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25 мая, 08:09

Forgot About EUR

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Flying under the radar of Fed headlines, amongst other things was the statement from Angela Merkel that EUR was too weak!There are for sure some bullish factors that can actually propel the EUR higher. We've talked about them briefly in the past (here) But more importantly, her actions underscores one of the major actions of German chancellors in the recent past: Angela Merkel has disagreed with the direction for the Euro vs that of Mario Draghi. The direction as result of the disagreement has been clear:EUR has been bid. From 1.05 to 1.12 on a rope. Seems to be me that fiscal policy wins here.I think it's interesting that a few months back, we've had probably some of the most negative policy sentiments on EUR we've had in a while.After such a rip like this, my first instinct is to fade this move. I think tactically you could probably bid EUR a little lower than here and still get filled.But let's step back and see where we are in the long term:Definitely looks interesting. Wondering if anybody out there is still betting that EUR/USD goes below parity.And of course, this is in face of the Ariana Grande concert bombing (not trying to be insensitive but I'm a big Ariana Grande fan). I can only conclude, there is a strong bid under EUR.Thanks guys, have a good weekend.

24 мая, 23:51

Market Volatility: "The reports of my death are greatly exaggerated."

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I started drafting this pieces a week or so back when the VIX first closed in the single digits. When CNBC and Bloomberg TV, cover on a daily basis the phenomenon of volatility being low, we are probably close to the end rather than the beginning.Why has VIX been so low? Should it be this low? Will it stay there?The VIX is calculated using a "formula to derive expected volatility by averaging the weighted prices of out-of-the-money puts and calls." There's a pretty complicated paper on the exact calculation (read it here).There are a couple of ways I personally think about the VIX - we can talk about whether that's right or wrong in the comments below (would love some feedback - I do not profess to be an expert).To me, it measures fear and greed (and with greed, comes complacency). In addition, the VIX is a numerical representation of supply and demand levels for S&P options.  From where I'm sitting, there looks like there are a lot of option selling.I was just speaking with a fund that has done well enough in the discretionary macro space, and all of a sudden, they want to get involved in selling vol. Obviously, retail is in on this as well, evinced by the myriad of short VIX ETFs in existence. I know, I know. Anecdotal signs. But to me, they point to one thing:Contributor James posted on Macro Man a few months back with some insights on the VIX, looking at various rolling correlations and momentum numbers - I don't know if looking at momentum and price dislocations, etc. for the VIX makes particular sense.I wanted to think about what could be contributing to the drop in market volatility.Two factors in play, contributing to the suppression of volatility and its subsequent unwind are the following.Passive investment/Indexing:It's well documented that there has been huge flow into passive investment in favor of its active counterpart. However, the performance and subsequent investment flow from active to passive follow a clear cyclical pattern, as you can see in the picture below.It's been well documented that we are currently in the midst of a historical shift towards passive buy and hold investment.This is where are we now looking at relative performance:I have noticed some reflexivity (à la George Soros) characteristics in this shift:As volatility drifts lower, the more passive investment out performance, as passive investment out performance, money flows out of active management to passive investment, thus helping to suppress volatility.Reflexivity is dual sided. This positive feedback loop that has helped quell volatility, can easily be unwound in the other direction as well in violent fashion (selling begets selling).Risk Parity Funds/General Vol Targeting Funds:Another factor that could lead to large increases in equity and fixed income is the rise of the myriad of risk parity funds.These are just a portion of the risk parity funds that currently exist in the marketWithout going into a deep dive of risk parity funds (maybe we'll save the fun for some other time), I just want to highlight a couple of risk parity funds' characteristics that can lead to a unusual large sell off in the assets these funds own. First, there are a lot of money implementing the same strategy. Doesn't take a genius to figure out that things can go bad quickly if everyone is trying to escape a burning theater at the same time.But what can lead to such an exodus? These funds are volatility targeted and implements similar draw-down types of risk controls.What are draw-downs? Think stop-loss but on an entire fund level instead of one particular position. When are draw-downs implemented? When the fund volatility exceeds a certain preset level (fund volatility roughly calculated via the volatility of the composite assets). With that said, it's to see how a large enough exogenous shock to a specific market, can lead to a large continual spike in volatility and draw down in a number of markets.Should volatility be this low?  Will it stay here?Should it be this low? Probably.All the reasons, I've mentioned above probably shows you why volatility should be this low. However, as a speculators, we are worried about the world in the future, not in the present.So what about the future?We have a deterioration of some of the US macro data, the Fed continuing marching on in terms of hikes, geopolitical risk with Syria and North Korea, and the circling of political vultures over the Donald Trump's scandals du jour.There are copious amount of risks simmering under this low volatility market surface, that can trigger be the exogenous shock.A conjecture on how this ends:Oh, the humanity!Pretty sure most of us know this, just a question of when.I can't predict when, I can only advocate insurance.If you own a house, that's your asset, you buy insurance on it. If you own a portfolio, that's an asset, why don't you buy insurance on it? Besides, insurance is cheap.

