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I wish I could take credit for the following theory, but I am not as shrewd as HSBC Spot FX Trader Brent Donnelly who noted in a recent piece;
My observation in past years is that the hot trades of the New Year start to work in late December and trend for the first 4 to 6 weeks of the year. Around the end of January, those trades become random. Sometimes they mean revert; sometimes they don’t.
I couldn’t agree more with this statement. I have noticed the exact same tendency.
In his research piece, Brent lists what he thinks are the “hot trades” for 2020, but instead of just regurgitating his forecasts, I thought I would take over from here and discuss where I believe the fast money is piling into (although this Brent fellow seems awfully smart because our lists are remarkably similar).
To understand the portfolio flows, I ask you to remember back to mid-December when I highlighted a terrific interview with hedge fund legend Stanley Druckenmiller [“Sold to you Stanley!“]. In a Bloomberg TV one-on-one, Druck stated:
“I am long equities.
I am long commodities.
I am short fixed-income.
I am long commodity currencies.
It’s ALL SYSTEMS GO!”
If I may paraphrase Druckenmiller, he has set up his portfolio for global reflation – at least relative to beaten-down-economic-expectations. However, Stanley is not going to get on Bloomberg and announce his portfolio makeup without having already made those changes. Yet it is also probably safe to say that Druckenmiller, on the whole, is way ahead of most investors.
Which bring us to my working theory; Druckenmiller’s opinion represents the direction smart fast money is shifting. Therefore, at the margin, we will continue seeing equities and commodities bid, while fixed-income stays offered. Like Brent says in his note, this portfolio re-balancing often takes six weeks to complete, so we shouldn’t expect these trends to reverse anytime soon. Portfolio shifts will most likely not be complete until the end of January.
Many market pundits are expressing confusion about today’s move higher in equities given this weekend’s geopolitical turmoil. Although events could escalate further, even with increasing tensions in the Middle East, financial markets might shrug off these worries as the fast money continues to re-position for global reflation.
If you want to fade these moves, be aware of this New-Year-portfolio-rebalance tendency. At the very least, think about scaling into it over the next few weeks.