Hey guys,
Inflation, rate expectations, geopolitics, BOJ pivot…
It’s all happening at once.
In this report we’ll uncover:
An update on our macro trades
Geopolitical risk premium in Brent prices
US macro update
Without further adieu, enjoy:
Trade Updates
JGBs shorts
Outlook: Bearish
Our JGB short, discussed last week, profited from the recent yield rise due to its short duration (<30 days). While we see further downside potential, exiting a crowded trade was optimal. Mark Dowding, CIO at RBC BlueBay Asset Management said “this is the largest macro-risk position we are currently running” when discussing BlueBay’s short positioning on JGBs. Great to see others on the street sharing the same view, however, we always aim to uncover strong trade ideas before they become known knowns.
With the Shunto wage negotiations expected to result in an average wage increase of c.4.1% compared with last year’s 3.6%, the BOJ are moments away from exiting negative rates. Comments from the policy board members reaffirm this view of a BOJ pivot; also on-the-ground economist, Takahide Kiuchi of Nomura Research put the probability of a BOJ hike next week at 70% compared to the market’s expectation of 50%. Noting that the spring wage report will ultimately be the catalyst that could trigger the BOJ to move ahead of expectations. Nippon Steel, Japan’s largest steel maker, has agreed to an 11.8% increase in base salary, whilst companies like Honda announced a 5.6% annual rise.
Brent Crude Shorts
Outlook: Neutral/Bullish
My Brent crude short position, announced last week, initially captured the market's downward trend, reaching lows of $80.85 per barrel. However, the geopolitical landscape shifted with renewed attacks on Russian refineries by Ukraine. I exited most of my shorts at $81.25, profiting from the small $1.65 per barrel decline before the market reversed sharply.
The reversal can be attributed to Ukraine's ongoing drone attacks on Russian refineries, raising concerns about supply disruptions and escalating tensions. For the second consecutive day, Kyiv attacked the Ryazan oil refinery, one of the largest refineries in Russia on Wednesday. This has reintroduced a geopolitical risk premium into Brent crude prices. While quantifying this premium is challenging, its impact on future prices remains crucial.