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18 мая, 18:18

Big Trouble in Little China .. (and at least a cold in Europe)?

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(The post was meant to be published yesterday night, so apologies if some comments might sounds outdated already)Here at the Jack Burton School of TradingTM we are wondering if the market is missing a piece of information or if is, at least, underestimating a risk.Looking at the Treasuries yield going lower? Or maybe the Bund?What if the recent price action (today in particular) is not driven by US "political" battles, but by China?“I have a very positive attitude about this”: common feeling among many market participants.Most of the Street is looking at China as not much of a problem, at least until fall. What we fear is that China is slowing down (as some data is showing) and the slowdown is already enough to create problems for the rest of the world, especially where the effect of the wall of liquidity/credit impulse/investments coming out of China has been stronger.What have you been drinking??Let`s try to put pieces together (apart from the obvious ones such as Chinese stocks), to name a few: Commodities, Canadian real estate, Australian real estate. We see them as some sort of canary in a coal mine (We can`t really count on Japanese stocks as BOJ has been buying them like crazy).To confirm that China is indeed the problem we would monitor price action in European assets. If they start (or keep) under-performing US assets, we think what looks like a potential fade now, will have the capability to transform itself into something bigger. Source: Cornerstone MacroGiven how European risky assets have performed since the beginning of the year and how consensus that view is now, we think European equities could be in for a bad surprise and another consensus trade, Italian BTPs, could become a bitter pillto swallow for those who recently closed their shorts after the French elections (if we are looking in the right direction=East). Europe's growth is heavily dependent on China (exports to China & HK % GDP (20163Q): Germany 2.5%, Europe 1.3%, not to mention investments) and if something is truly happening there we will feel it in this part of the Old World.BTP could still go up at the beginning as Rates are bid and the market might discount a more dovish ECB, but we don't believe it could go up much more from here. In our humble opinion the ECB would step in only after a proper risk off move, which at a certain point (as in February 2016) would drive BTP lower. Moreover, the market is not pricing anymore the risk of early elections in Italy (look this space..and don`t forget the banking system!).So, in the end, if we just focus on the US “noise” this move could potentially transform itself into a juicy dip for risky assets. But what if the market is looking in the wrong direction? This will probably all transform into another dip meant to be bought, but in case is not remember:“It`s all in the reflexes”. 

11 мая, 17:51

Forget It Jake, It's China/Jeff Gundlach aka Macro Clown Jr.

