Manufacturing posted extremely strong numbers relative to expectations. In Germany, IFO survey data was mixed, with the expectations component surprising to the upside, but but business climate and current assessment componets disspointing. Overall, we continue to see a trend of “growing but slowing” across the global economy.
Global Policy: This week, we will get policy adjustments from the BOJ and the ECB. From a high-level perspective, we see the BOJ and ECB as two of the most dovish central banks globally and expect them to act in line with this. We will release our previews for the BOJ tomorrow and the ECB day after tomorrow.
Global Market Trends: Markets continue to love risk, with inflation assets and currencies rallying versus the dollar. In particular, gold has begun to gain some sequential momentum, reflecting the inflationary pricing of markets. In the global equity complex, we see major stock markets in the green, barring the Nikkei, which now has negative one-month price momentum. As of midday Eastern Time, commodity markets see potent moves in the energy complex, led by a continuous bid for natural gas. Our quantitative portfolio allocations continue to benefit from these moves, and we think there is more room for these inflationary trends to run, given their global breathe.
Having addressed the significant changes over the last 24 hours, let us look at our monitors and models. For those of you wishing to get “to the point,” here are our top trend signals on the long side:
Now, for those looking for more detail, let us look at the underlying models. We start by tracking economic data relative to consensus expectations, as the impact of financial data on markets depends on whether its surprises the upside or downside. We standardize this data and call this indicator Economic Momentum, i.e., higher values are positive and lower values are negative. The color-coding in the table represents higher/more downward momentum for a given country:
Next, we show our estimates for global growth through the lenses of our forecasts for global growth & CPI indices from the OECD:
As we can see above, our model estimates imply that we are in and around peak growth, with inflation mainly remaining sideways. Next, we show our Global Policy Monitor, which tracks the broadest measures of private-sector monetary aggregates (M4 money supply, credit impulse, etc.) along with our tracking of effective-central bank balance sheets (monetary base). The measures are normalized and standardized, with values above 50 implying rising monetary aggregates and below 50 reflecting slowing growth. The color-coding reflects increasing monetary base relative to its 5-year history for a given country:
Next, we turn to how this combination of policy and economics reflects in markets. Below, we show our Market Trend Monitor, which tracks changes in global investment markets to classify market pricing as expansionary, inflationary, deflationary, or stagflationary. We typically prefer allocations in line with the current market trend. The current market trend is INFLATION, i.e., favoring commodities:
Next, we look at our Currency Bloc Monitor, which aggregates exchange rate moves across 20+ currency pairs into significant regions or Blocs. We use this method to estimate the flow of capital in the global economy. The color-coding in the table reflects the strength of a Currency Bloc versus others for a given time frame. We show the evolution of these Currency Blocs over time:
Finally, we show our Trading Tools Report, for the CRB Commodities Index, given the strength in the energy complex. We display our various screens to assess risk and reward:
We look forward to sharing our extensive library of content with you over the months to come. If you enjoyed these materials, feel free to share this with friends or colleagues, and don’t forget to subscribe for more!
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