Citigroup strategists recommend increasing bets on the poor performance of long-term US bonds and the decline of the US dollar, as President Donald Trump may undermine the political independence of the Federal Reserve.
Strategists including Adam Pickett and Dirk Willer wrote in a Wednesday report that investors should “lightly increase” their existing bets at Citigroup that 30-year forward rates will lag behind 5-year rates, and that the yield curve will steepen as the gap between the two widens. They also recommended buying the euro against the dollar through derivatives.
Strategists wrote in a report: “We believe there are two main market release valves for concerns over the weakening of the Fed’s independence: a weaker dollar and a steeper curve.”
As they expected Trump’s tax cut bill to increase government debt and put pressure on long-term treasury bonds, these strategists initiated this trade (known as steepening the curve) in May.
Trump’s attempt to remove a Federal Reserve governor – and potentially exert influence through regional bank branches – provided additional impetus to trading, as his intervention could undermine the central bank’s credibility in fighting inflation and thereby support long-term yields.
On Wednesday, after Trump announced that he would fire Federal Reserve Chair Lisa Cook, the spread between 30-year and 5-year US Treasury yields widened to its highest level since 2001. Cook had previously been trying to persuade Federal Reserve Chair Jerome Powell to lower interest rates. Trump’s move, which was unprecedented, intensified concerns that the Fed would face political pressure to cut rates, thereby heightening the risk of future inflation.
Citigroup strategists said they were surprised that the dollar did not weaken further amid the “reorganization risk” of the Fed’s decision-making body.
This rebound might be due to renewed concerns over France’s fiscal issues. Strategists say this development is unlikely to “substantially dampen interest in the euro”.
Technical analysis:
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Gold: The price has gradually recovered to the 3380 level, but the upward momentum is slightly lacking. Within the day, it may still need to draw on the liquidity near 3375/70 to continue testing the 3400 integer threshold. We suggest trading be inclined towards short-term and multiple times within the day. If there is a downward sweep of liquidity at the opening of the European and North American markets, remember to try to catch the short-term rebound signal, and then reduce the position at a 1:1 profit-loss ratio to protect and continue holding. For detailed positions, please consult the plugin.
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The Nasdaq: After sweeping through the range of 23,400 to 23,600, the Nasdaq began to fluctuate and pull back following the overnight release of Nvidia’s quarterly earnings forecast, which started to cool down. The short-term price direction is not clear, so it is advisable to be cautious and wait for a clear signal before attempting any short-term operations. After clearing out the liquidity, if a reverse signal appears, then it would be appropriate to try short-term trading. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
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Crude oil: Yesterday, our plugin suggested a buy stop trade at a 0.2 space, which could have resulted in a profit-to-loss ratio of around 4 times. However, the price then started to fall. Currently, it is attempting to test the starting point of yesterday’s movement again. We do not recommend a second operation at this level today. Instead, we should observe whether a new bullish signal appears below the 64 level before attempting again. For detailed positions, please consult the plugin.
(Crude Oil 15-Minute Chart)
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Today’s key economic data and events to focus on:
At 19:30, the European Central Bank of Germany will release the minutes of its July monetary policy meeting.
20:30 U.S. Seasonally Adjusted Initial Jobless Claims (in thousands) (to 0823)