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Gundlach, a fellow Macro Clown?Chuckling to myself at Gundlach throwing twitter shade at our very own Macro Man.This is the same Gundlach who thought EM equities was going to fall 40% or more back in 2016. Oops. EEM has been up 40%+ since then. My Pnl is pretty glad I didn't listen to Gundlach on that one.Now Gundlach has switched views, talking EM outperformance, citing valuation, growth differentials, and recent outperformance. Maybe he is secretly a fan of this blog - we'll know if he comes out soon endorsing a GBP long ;).I'm not going to disagree with Gundlach here. But it's so key to anticipate while trading - the markets themselves are quick to discount, thus the best opportunities risk reward wise in markets are ones with high convexity/high gamma situations - those usually happen at the market turns. A lot of the easy money has been made in the EM trade.Alright, alright. Let's get down to business.Regardless of the blog topic, it seems like the comment section always reverts back to some talk about China. Thought I should take a look and see what the big deal is.China has undoubtedly been the driver of global growth. The engine of said growth comes from China's once ever expanding (now recently, contracting) FX reserves. The FX reserves come from the country's trade surplus. The country uses the money to stockpile financial assets in the US and other countries, fueling economic growth.When most people think China FX reserves - they immediately tie said thinking to US treasuries. However, I have on good word from an ex-SAFE Investment Company trader who was involved in the FX reserves liquidation, that they actually sold mostly emerging market assets during the move in 2014 to 2016.I believe that was the main reason for emerging market decline we saw in 2015 (this was well telegraphed at the time). Back then, China was in a tightening cycle, in an attempt to defend against capital outflows and tried to reduce its spare capacity.Looking at the world now, we are at a place where said decline in reserves seems to be bottoming. Whatever reserve contraction that has already taken place, should have been priced in.Moving on to the different ways that the PBOC controls the Chinese economy. Such methods are numbered and in my opinion, byzantine.The above are only some of the rates set by the PBOC - but from my understanding, the most important rate to watch out for is the 7-Day Repo Fixing. The majority of Chinese credit (from mortgages to hard money loans to credit cards) are tied to that 7-Day rate - we've currently seen a spike in said rate, hinting at a contraction of liquidity in China. The current spike is within historical precedence but should be monitored.Looking at a few other indicators of liquidity, I do not see any canaries in this coal mine (....yet). M2 growth continues to decline as China seems like they want to lessen liquidity, but nothing out of the ordinary is evident versus the past couple of years. However, corporate lending rates are alarmingly elevated (over 8% for 1-day interbank corporate fixing) and look to be heading higher. This is by far the biggest concern I see.Lastly, looking at inflation. Hot off the press after the latest print a day ago.Don't see a big deal here yet. CPI is still very tame as food inflation has collapsed. PPI's spike in the past year has tapered off and came in below expectation. The recent PPI spike was due to China's policies to reduce spare capacity, and thus will be transitory. Overall, there doesn't seem to be a huge need for China to tighten in the near term from an inflation perspective.With all things considered: long-term, China is looking to rein in misallocation of resources vis-à-vis bad debt and to stimulate more consumption as it tries to shift its behemoth economy from an export-driven one to an import-driven one.  This means a couple of things: (Again keep in mind this is a very long-term phenomenon) a shrinking current account as trade surplus becomes a deficit. This, in turn, would increase the capital account, moving it from negative to positive - one way this occurs would be the liquidation of foreign reserves.  Undoubtedly, our EM thesis will be put to the test if that occurs. As a shifting Chinese economy will have impacts globally - and we will see which is more negatively affected: the US or EM.Hope this China post can spur some more lively discussion. Thanks guys,

