Goldman is out with their top trades for 2018
Spoiler alert....They are not buying the FANGs
Goldman Sachs is out with their best trade for 2018 and it would be too cliche to just buy Facebook, Amazon, Netflix and Google.
So with that off the table, here are some of their picks:
- The 10 year yield will have a 3% handle in 2018. The current yield is trading between the 200 day MA at 2.30% and some resistance at 2.40%. They expect not 1 or 2 or 3 but 4 Fed hikes in 2018. Their risk on that trade is if the yield falls to 2%. They argue that inflation uncertainty and the Fed's QE tapering should put the pressure on rates to move higher and most of the gains to come in the 2nd half of the year.
- The like the EURO. They specifically see EURJPY moving to 140.00 from the current 132.15 (see earlier post on the EURJPYs break lower here). Their stop is 130.00. With the price at 132.17 now, can they get stopped out before 2018 even begins? Just joking.
- Sees strength in emerging markets. With global growth in the developed countries, the emerging markets will get an even greater boost. They recommend a long in the MSCI Emerging market index. They see that index moving up 15% to 1,300. Their risk is if there is a 8% drop to 1125.
- They see Europe reflating. They see the Euro area's 5-year inflation 5-year forward swap rate rising to 2%. It sits around 1.7% currently.
- US credit cycle is "long in the tooth" according to Franceso Garzarelli, co-head of global macro and markets. At the same time emerging markets are "younger and friendlier. The trade? Buy JP Morgan EMBI Global Total Return index and sell iBoxx USD Liquid high yield index. They recommend 50% more of the EMBI index. They look for a 6% return. If it goes down 4%, get out.
- They like a cross currency trade in Asian FX currencies with buys in Indian rupee, Indonesian rupiah and South Korean won and shorts in the Singapore dollar and Japanese Yen. They argue the trade offers a positive carry of 4% to start.
- They see industrial metal prices rising on strong global growth but suggest doing the trade via currencies. So they recommend a basket of currencies weighted with 25% Brazilian real, 25% Chilean peso and 50% Peruvian sol vs the USD. The carry they figure is 8%. They would get out if the portfolio falls 4% from the current levels.