Capitulation Dynamics

Published on: June 14th, 2019

Faced with deteriorating confidence, weak data, trade wars, falling equity prices, a rising USD and political pressure, Federal Reserve capitulation is the market’s base case. Are they right? And what should we do about it if they are?


  • ZW
    ZH W.
    14 June 2019 @ 17:53
    Julian, thanks for the piece. Given that the interest rate market has already priced in at least 100 bps cut, and you recommend taking profit on the long TLT position, would a curve steepener trade (long 2s10s or ED6-ED12) continue to have good risk/reward and safer to sit on?
    • JB
      Julian B. | Contributor
      19 June 2019 @ 13:51
      In general yes I like steepeners and we've been playing forward swap steepeners with MI2 clients since September. But I think we have priced a lot into the whole curve at present, from EDs to 30's. So before adding to positions I'd want to see how the Fed reacts and the trade situation pans out.
  • rm
    robert m.
    14 June 2019 @ 22:10
    How do you see the aud playing out?
    • JB
      Julian B. | Contributor
      19 June 2019 @ 13:44
      Hi Robert M. Australia has a lot of issues both domestic and as a result of a slowdown in China. That said 0.6800 vs the USD is a major level so its important to watch. Personally, I'd love to see .6000 and even below but that depends on the Fed hanging tough. The moment they really start to ease its important to realise that they have a fair but more room that the RBA to weaken the currency.
  • VD
    Viknesh D.
    15 June 2019 @ 09:41
    Double thumbs up - direct and to the point piece.
  • PW
    Phil W.
    15 June 2019 @ 09:58
    Thank You Julian, Brilliant Piece! Clear actionable trade ideas with suggested stops etc really works for me. More of the same would be great. :-)
  • HH
    Hugh H.
    15 June 2019 @ 20:03
    Thanks a lot, Julian. What are your thoughts on GLDW considering a potential big upward movement of USD?
    • HH
      Hugh H.
      19 June 2019 @ 16:05
      Thank so much for your explanation!
    • JB
      Julian B. | Contributor
      19 June 2019 @ 13:37
      Hi Hugh, well as we said in the piece, we don't have a view on the $ vs the majors only the Asian currencies. So in that sense we aren't looking for a major $ up move. That said GLDW has had a decent bounce (keep you risk tight), because its always possible, especially if the trade talks go badly that the Chinese let USDCNY break 7.00, which triggers broad strength. However, even if that happens my bet is that because that would be so disruptive, the Fed will act quickly to cut and so while I'd expect gold to suffer in the turmoil, I don't think we are in danger of a collapse. What I wouldn't like to see is a drop below 127.
  • km
    ken m.
    16 June 2019 @ 12:27
    Thanks Julian - echoing the others. This is so clear, and so actionable. Very helpful!
  • JQ
    JACK Q.
    16 June 2019 @ 12:58
    Hey Julian - at what point would you consider to re-add and size up in fixed income particularly in 2s and EDs? After FED actually starts to hike?
    • JB
      Julian B. | Contributor
      19 June 2019 @ 13:25
      Hi Jack Q. The piece was mostly focused on our trade recommendation of TLT, which is a mix of 10's and 30's. EDs and 2yrs are a little different. That said at present with close to 4 cuts priced those are also a little rich. In fact I think there's decent odds that the Fed fails to endorse the markets moves an in the short term we could get some weakness. That said if 2 year yields get back to 2.2%-2.4% I think those are pretty attractive levels given the current dynamics and absent a real trade deal.
  • LM
    Lawrence M.
    16 June 2019 @ 15:56
    Thanks Julian! I agree with many of the other commentators. This was a very easy, clear, and actionable piece to follow.
  • JL
    J L.
    17 June 2019 @ 13:23
    Hi Julian how do you see puts on the EWY Korea ETF as a retail way of playing your dollar thesis? It has a pretty good correlation to KRW and a pretty ugly chart