05 мая, 09:53

Harsh (Crude) Realities

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I'm gonna take a victory lap (and you'll have to trust me on this one). And then get back to kicking myself for not seeing this one coming!Let me start by telling you a quick story. The scene goes back to mid-September 2014. Yours truly (let's call me MC) was in the pantry during Asia market hours with a coworker named Goofy Man (let's call him GM).Me and Goofy Man talking marketsGM: How goes it?MC: Same sh*t, different day. By the way, you watching crude these days? WTI? This thing might fall off a cliff.GM: Dude, no way. Bottom of the range. At the most goes to 80's. By the way, have you looked at EM and Europe? Valuation is so cheap!MC: Dude, valuation can be cheap for who knows how long. But, seriously. Look at this oil thing. Have you been following the Russian headlines?GM: Russia in turmoil means higher oil prices. Everybody knows that. You want any of these spicy green chilis with your lamb vindaloo?MC: Yeah, I take whatever else you're not eating. Thanks. Dude, but seriously, look at these production stats on my excel. Oil can take go from here to the 50's or 40's. Have you read Alchemy of Finance by George Soros, this is kinda like the oil glut in the 80's.GM: Dude this is some good chicken masala.Back in September 2014, I recommended to researchers and PMs at my firm that oil could collapse 50% or more. The oil glut mirror that of the glut in 1985 detailed in George Soros' Alchemy of Finance (one of my favorite investing books). With that said, the catalyst that led to the glut was not over-extended credit in OPEC nations from the international lending boom back in the 1970's/80's. In this situation, the catalyst was the need for Russia to increase sales of crude to meet their budget.That was my number one insight. The fact that as crude prices fell, Russia would need to sell more quantity of crude to make the same amount of money, attempting to meet their budget. As they sold more, the more crude prices would fall. This would occur in a reflexive process.Secondly, I did some studies on adjusted vehicle sales and fuel efficiency, showing that the purchase of fuel adjusted car sales globally and US have declined while oil inventory has risen.Lastly, my most important insight is in the chart below.Back when I look at crude in September 2014, OPEC market share was at 30-year lows. What that told me was that OPEC had no ability to step in and cut production in meaningful ways to support crude. (crudely circled in red on the chart. Pun intended)This leads to me kicking myself. Damn it. Why didn't I see it coming?I haven't looked at crude for a while now, as after WTI hit the 40's/30's, it became uninteresting. Looking today, we are not exactly at the lows either for OPEC market share (pun intended again).With that said, it seems to me that the current fall in crude can continue more.Production has stayed elevated since the bottom of crude in 2015. Inventory, on the other hand, has even risen since 2015, despite what the small bounce in oil prices might imply. And surprisingly, speculative positioning has risen back to elevated levels before the oil crash.I'm watching this oil market break out of the range - kicking myself since I should've been short, or at least have told the Goofy Man.I think we have a lot of downside left.With WTI falling, along with base metals and other commodities. I think we should be in the camp of lower yields and lower breakeven inflation. I know, I know. I was big in the camp of huge inflation, but like the great John Maynard Keynes said,  "When the facts change, I change my mind."Well, in this situation, as a speculator, when the sentiments change, I change my mind. Haha, I know, I know. I'm cheating.This move also has other ramifications. A lot of US high yield are energy dependent. We are all sitting here thinking why is the VIX so low and what can drive it higher. Hmmm. We will see (the VIX, is that a MM post to come? Hmm.) Also, the driver for lack of commodities demand, and the fall of crude - could that be driven by something more sinister, like China? (I see a lot of China comments, maybe there will be a China post coming soon). Thanks guys, good luck with the jobs number tomorrow.

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28 апреля, 18:17

Bad News Bears

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Happy Friday everyone.Well, for all the hard data bears, is it time for your victory lap?GDP printed at 0.7% vs 1% expected. Digging deeper, one sees that consumption was well below expectations and inventories subtracted 0.93% from growth.Jeez. Whatever happened to those animal spirits everyone talks about on CNBC?With what I consider a pretty bad number, the markets seems to be taking it well (for now). Stocks peeled off a bit, but let's see where we close for today.What's interesting is that we still see yields higher on the day (albeit slightly) and 10-year breakeven inflation (BEI) still bounced off the print. Zooming out, for all the technicians, 10-year BEI had a very nice weekly bounce off the 200-day - why isn't anybody talking about this? Is anybody talking about this?On top of that, an additional thing I like keeping my eye on is the US 2s10s BEI curve. This curve steepened on the number - that usually means to me future growth expectations. It's steepened for the week as well and it has risen notably since going temporarily inverted in March.Something to go "Hmmm" to:Copper is also interesting, bouncing on the number and looking to close higher for the day/week (for now).All things to chew on for the weekend before the FOMC meeting coming up next week.On a separate note: I am loading up on the Weeknd for the weekend - hopefully while enjoying this awesome New York weather!Have a good weekend!

27 апреля, 09:38

I'm Yelling Timber! CAD's Going Down!

