Markets are always trading the 3Ms - Macro, Momentum, and Misfit trades - which are: - The macro trade in H1 was short USD; - H1 momo liquidity trade shifted from gold, crypto, international back to AI & Mag7; - Misfit: bonds, oil, value, small cap, China.
1. The Macro Trade: the dollar rallied on extreme short positioning, hawkish Fed, RoW impacted by Trump tariff rates; indeed, the June BofA Global FMS had investors most underweight the US$ in 20 years, one month later, the July FMS found that “short US dollar” was the #1 most crowded trade as the number hedging against falling dollar fell 40% May to 33% July. The emotional bearishness on the US dollar masks a world that’s still long US assets (>$0.5tn inflows decade-to-date… >$60bn more inflows in ’25); and until trajectory of US debt & deficits changes, "investors fade US dollar DXY index (100) as it approaches 103 (200-day moving average)." Alas, since said trajectory will never change, that's hardly the trigger to go long, especially since there is literally no other fiat currency that can replace the greenback. Of course, that doesn't mean that there are no non-fiat alternatives. Quite a few in fact, which is why gold (+24.4% YTD), and bitcoin (+23.7%) are the two best performing asset classes YTD.
2. The Momentum Trade: The momo trade in gold, crypto, and international that defined the first half shifted back to US big tech in July on i) bullish exponential AI capex spend (soon >$400bn and 20-25% US equipment capex), ii) secular shift from humans to AI, iii) from big 68% US consumption % GDP to low 14% US investment % GDP; But in the short-term, the US big tech momo trade is now stretched, and bulls need new highs MAGS >$60, SOX >$6k, ARKQ >$100 to stay long; Stay long International as global investors will barbell US growth with RoW value stocks… Meanwhile, the RoW fiscal excess evident in global cyclicals breakout vs defensives...and the big outperformance of intl small cap stocks YTD (e.g. China 35%, Europe 22%); Bullish on China because "no one long, China next in line for lower Trump tariff deal, exports to RoW strong, and less dependent on US." Small cap action shows China credit/consumer/real estate deflation ending – no reason why H-shares can’t challenge 10k (ultimately 12k highs in 2021); And with Europe the focus of Russia/Ukraine conflict in August, "long gold/crypto is a structural trade in geopolitical world of sanctions & tariffs."
3. The Misfit Trade: The 10-year rolling return from long bonds is a record low -1.3% in Jan'25, which is the same “buy humiliation” entry point as were stocks in Feb'09 (-3.4% rolling return, worst since 1939), commodities Jun'18 (-7.7%, worst since 1933), gold in Sep'22 (-1.5%, worst since 2002); but 2020s is a world of inflationary geopolitical Isolationism, government Intervention, less Immigration... and the possible end of Fed independence; And while no longer case for a secular bull in bonds; with US Treasuries up +3% YTD, expect further gains in H2 because:- US growth cooling (real domestic sales up 1.1% SAAR in 2Q’25, slowest since 3Q’22)- labor market ambiguous but AI adoption starting and payrolls <100k consistent with lower rates- Hawkish Fed tactically good for long-end; and low Trump approval rating (driven by inflation) means government intervention to lower prices (e.g. healthcare or lower tariffs);- Pushback is rising to JGB yields (ground zero for bond vigilantes & rising Nasdaq (wealth effect), but too many interest rate sensitive sectors (RTY, REITs, XHB) discounting 5% not 4% yields.
