Wk17 MacroTechnicals - The Rubber Band Trade

We've witnessed history. There are a number of technical studies floating around pointing out that the speed and magnitude of the rally have either, not been seen before, or is extremely rare. A Black Swan. But has the market got ahead of itself? I think it's highly likely that it has for a number of reasons, and mostly around the view that this rally has been almost purely 'technical' - in other words, the rally has been a reflection of the tidal shifts in positioning and reflexive-sentiment across markets.

We began the year with firm expectations of continued goldilocks supported by gradual policy easing and tax relief, and Emerging markets outperforming Developed markets since the middle of last year. That all started to unwind as the war kicked off a de-grossing through the month of March, which ended with yet another tidal shift in positioning as the military campaign began to deescalate coming into April.

Secondly, markets have behaved as if the fundamental impacts will be minimal in the end, and that was a fair assumption to have in recent weeks while seeing the conflict was turning far less escalatory. But Crude and Gasoline is still up some 30-40% so far this year, and our updated scenario-based work (cover in more detail later) points to the conflict dragging on that would keep cost inflation elevated for longer, and its impacts on the global macro complex deepening. Anything short of a complete resolution/settlement between the US and Iran should keep the market having to shift in that direction of having to reconcile deescalation narratives with fundamental impacts.

That is why this rally looks far more technical than fundamental to me. Price action has been driven by tidal shifts in positioning from one extreme to another and across various markets, with mechanical flows and reflexive sentiment playing a major role. But the underlying macro risks is still largely underappreciated, and the more evident it becomes that the Iran conflict will drag on, the less able the market will be to look through those risks.

Although I have missed out on a decent chunk of the rally, there was a good opportunity to get into some lagging performers such as MSFT and ORCL on Monday - these were some of the strongest performers last week, and also traded some quantum names on the Wednesday open for a quick trade which I've completely unwound on Friday.

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