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"You better move! You better dance!" - Ke$haOh boy.And here I thought the Donald was going to take down Mexico.Trump goes after Canada on the lumber trade. CAD moved on the news. Fast forward a couple of days, Trump comes out Wednesday night and says we are staying in NAFTA, CAD moves back on the news.In the midst of these flashy headlines, I wanted to take this opportunity and actually dissect the noise and actually pinpoint what I think is truly important for USDCAD.Let's start with the noise.These were the main Canadian exports in 2014 - (sorry for the lagged data) Assume they haven't changed much.As you can see, lumber is not a big driver here. From a correlation perspective, you get a lot of noise for both lumber and gold. Looks like nothing substantial there. I understand the Donald's posturing has ramifications beyond the Canadian lumber industry and that could have been the cause for the move. But I digress, there are more important factors for CAD - all shall be revealed as you keep scrolling down.My eyes hurt from looking at this chart.Alright, moving on to car exports, we start to see something more interesting.Finally, looking at oil price, we really get something juicy.But even here, we have seen the correlation between CAD and oil has slipped since the height of the oil crash. In fact, weekly correlations (what I have plotted above) have been hovering around 0.2 to 0.3 in the last 12 weeks or so.Now comes the signal.This brings me something that's even more interesting. The Canada housing bubble. I think this will be the main driver for USDCAD moving forward the rest of the year.What's HCG you might ask? Home Capital Group. These guys are asking for 2 billion dollar credit line (or would it be CAD in this situation? Who knows). The company closed with a market cap of 384mm CAD. I sure hope they have Buffett on the batphone speed-dial. Yes, yes, I know. Correlation has fallen off. That's because this stock has been crushed as of late while CAD has only started to react. But when the market focuses on this, the correlation will go back up.[Insert some quote from Chuck Prince about dancing to music, to pay homage to Wall Street history and to sound smart] Except the music has probably stopped in Canada. Strap in boys and girls, we are about to experience some mid-flight turbulence. How big is this bubble? Huge. Charts presented without additional commentary:Focusing back on the USDCAD cross. This whole time, current account in Canada has shrunk versus that of the US while unemployment has risen relative to that of the US. Normally, I would try to be a contrarian and look for reasons to fade those fundamental changes. But in this situation, the housing bubble has gotten me thinking that things can actually continue to worsen.If it does worsen, what will Poloz do? I think negative rates and QE are not out of the question in Canada. In the meanwhile, we could see steady rate hikes in the US (yes, we can argue about this, but let's do that on another day).So we have an economy who's biggest trading partner is a country run by the Donald. A country who's current account has precipitously declined since 2008/2009 and remains low. A fragile economy hurt by the oil glut.Rising unemployment. And a housing bubble teetering on the precipice as said unemployment and economic fragility puts additional pressure on Canadian housing affordability.Oh boy.What Ke$ha said. No, not the dancing part. You better move. I am loony for this loonie short.Thanks guys, good luck.

24 апреля, 01:49

Sunday Funday: French Election Observations  

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A few posts down, Macro Clown speculated regarding a top in populism - citing a potential Macron victory as one of the reasons.*Tips hat*Now that Macron has taken the first round of French elections and looks to cruise in the next round run-off (almost sweeping endorsements from other candidates) there are a couple of things I'm watching.- First thing's first, let's see where we close on all immediately tangential markets (EUR, European rates, US rates, equities of the US and Europe regions). I've seen numerous weekend gaps that get closed and reversed by the end of Monday's session. A full reversal à la US elections would be a shocker to me and a warning sign. If we end Monday on the highs (esp even higher than now), then we are probably off to the races for a number of following sessions.My guess: By the end of last week, the Spoos refused to break, while Russell looked to be consolidating. If we have a good close tomorrow, we are probably taking off. - Risk is getting bid across the board and it's interesting to see dollar weakening across the board while US rates are rising. Something will give in the upcoming days- Two currencies jump out on my board. With the dollar getting slammed, the two currencies not hugely bid are GBP and CAD. GBP has had a huge move last week, and not hugely associated with "risk" so I'm okay with a flat GBP. CAD is only strengthening slightly despite oil and copper being bid. Although also not a direct proxy for risk, this is something I'm keeping my eye on. (Full disclosure, I'm biased - I think bad things will happen in Canada)- EURIBOR futures have yet to open. It would be very interesting to see how much the EURIBOR curve steepens vs that of the Fed Funds curve (if any)- The market (me included), thinks the run off as a done deal. That makes me wary. If EUR vol falls enough, it's probably worth getting long. Using BBG's ATM 1m vol -  mid-March levels (when Macron first took a commanding lead, before Melenchon's surge)-To further develop on Macro Clown's populism post from a little while back:It's interesting to see the previously conceived trend of rising right-wing populism globally might not be the true prevailing trend. In fact, the true prevailing trend seems to be the falling of left-wing socialism. The battleground seems to lie between right-wing populism vs globalist/centralist. If that's the case, we should all be more optimistic. Look at that 200-pip smile (although only 140 pips now at the time of this posting)!Fingers crossed for no upcoming scandals.Have fun Monday,

