H2 Macro Trades Playbook
H2 Macro Trades Playbook
As we move into the second half of the year, it's time to get our thinking hats on.
When July 1st comes around, it seems to always serve as a reminder that time is going by faster than you realise. We’re halfway through the year, and these last six months felt even quicker than the ones preceding them, right?
But in the small office of the AP team, it also reminds us to get our thinking caps on. Why? H2 is underway, and it’s time to start noting down our thematic speculation.
Rate cuts were meant to be the big story in 2024. Technically, they still have been, but for different reasons than most thought. The biggest themes of 2024 may still be to come. Some new, some old.
If you are a new reader, or maybe you’ve been here for a while and you’re intrigued to know what is behind the paywall on each article, you can access a 14-day free trial on the button below.
Five themes for consideration. Here’s what we’re thinking.
US Small Caps
As markets began to price in 2024 rate cuts more aggressively at the start of November last year, US equity markets rallied. The S&P rose 15% through to the end of the year, while the Nasdaq gained just shy of 20% in those two months. However, it was small-cap stocks, the Russell 2000 Index, that won gold. The index gained 25%.
Outlooks changed quickly to start the year. As rate cut expectations were reduced, small-cap stocks fared the worst, while their peers, S&P and NQ, continued their journey higher.
As the halfway point in 2024 passes us, the Russell 2000 is pretty much flat.
Why is an underwhelming index making its way into a “Trades to Watch” list for the next six months? Rate cuts, although now a different story to the one originally expected in 2024, will be coming.
Markets expect the first quarter-point cut to happen at the September FOMC meeting, with the second cut to come in the December meeting. There will be a time before the September meeting when yields cool, and this will serve as a tailwind for this index.
We expect RTY to break above recent highs in the latter part of the year, moving past 2,250 after that. That only represents a 9% return from current levels. However, this is our base case, and we believe there is an opportunity for small caps to outperform this and close the year higher.
Commodity Continuation
Commods were amongst the best performers in Q1. PMs and oil were all the craze. While PMs continued their move higher to start Q2, oil pulled back. Call it May 21st (white line on the graph below), PMs joined the pullback, and most ended Q2 flat. A quarter that fell short of expectations, but this is not a bad setup for continuation.
Where in the commodity markets are we looking? Mainly towards PMs. Oil has more unpredictability with OPEC’s control over supply. Although we often dip our toes into the crude pool, long or short, it’s harder to say how we would play it over a six-month time frame. We focus more on the short-term moves.
But within PMs, there are two that we lean towards to make a strong return in the coming months: Silver and Copper.
We’ll just touch on copper quickly, as we gave a more in-depth article back in May on the matter. You can read that here:
Copper demand is on the rise. This is expected to drive up copper prices over the short and medium term as the current increased demand is expected to far outweigh supply growth within the industry. Maybe we see a Goldilocks scenario of some “copper shortage” headlines getting thrown about. The traders then get involved and it becomes mania. Look at cocoa as an example of this just a few months back.
However, we are cautious that China plays a big role in this play. A potential deceleration in the Chinese manufacturing industry has the capacity to promptly influence price trends.
The pullback in PMs we mentioned earlier… well, that was noticeably seen in copper. A 50% retracement in the move higher that started at the end of last year. Pullbacks offer opportunities to get long on trends. Better to be adding on pullbacks of strong trends than to be chasing it at swing highs.
According to projections, the silver supply deficit for 2024 is expected to surpass 2023’s deficit due to insufficient silver production. Some argue that by deducting net investments in silver exchange-traded products, the market’s deficit becomes apparent.
It is estimated that mining production will increase by approximately 4% (at 843 million ounces) and consumption will range between 1.2 to 1.4 billion ounces. This is attributed to the demand surge driven by technological advancements such as electric vehicles, solar panels, and wind turbines, all of which rely on silver. As a result, there will be a significant supply shortfall.
Although this thesis is based on a wider timeframe than six months, this has been, and will continue to be, the driving force behind the move higher.
Unlike gold which is trading at ATHs, silver has been at these prices before (and even much higher prices at that). Why silver and not gold? The spot gold/silver ratio started at 90 this year but has trended down to 80 (a lower ratio signalling an outperformance in the denominator). We believe this trend will continue, and silver will offer higher returns than gold.
Another tailwind of the commodity trade is the dollar. As rate cuts from the Fed arrive, the dollar becomes less attractive for investors, decreasing the price. A decreasing dollar can play a strong role in metals pricing, much more so than is seen in other asset classes.
The Trump Trade
Are you surprised to see a ‘Trump Trade’ make the list? Probably not. It’s been a popular topic on the macro scene this week, and it’s quickly made its way to Wall Street, too.