FXstreet

Goldman says bet on expansionary policy from the ECB and lower oil prices helping developed world consumers in 2015.

Global markets have been subject to the actions of central banks around the world for the better part of the last decade, and judging from Goldman Sachs’ top trade ideas for 2015, investors should expect more of the same.

Goldman Sachs’s global marco market research team, led by Francesco Garzarelli, outlined its top macro eight trades for 2015 on Thursday, offering a range of ideas from a short of the Euro to a bearish trade on the price of copper relative to nickel.

The report’s top recommendations have ”a mildly pro-cyclical flavour” and revolve around expectations that the U.S. economy is strengthening, Eurozone economies could accelerate with expansionary monetary policy from the European Central Bank’s, and falling oil prices will positively impact disposable income in developed markets.

Goldman’s top trade for 2015 is to play continued Euro weakness versus the U.S. Dollar using a Euro-to-Dollar currency put spread. The firm forecast’s that the Euro will fall to $1.15 relative to the Dollar over the next 12-months, reflecting both added easing from the ECB, possibly including sovereign quantitative easing, and the Federal Reserve’s first hike in interest rates in over six-years. “In short, monetary policies are set to diverge between the Euro area and US, a reflection of diverging growth and inflation outlooks,” Goldman writes of its top trade idea. It recommends a one-year EUR/Dollar put spread with a break even around 1.19.

The number two trade for Goldman also relies upon the firm’s expectations of U.S. monetary policy. Goldman recommends a zero cost spread trade on the 10-year U.S. Treasury Note, which will benefit if the oft-used benchmark trades above 3% by June, ahead of investors’ expectations. Goldman recommends buying a constant maturity 10-year U.S. Treasury cap spread at between 3% and 3.5% and selling a corresponding floor spread at between 2.24% and 1.75%, with both trades expiring on June 30.

“We expect 10-year US Treasuries, currently yielding around 2.3%, to trade at or above 3.0% next June – one quarter ahead of the market-implied lift-off date for the Federal Funds rate,” notes Goldman. They see the 10-year Treasury trading at a yield below 2% as a two standard deviation event given momentum in the U.S. economy and the probability that easing accelerates economies in Europe and Japan in coming quarters.

Goldman’s first non-U.S. trade recommendation revolves around an expectation European stock markets rise in 2015 as the impact of ECB money-printing makes its way into the real economy. Goldman recommends investors go long a December 2015 Eurostoxx 50 call spread, buying a Dec. 2015 strike call at 3,150, and selling a Dec. 2015 strike call at 3,450. “The (nearly) at-the-money 3150 call costs 170.6, while selling the 3450 call costs 69.10 (both priced as of the close on November 19), giving this position a maximum potential 2-to-1 payout,” notes Goldman. The firm sees two reasons European stocks will move higher: regional growth simply accelerates, or disappointing inflation readings force the ECB into added action. Both scenarios, Goldman believes, augur well for European asset prices.

Go long U.S. high yield credit risk, Goldman recommends as its fourth top trade of 2015. The firm recommends expressing that trade by selling credit protection of the 5-year CDX HY Series 23 junior mezzanine tranche, which currently runs at a spread of 495 basis points per year. They expect a tightening of that spread through 2015, reversing recent under-performance through the year, given their expectations of no defaults on the tranche. Only four of the 100 companies referenced in the CDX HY 23 index have positive betas to crude oil, and only two of those companies are currently rated non-investment grade, Goldman notes.

Risks to Goldman’s top trading ideas for 2015 include the prospect that the U.S. economy doesn’t live up to expectation, political polarization in Europe leads to continued slack growth and the decline in oil prices proves short-lived. It is also worth noting four of Goldman’s six top trades of 2014 are in the black for the year, while one lost money and another performed little better than a draw.


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