20 апреля, 22:11

It's Goin' Down In The DM, Hit Me Up On The EM

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Quick update on DM and EM divergence today. I know it has been a well-documented topic for the last few years, but wanted to point to people's attention again, as I feel like we are close to the precipice for a reversal.I'm sure Bloomberg has shown this chart in the past in its regularly scheduled programming. But digging into the fundamentals, things become even more eye opening.A quick look at fundamentals, obviously EM is cheap - I picked a few indices that generally people put in "EM" and "DM" buckets. For the most part, DM is expensive. For the most part, EM feels cheap. Valuation below - (by the way, Eurostoxx was used for Europe, FYI)I'm sure we've all seen US equity and growth divergence charts on Zerohedge.com. I wanted to dig deeper myself, to look at the differences between EM (MXEF as the proxy) vs DM (US/SPX as the proxy) in terms of growth vs equity performance.Despite EM outgrowing DM - the underperformance has been palpable.Please mind the gap. The divergence has been evident, yet it seems to be bottoming. I hate to bring everything back to Trump but I think that will be the catalyst. Remember from the last post, trades go in and out of favor. The EM trade has been out of favor for 7 years. The Trump trade has been 7 weeks. Both of which might be making a resurgence soon. Yo Gotti knows it's going down in the DM. But, but, but, but...Protectionism and other Trump stuff!Well, interestingly, after all the populist rhetoric, EM equities have actually outperformed DM in 2017 YTD.  EM currencies have been ripping as well against the dollar during the same period. Inflationary pressures can be good for EM exporters can temporarily soften any blows from protectionism.  Additionally, the potential lack of access to the US and other DM can lead to meaningful reform in emerging economies. The world runs on unintended consequences. Trump's actions can unintentionally manifest as incentives for EM to take on reforms that will drive wage growth, productivity growth and domestic consumption that ultimately leads to economic resilience. A number of EMs are in crisis/post-crisis mode, where their domestic issues are being aggressively addressed (Brazil, Turkey, Argentina, and Russia come to mind). Although I like most EMs, a caveat must be noted. There should be a distinction made between good and bad EMs. Zuma's debacle that is South Africa - bad EM. Real reform and progress made in Argentina - good EM.As always, good luck out there.

19 апреля, 09:13

Does Breaking The Support Line Mean Mr. Bond Is Truly Out Of Danger?

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A wise man once taught me that most trades aren't necessarily "right" or "wrong" but are either in favor or out of favor.A few posts back, Leftback (LB) took a strong stance stating that Mr. Bond chose to die another day and seems to have been vindicated. Hopefully, LB is sitting on a nice, hefty profit!Another contributor, Macro Clown (MC) commented in his GBP post that he was a strong believer that duration has entered a long-term selloff, and bonds into a bear market. I happened to have and still continue to share MC's view.Clearly, the clown's face has been ripped off, and I haven't faired so well myself - as you can see below, 10yr rates pierced that mythical 2.3% support level.  With that said, I just want to remind everyone that this doesn't necessarily mean we are wrong - it could be that the trade is currently out of favor.Holy technical support levels, Batman!(It's a very clean break of support, but I would like to remind all veteran traders that technicals usually don't work when all the technicians are fixated on it - we broke 2.30, but now what? Everybody's  and their mom's CMT sees this trade. Instead of chasing I'm looking for a reversal signal)Although it might seem that all hope is lost on both the fundamental (the last few prints of missed PPI and CPI, poor manufacturing numbers, etc.) and technical fronts, I believe there are potential signs of relief. For example, one of the leading indicator assets that have been the harbinger to the move in US breakeven move has been the move of base metals (specifically iron ore in China).Iron ore has collapsed. Risk reward for this asset is no longer to the downside. If iron ore finds a bottom, that could spell the bottom for inflation and yields.With that in mind, the doom and gloom concerning hard data - it is important to remember that unemployment is still historically low and ISM has been printing at the highest level in a few years. Some assets have held up okay such as oil during this sell-off. In the very short end, the market still thinks that the Fed is on track. Inflation (PCE and CPI) have not shown sharp drop-offs either - I know they're slow moving. Nothing in the rate progress has changed other than psychology. Read: the short duration trade is out of favor.These tidbits could offer clues of where inflation could go next.With that said, there are a few gray swans that exist in the market: continuing escalation in Syria (I know - I was supposed to write about this but didn't), North Korea, French elections (suddenly a photo finish - this global election cycle has engrained the idea of never trusting polls in my psyche). DM equities could find itself on false footing and see a drop as well - be careful Harry Hindsight!These are all valid and possible concerns that can force yields to shoot even lower.MC wrote about the populist trade getting ahead of itself. We have been witnessing the reversal. Just keep in mind that we could get to the point where the reversal itself gets overdone.Good luck, don't lose your shirt or your face.Oh! By the way, I wanted to tell a quick fictional story/obituary that should serve as a lesson for traders of all ages and sizes.There was once a court.The court had a jester of the global macro nature and a monkey of the execution variety.All the jester had lofty ambitions outside of the court. All he wanted to was to be left alone so he could read, write and trade in the macro world. The execution monkey was simple, always chopping wood and playing on his iPad. The jester thought he had ripped off enough faces with his short duration trade to earn himself immunity in the court.Little did he know, the monkey would falsely brand the jester a heretic in the court just as the short duration trade roared back, causing the jester to lose more than his face. In one foul swoop, the monkey had killed the jester. Although the jester is currently pronounced dead, with any luck, he will be resurrected, make his return and get the last laugh.Trades are never always right or wrong - just in favor or out of favor. Look alive out there and stay nimble.

