30Y Micro Yield (
30Y1!
), Micro Nasdaq (
MNQ1!
), Chinese Yuan (
CNH1!
), Live Cattle (
LE1!
)
On January 2nd, I published an idea titled “Year of the Rabbit: ‘Short-tailed’ Trading”. My outlook for the new year was:
“In the new year, uncertainties will remain the key price drivers of global stock markets: central bank policy, inflation, economic growth, geopolitical crisis, and China reopening. Depending on the specific outcome, the impact of a given factor could range from very positive to very negative, and anything in between.”
Eight months into 2023, we have witnessed some extraordinary events playing out:
• US regional bank crisis shocked the global financial markets. However, swift government actions helped starve off a chain reaction that could trigger systemic risk;
• Decades-high US inflation has quickly come down. Fed tightening policy does work, even though it usually has a 10-month lag;
• The US debt ceiling has found a resolution. Instead of raising the debt limit, Congress suspected it for two years. In a matter of two months, the national debt has increased by $1.3 trillion. This helped push Fitch to downgrade the US sovereignty rating;
• China reopened after three years of Zero-Covid policy. While the economy rebounded in Q1, it quickly deteriorated in Q2. The economic engine seems to lose steam quickly.
Trading Strategies Revisited
Under these macro backdrops, it’s a good time to revisit some of my own trade ideas. I write on TradingView weekly and have published 31 ideas so far in 2023. Of these ideas, TradingView selected 13 to be featured on “Editors’ Picks”. Below are recaps of four ideas published in July and August.
July 10th: Housing Cost Jumps Amid Falling Inflation
Trade Idea: Long CBOT 30-Year Micro Yield Futures ($30Y)
My theory:
• The decline in home sales countered the effect of rising funding cost, putting the mortgage rates in sideway moves.
• Now that the housing market recovers, 30-year Fixed could be on the way up.
• July FOMC meeting could provide a boost if the Fed raises 25 bp as as indicated by the Fed Watch tool? .
Hypothetical Result for Illustration Purpose Only:
• Changes in market prices: August contract (30YQ3) was quoted 4.012 on July 7th and 4.381 on August 18th, an increase of 369 points;
• Gain (Loss): Each point is worth $1. Therefore, 1 long 30YQ3 would gain $369;
• Return: Using the $290 margin as cost base, this trade would have a return of 127%.
Where are we now?
It’s my long-held belief that the negative yield curve environment would reverse back to normal. Yield spread is finally narrowing. 30Y yield is now higher than 10Y yield.
July 24th: Implications of Nasdaq 100 Rebalancing
Trade Idea: Spread trade – Buy S&P Technology Select Sector Futures ($XAK) and Sell Micro Nasdaq 100 Futures ($MNQ)
My theory:
• The Nasdaq 100 rebalancing is a unique issue with the Nasdaq 100 index. It has nothing to do with the fundamentals of these companies and has no impact on other Tech sector stock indexes which also include the same component companies;
• In the long run, Nasdaq 100 rebalance will dilute the impact of the largest stocks. Strong growth in Big Tech will be fully represented in XAK but capped in MNQ.
Hypothetical Result for Illustration Purpose Only:
• Market prices: MNQ and XAK were quoted 1,786.60 and 15,555 respectively on July 21st. On August 18th, they were settled on 1,665.20 and 14,744, respectively.
• Trade setup: 1 XAK - 6 MNQ = (1 * 1786.6 * 100) - (6 * 15555 * 2) = 8,000
• Initial margins: 9500 + 1680 * 6 = $19,580
• New Spread value = (1 * 1665.2 * 100) - (6 * 14744 * 2) = 10,408
• Gain (Loss):10,408 – 8,000 = $2,408;
• Return: Using the $19,580 margin as cost base, this trade would have a return of 12%.
Where are we now?
As expected, XAK held up better than MNQ even though both were trending down.
