As traders, we are often on the lookout for the next big thing —the better idea or trading style.
The next theme or narrative, that’s going to get the market, and prices excited.
Which in turn could mean trading opportunities, and potential profits. That is, if you get your timing and execution right.
Because let’s not forget that in trading there is always a caveat, and the ever-present opportunity to get the trade wrong, even if your idea is correct.
There is a whole industry out there trying to tell (sell?) you what the next big thing is going to be.
Of course, some themes are more persistent than others.
Tariffs are the perfect example of that, and they keep coming back to bite us. However, as traders, we are nothing if not adaptable; we have to be.
And we are gradually getting to grips with just how the Trump administration plays this game, and the swings in the market that this creates.
The Trump tariff playbook is a variation of the carrot and the stick.
The stick comes first, in the form of punitive tariffs and a blaze of publicity, about how the offending country has abused the US in the past, and that it's now time to level the playing field.
The carrot comes later, when the other country inquires about the possibility of negotiations. And that carrot, or incentive, is offered as a deferral of those tariffs, while talks take place.
We saw this exact same thing play out over the weekend just gone, with the EU,and we saw a bounce in equity markets on the back of it .
Then there are the other themes that the media and the talking heads in your social feeds would like you to take notice of.
How about the impending demise of the Japanese bond market?
Many would have us believe that it's in imminent danger of crashing.
And it's certainly the case that the Japanese economy is undergoing a transition, after decades of stagnation, and extreme forms of monetary policy. That included negative interest rates, so called yield- curve-control, and one of the biggest quantitative easing or QE programmes, that that the world has ever seen.
Under which, trillions of yen were printed and used to buy Japanese government bonds.
With the Bank of Japan becoming the biggest owner of its nation’s debt as a result.
Demand for ultra-long govt bonds in Japan dried up recently, which was a cause for concern.
However, the Japanese are past masters at dealing with things like this, and the powerful Ministry of Finance has let it be known that it was considering reducing its issuance of long bonds, going forward, with a view to nipping this issue in the bud.
That said, an auction of Japan’s ultra long 40-year bonds is due to go ahead on Wednesday 28th of May.
USDJPY versus Japanese 10-year Govt Bond Yields
Source: Barchart.com
Right in front of us
Sometimes we don’t need to look beyond what's in front of us, because there simply isn’t a better story out there.
The problem is we don't always realise that, even while we are right in the middle of it.
One such example is the European defence narrative.
Europe is going to have to fend for itself when it comes to security on the continent, and fending off the unwanted attention of the likes of Vladimir Putin and his cronies.
The US has made it clear it's no longer prepared to foot the bill for NATO, and EU member states, and others, now need to boost their commitments, and real spending on defence.
Indeed, over the weekend, Mark Rutte, Secretary General of NATO suggested that the alliance will adopt a spending target of 5.0% of GDP, among members, from next month..
That’s well above existing commitmentsand anything in the pipeline too.
The figure breaks down to +3.50% of GDP in hard defense spending, and an additional +1.50% of GDP spenton related items such as infrastructure and military mobility.
We have discussed this before
Back in April I wrote the article When emotion Overrules Markets and in that I highlighted the German armaments business Rheinmetall (RHM GY). Which has been at the forefront of the surge in European Aerospace and Defence stocks.over the last 6 or 7 months.
Here is Rheinmetall in a watchlist alongside a selection of other European Aerospace and Defence names.
RHM is the best performer year to date, up by +205.0% which includes a +35.00% gain over the last month.
RHM what the Americas refer to as a “category killer” (which may not be the best turn of phrase given what it does for a living) but it isn't alone in posting gains.
Source: Barchart.com
Three out of the four names in my watchlist have added +90.0% or more over the year to date, and in fact all four are positive over the 50-day, one month and 5-day time frames.
It’s also interesting to note that, what we might think of as the underperformer of the group MTU Aero Engines (MTX GY) posted gains of +21.12%, over the last month, and therefore looks to be gaining momentum itself.
Not shown on the watchlist above, but very much in the sector, is BAE Systems, if we look at the relative performance between BAE, Thales and Leonardo, we can see BAE is a laggard.
Perhaps that’s down to the fact that BAE has a big presence in the US, unlike some other names in the sector that are more of a pure play on Europe.
However, even allowing for that, a search using Perplexity AI suggests that as much as +56.0% of BAE Systems income, is generated outside of the USA, so perhaps the lag is over done here?
BAE Systems vs Thales and Leonardo 6-month % Change
Source: Barchart.com
You will need to decide about that for yourselves.
However, it shows that even within a “go ahead” sector there can still be potential opportunities and signs of possible misspricing.
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