07 апреля, 07:43

AUDNZD - How Much Can It Run?

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As I toil during these Asia market hours, I thought it would be good to do an Asian market piece.AUDNZD has been in my interest since its initial bottom in mid-2014.  Historically speaking the pair's movement is reflective of the business cycle differences between the two economies. We have bounced off historical lows both in nominal terms and real terms.What caused this move off the lows? Can this bounce continue? Or is it time to be a Dodger's fan and leave before the trains start running late or the traffic gets too bad ;)I have distilled that into a few focused factors that I believe are important for AUDNZD right now.AUDNZD has been recently trading off the terms of trade differential between the two countries that disregarding the potential housing bubble aside, the economy in Australia looked much more favorable than that of New Zealand – something that AUDNZD has yet to price correctly.One of the main things I’m looking at here is the divergence in Australia’s and New Zealand’s respective terms of trade. There has been a strong correlation between the two country’s terms of trade and their currency levels. The rising prices for Australia’s commodities have been driving by the huge rebound in metal prices (20% to 25% of Australia’s exports = iron ore, the price of which has risen precipitously). However, base metal prices have failed to maintain these current levels, as the Trump/populist trade unwound somewhat in the past few weeks. On the other hand, milk futures prices seem to be establishing a bottom. It’s reasonable to expect an appreciation of AUDNZD to come to a halt as well.With that said, we are at a good risk reward point in terms of relative economy performances.NZ has experienced growth and inflation after the RBNZ lowered rates after the Christchurch earthquake in 2011. After experiencing growth, they were the only major central bank raising rates back around ~2014.  AU has been relatively more stagnant, however, after having relatively lower rates since mid-2014 is starting to pick up.Looking at relative unemployment rates, we are at a local low of NZ minus AU unemployment (higher unemployment rate in AU than NZ) and have to start to trend the other direction. Ultimately, from a trades perspective, New Zealand is strongly dependent on Australia (~19% of total trade) but the reliance is non-existent the other way around (~3%). One could interpolate from this relationship that New Zealand, with their higher interest policy,  will soon start to feel some of the economic pains that Australia has had to deal with in the last couple of years.Additionally, looking at the respective central banks’ posturing: both central banks are in easing cycles, but it is clear that NZ has been doing the catch up since 2015. The central bank rate differentials using AU minus NZ should that AUDNZD should be higher, especially if the trend continues of the RBA starting to taper and RBNZ continued to need to weaken its currency, the story is also true for approximate real rates for the two countries as well (generic government bond rates minus inflation). I also built a real rate spread using extrapolated CPI and government bond yields (to calculate a real rate). This does show that there continues to be a break between AUDNZD and real rate differentialsWith the above highlighted, it is easy to imagine that AUDNZD presents a lot of value. Looking at the pair in real terms – NZD still hovers around historical levels, potentially prompting more action from the RBNZ while the AUDNZD real rate is near historical value territories.From a positioning perspective – using CFTC FX futures positioning, it's starting to look stretched from a long AUD vs short NZD perspective.So now what?I think from the rate's and central bank's perspectives, there still seems to be a disconnect between the rate markets and AUDNZD. We could be witnessing the long term bottom of AUDNZD as the business cycle slow shifts to a long-term bottom for base metals and energy. However, after the explosive move driven by the rise in inflation and yields (derivative effect evinced through rising base metal prices), we could possibly be in a position of over extension of those metal prices. If we pullback in metals/inflation (I think we can pull back), so can AUDNZD.Unemployment differentials show a clear bottom, but no clear strengthening in Australia vs New Zealand. Risk reward is to be long that chart and thus AUDNZD.Finally, positions seem a little stretched at this point, but obviously, this doesn't necessarily have to be the utmost driving factor.Conclusion:I think it's okay to be a short term dodgers fan and book some profits for now. But as AUDNZD pulls back between 1.05 and 1.06. I would look to rebuild or add to a long position.Thanks guys, good luck tomorrow with the jobs number. Been really busy of late - will do some work on US equities + Wars - look out for a Syria piece this weekend! 