August 7th: What Disinflation: Beef Price Went Up 64% in 5 Years
Trade Idea: Short Cattle-Hog Spread – Sell Live Cattle (
LE
) and Buy Lean Hog (
HE
)
My theory:
• In my opinion, the cost factor pushing pork prices up in the short run is greater than the supply-demand force that drives up beef prices in the long run.
• There may be room to short the cattle-hog spread, until pork prices stabilize in a new equilibrium.
Hypothetical Result for Illustration Purpose Only:
• Market prices: LE and HE were quoted 183.10 and 83.25 respectively on August 4th. The cattle-hog spread was 99.85; On August 18th, the new spread was 96.41 (LE 178.53 vs. HE 82.13)
• Gain (Loss): The cattle-hog spread was narrowed by 3.44. Since we short the spread, we would gain $1,378 (=3.44 x 400);
• Return: Using the $3,200 margin as cost base, this trade would have a return of 43%.
Where are we now?
Cattle futures were down 2.5% while hog lost 1.4%, which helped narrow the spread.
August 14th: CNH – Hedging Currency Risks
Trade Idea: Long USD/Offshore RMB Futures (
CNH
)
My theory:
• The key drivers in the US/China currency exchange rate: relative interest rates; relative stock market performance; relative economic strength; and the dynamics of the US-China relations.
• Yuan could break out of the recent range with USDCNH going above 7.50, if there are more headwinds ahead
Hypothetical Result for Illustration Purpose Only:
• Market prices: September contract (CNHU3) was quoted 7.2646 on August 11th and 7.2921 on August 18th, an increase of 275 points;
• Gain (Loss): Each point is worth 10 yuan. The gain would be 2750 yuan, or $377 at current market price;
• Return: Using the $21,100 margin as cost base, this trade would have a return of 1.8%.
Where are we now?
• Since I published this idea a week ago, the CNH exchange rate broke critical support levels of 7.27, 7.28, 7.29 and 7.30 sequentially;
• In my opinion, the government would prioritize stabilizing the economy and monetary easing policies over the task of defending its currency;
• A weaker Yuan may be even preferable as a policy tool to support China’s export.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
30Y1!
), Micro Nasdaq (
MNQ1!
), Chinese Yuan (
CNH1!
), Live Cattle (
LE1!
) On January 2nd, I published an idea titled “Year of the Rabbit: ‘Short-tailed’ Trading”. My outlook for the new year was:
“In the new year, uncertainties will remain the key price drivers of global stock markets: central bank policy, inflation, economic growth, geopolitical crisis, and China reopening. Depending on the specific outcome, the impact of a given factor could range from very positive to very negative, and anything in between.”
Eight months into 2023, we have witnessed some extraordinary events playing out:
• US regional bank crisis shocked the global financial markets. However, swift government actions helped starve off a chain reaction that could trigger systemic risk;
• Decades-high US inflation has quickly come down. Fed tightening policy does work, even though it usually has a 10-month lag;
• The US debt ceiling has found a resolution. Instead of raising the debt limit, Congress suspected it for two years. In a matter of two months, the national debt has increased by $1.3 trillion. This helped push Fitch to downgrade the US sovereignty rating;
• China reopened after three years of Zero-Covid policy. While the economy rebounded in Q1, it quickly deteriorated in Q2. The economic engine seems to lose steam quickly.
Trading Strategies Revisited
Under these macro backdrops, it’s a good time to revisit some of my own trade ideas. I write on TradingView weekly and have published 31 ideas so far in 2023. Of these ideas, TradingView selected 13 to be featured on “Editors’ Picks”. Below are recaps of four ideas published in July and August.
July 10th: Housing Cost Jumps Amid Falling Inflation
Trade Idea: Long CBOT 30-Year Micro Yield Futures ($30Y)
My theory:
• The decline in home sales countered the effect of rising funding cost, putting the mortgage rates in sideway moves.
• Now that the housing market recovers, 30-year Fixed could be on the way up.
• July FOMC meeting could provide a boost if the Fed raises 25 bp as as indicated by the Fed Watch tool? .
