We have added ZIM 0.00%↑ to our equities leg, we played ZIM before via calls struck at around 15 USD back in January, we did not go into detail that time as we thought the trade was done, then it was mostly a play on the tensions in the Red Sea. This time it seems like the reason for this is forward demand has been pushing prices up as many orders are being placed earlier than usual. We are jumping in a bit late for our liking, however, current momentum on the sector, shipping costs increasing, and a lot of single names still trading well below 2021’s high, means there is still opportunity in our view. We must keep a close eye on this as it could translate into inflationary pressure
A more interesting (and perhaps related as China exports inflation and imports disinflation/deflation?) topic is the Chinese bonds at all time lows yielding just about 2.20% in local ccy.
Longtime readers will know that we have a target of 7.50 for the CNY since a while back, recent price action definitely has he PBOC’s fingerprints all over:
Just as we had an eye on the divergence between USDMXN and the silver/gold ratio (which just violently narrowed a few weeks ago after their elections) we also keep a close eye on the divergence between EURUSD and the 1Y1Y fwd - 10yrBE, this has been signalling a stronger USD for quite a while, or a steeper curve. Perhaps European elections this summer will be the trigger for this as well?
For the month of July, our quantitative models indicate overweights in the following sectors: $XLH, $XLK, $XLE, with gold miners still showing like a weak buy signal. Bear in mind the model follows momentum and and penalises correlation, this is used purely as a guide, but we find it useful to keep our discretionary bias in check.
Finally, we would like to share an interesting chart our PM tweeted a few weeks ago, this is the performance of the Dow Jones vs the price of gold. It seems to us a most interesting matter of philosophical debate: Why it is that this chart is mean reverting rather than trending?
Consider these are the most industrious companies in the US, they create value for society through goods and services, innovation, technology, employment, trade, etc. Gold on the other hand, has ornamental uses, safe heaven asset and some industrial applications in electronics. Yet, at times equities underperform massively, at times they outperform, and if timed wrongly the Dow Jones could have returned 0% vs gold over a 90 year period! Definitely some food for thought in our opinion, it could be that either equities create less value than we think? Or the value we attach to the safe heaven and ornament is just much more than perceived.
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