29 марта, 17:34

Around the word

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Spring is in the air. Blog pages need to be refreshed. A few charts from around the world.First on rates, since I don't have much to say and will leave it to the other excellent members of MM blog, except the 5 year looks to have made and held a new range. I am assuming there are lots of players using the 5yr in their spread model, looking for the curve to flatten, though TBH that was a 2014 trade and the 5/30, 5/10 have been in a narrow range since.5-10 spread. Hasnt done much lately.Staying in the realm of Fixed Income, we move to Credit, where CCC bonds saw spectacular returns in 2016 and into 2017. They are about 3% off their high.Benchmark High Yield CDS spreads have ticked ever so slightly higher, though I would caution its to early to really call it a trend change.For those of us who are not NYC hedge funds trading the CDS contracts or buying CCC bonds (which always have some hair) BB and B bonds are a good proxy for the risk most bond investors are willing to take. Since the beginning of 2017, single B have generally been below 6%, which is not very appealing IMO, but given the alternatives, isn't the worst one can do if you are buying credits you like.Alternatively, if you move up to BB, good luck finding anything with a 5 handle.Indeed the BBB spread, has hardly moved. There is little worry about investment grade credits at this time.Turning towards FX, which I will leave to the other authors in this space to be more specific. The DXY, after doing a nice break out early in the year is right at some critical moving averages now, given the strength in the Euro and Yen of late.The consensus shorts, of Asian currencies (proxy by the Sing Dollar) show a similar trend. Though to me the LT play is still short, especially given the price of things in SingaporeHowever EM FX, to this author, has been strong this year, especially given the move in oil. Though to be fair, oil and EM FX wen the opposite way after the US election and are now just closing the gap.(JPM EM FX in White, Oil in Yellow)But when the beaten down Mexican Peso strengthens for almost 2 months straight, perhaps something has changed. We saw a similar type of move in BRL in 2016. Blow off and then strong reversal.Where your author does have some interest is in 'other' currencies, like Gold and crypto landGold hasn't been able to get above the 200 day recently. Though it did put in a nice 75% retracement in December which would be the maximum allowed if 2016 really was the start of a move higher, according to most voodoo.In crypto land, bitcoin looks to have topped. Below is  chart in CNY, given that is where most of the specs are. Though it seems like other crypto coins, have picked up the slack recently. Your author is pretty cautious on the space hereTurning toward equities, where Europe has seen strong returns to start 2017. Even still IBEX is still far from the recent highs. My guess is we get there after the French elections.While EM equities have reversed its losses post US election, earnings are no where near where they were 5 years ago (some of that is FX related). But the chart looks good as well.However if you want to play the global reflation theme, you really should be looking at Asia Ex Japan, IMO. Earnings estimates have been on the rise in 2017And dont look now, but its been positive almost every day this year.And the EM heavy weight, South Korea (why are they still considered EM is another question) has seen EPS expectations rise and the KOSPI on the verge of breaking out of a 6 year range.  India has also been on your authors watch list, as the Sensex is  now near the post Modi high, though EPS haven't caught up yet.  Lastly the US stock market juggernaut, proxy by the Nasdaq 100, is still growing it EPS and valuation is pretty similar to the past few years. Hard to short stocks like that. Happy Q1