Citi Research’s strategists have some trade suggestions for their clients.
Ignore golden rings and turtledoves. Investors anticipate practical trade ideas from Wall Street gurus by December.
And this week, they received precisely that from Citi Research’s global macroeconomic strategy team. The Citi strategists provided BourseWatch with a report that included a few trade suggestions in addition to some wildly optimistic forecasts on market-related subjects like Chinese aluminum production and Federal Reserve interest-rate policy.
One of the suggested bets is a leveraged wager that the Nasdaq-100 NDX will continue to rise due to the artificial intelligence trade. The group suggested that investors purchase call options on the index that are out-of-the-money and have an expiration date of December 2026.
They stated that investors should have plenty of time to continue riding the AI bubble as it expands as long as capital investment keeps rising and the financial system’s liquidity is sufficient.
“We anticipate that the AI bubble will continue to expand in 2026. Instead of occurring before the bubble peaks, the huge sector rotation occurs after. The team stated in the study that “tech should be part of the longs, even though diversification is probably still helpful next year.”
In reference to the rotation trade that has been in the news this month, Dirk Willer, global head of macro strategy and asset allocation at Citi, and his colleagues stated that they anticipated cyclical industries like finance to continue to prosper alongside technology. As the bull market moves into its fourth year, what they characterized is more of a bullish broadening than a rotation. The team suggested an underweight allocation to staples and an overweight allocation to financials, arguing that financials should do better than consumer staples, a defensive sector.
The team stated, “We think cyclicals can do well in a reflating economy,” which is a situation in which both inflation and economic growth are accelerating.
The next theme from Citi came with a warning: Willer and his team noted that during years with midterm elections, stocks and bonds usually suffer. Moreover, the third quarter is typically when that vulnerability appears. When the ruling party maintains power, it is more likely to occur.
The team recommended investing in copper as a way to capitalize on Citi’s prediction that the rate of global growth will accelerate in 2026. One advantage is that this trade is “all weather”—that is, it is not directly affected by events in the United States. Investors have the option of investing in a copper exchange-traded fund or purchasing copper futures or a call option on copper futures.
Regarding the Fed, the Citi team stated that they are still doubtful that the independence of the central bank will be jeopardized by whoever President Donald Trump chooses to replace Jerome Powell as chair. In spite of this, the Citi team believes that the Fed will continue to decrease rates, which could lead to inflationary pressures later in 2026. Treasury prices may be impacted if investors demand a larger term premium to retain longer-dated U.S. debt.
Yields in the bond market are negatively correlated with prices, increasing when prices decline.
Lastly, the Citi team suggested a fascinating relative-value cross-asset trade: short AI credit, long AI equity.
The strategists on the team anticipate that the AI trade will probably keep pushing up important indexes like the S&P 500 SPX. However, the premiums on credit-default swaps linked to Oracle Inc.’s (ORCL) debt and other AI-related bonds may rise further if investors’ concerns about credit risk persist. According to the Citi team, a profitable strategy in this situation would be to hold a basket of investment-grade swaps and the S&P 500.
See: Big Tech’s debt-driven AI expenditure binge is revealed by Oracle.
The Citi team advised going long the S&P 500 and long an index of investment-grade credit-default swaps because a large portion of this debt is still investment grade.