Hypothetical Result for Illustration Purpose Only:
• Changes in market prices: August contract (30YQ3) was quoted 4.012 on July 7th and 4.381 on August 18th, an increase of 369 points;
• Gain (Loss): Each point is worth $1. Therefore, 1 long 30YQ3 would gain $369;
• Return: Using the $290 margin as cost base, this trade would have a return of 127%.
Where are we now?
It’s my long-held belief that the negative yield curve environment would reverse back to normal. Yield spread is finally narrowing. 30Y yield is now higher than 10Y yield.
July 24th: Implications of Nasdaq 100 Rebalancing
Trade Idea: Spread trade – Buy S&P Technology Select Sector Futures ($XAK) and Sell Micro Nasdaq 100 Futures ($MNQ)
My theory:
• The Nasdaq 100 rebalancing is a unique issue with the Nasdaq 100 index. It has nothing to do with the fundamentals of these companies and has no impact on other Tech sector stock indexes which also include the same component companies;
• In the long run, Nasdaq 100 rebalance will dilute the impact of the largest stocks. Strong growth in Big Tech will be fully represented in XAK but capped in MNQ.
Hypothetical Result for Illustration Purpose Only:
• Market prices: MNQ and XAK were quoted 1,786.60 and 15,555 respectively on July 21st. On August 18th, they were settled on 1,665.20 and 14,744, respectively.
• Trade setup: 1 XAK - 6 MNQ = (1 * 1786.6 * 100) - (6 * 15555 * 2) = 8,000
• Initial margins: 9500 + 1680 * 6 = $19,580
• New Spread value = (1 * 1665.2 * 100) - (6 * 14744 * 2) = 10,408
• Gain (Loss):10,408 – 8,000 = $2,408;
• Return: Using the $19,580 margin as cost base, this trade would have a return of 12%.
Where are we now?
As expected, XAK held up better than MNQ even though both were trending down.
August 7th: What Disinflation: Beef Price Went Up 64% in 5 Years
Trade Idea: Short Cattle-Hog Spread – Sell Live Cattle (
LE
) and Buy Lean Hog (
HE
) My theory:
• In my opinion, the cost factor pushing pork prices up in the short run is greater than the supply-demand force that drives up beef prices in the long run.
• There may be room to short the cattle-hog spread, until pork prices stabilize in a new equilibrium.
Hypothetical Result for Illustration Purpose Only:
• Market prices: LE and HE were quoted 183.10 and 83.25 respectively on August 4th. The cattle-hog spread was 99.85; On August 18th, the new spread was 96.41 (LE 178.53 vs. HE 82.13)
• Gain (Loss): The cattle-hog spread was narrowed by 3.44. Since we short the spread, we would gain $1,378 (=3.44 x 400);
• Return: Using the $3,200 margin as cost base, this trade would have a return of 43%.
Where are we now?
Cattle futures were down 2.5% while hog lost 1.4%, which helped narrow the spread.
August 14th: CNH – Hedging Currency Risks
Trade Idea: Long USD/Offshore RMB Futures (
CNH
) My theory:
• The key drivers in the US/China currency exchange rate: relative interest rates; relative stock market performance; relative economic strength; and the dynamics of the US-China relations.
• Yuan could break out of the recent range with USDCNH going above 7.50, if there are more headwinds ahead
Hypothetical Result for Illustration Purpose Only:
• Market prices: September contract (CNHU3) was quoted 7.2646 on August 11th and 7.2921 on August 18th, an increase of 275 points;
• Gain (Loss): Each point is worth 10 yuan. The gain would be 2750 yuan, or $377 at current market price;
• Return: Using the $21,100 margin as cost base, this trade would have a return of 1.8%.
Where are we now?
• Since I published this idea a week ago, the CNH exchange rate broke critical support levels of 7.27, 7.28, 7.29 and 7.30 sequentially;
• In my opinion, the government would prioritize stabilizing the economy and monetary easing policies over the task of defending its currency;
• A weaker Yuan may be even preferable as a policy tool to support China’s export.
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com/cme/
Jim W. Huang, CFA
jimwenhuang@gmail.com
jimwenhuang@gmail.com
