Trading Desk Notes - April 7thSubmitted by Polar Futures Group on April 13th, 2018
The stock market fell this week when Trump threatened China with $50 Billion in tariffs...and when China retaliated with $50 Billion in tariffs of their own Trump raised the ante another $100 Billion...and the stock market fell harder! White House talk of additional “non-tariff” protectionist measures (trade barriers) to “protect” American car makers from foreign competitors didn’t help...nor did Trump’s comment that, “We may take a hit, but you know what, ultimately we’re going to be much stronger for it.” Trump campaigned on a protectionist platform so the market should have seen this coming...but it didn’t...and now that the “Trade War” genie is out of the bottle it reminds me of the old saying on the CBOT floor, “A problem isn’t a problem until it’s a problem...and then it’s really a problem!”
The US has run massive trade deficits...every year...for decades...primarily with China, the EU and Japan. Trump says that has to change. Greg Ip wrote in the WSJ that, “China started the trade war, not Trump...China’s predatory trade practices...are undermining both its partners and the trading system.” Martin Murenbeeld has told us for years that the major cause of the American trade deficit is the overvalued US Dollar...it needs to fall, particularly against Asian currencies.
The “trade war” escalation may be reminding Mr. Market that a lot of things are seriously “out of balance” in the world and that big changes are inevitable...some people will see danger in that...others will see opportunity.
Intermarket relationships: The major US stock indices were the barometer of market sentiment this week. Global stock markets took their lead from the US markets, bonds were the mirror image of stocks, and crude oil, which had moved opposite to stocks in late March, was virtually tick-for-tick with stocks this week while the currency market marched to its own drummer...the US Dollar Index closed at its best level in 8 weeks.
My short term trading: I started the week long WTI puts, short CAD and NZD. I covered CAD and NZD Tuesday for small losses and re-established the short positions later in the week at better prices. I made money as a buyer (yes!) of the stock market on the mid-week bounce but couldn’t get turned around in time to get short later in the week. I bought puts on gold. I shorted the GBP and covered that for a small loss. At the end of the week I’m effectively short CAD, NZD, Gold and WTI. The managed account I have with Drew is short CAD, and long puts on EUR, WTI and T-Notes.
Risks/opportunities that could develop over the next few weeks:
Stocks: I think the sharp break from the January highs may have been the start of a topping process after a 9 year bull market. The Fed is taking away the punch bowl (they are on a path to raise interest rates, their balance sheet is set to shrink by $420 Billion in 2018, and another $600 Billion in 2019) and they won’t relent unless the stock market REALLY takes a hit. The leading tech stocks have been bullet proof for years but may now be vulnerable to “political risk.” In a bear market it never rains but it pours. I keep looking for rallies to run out of steam...a set up for trading from the short side.
Currencies: The USD could be setting up for a rally after going sideways since January. Short USD positioning in the currency futures market is the largest since the USD bottomed in 2011. We may see the growing policy divergence between the Fed and other Central Banks get even wider. We may see a “flight to quality” bid for the USD if there is a liquidity scare. I’ve got some small USD bullish positions...hope to be able to add to them if the market moves in my favor.
CAD, AUD, NZD: The commodity currencies are at risk of a rising USD, rising interest rates and falling commodity prices. AUD and NZD are particularly at risk if the market sees weaker Chinese growth...whether self-induced or otherwise! I’m short CAD and NZD.
Gold: Over the years the biggest “driver” for the gold price has been the strength or weakness of the USD. From time to time real interest rates have had a significant impact on the gold price...rising real rates have usually been a definite headwind for gold. Gold fell after Trump’s election as the US Dollar Index rose to a 14 year high, but since then gold has rallied about $200 (18%) as the USD fell. For the past couple of months gold has gone sideways in ~$50 range as the USD has also gone sideways in a relatively narrow range. If the USD rallies in the weeks and months ahead gold will likely fall...there’s been a “lid” on the gold price for over a year...the path of least resistance may be down. BUT...inter-market relationships sometimes change...and when they do that often signals a REAL change in market psychology. Gold hasn’t been above $1,400 for 5 years. If it was to rally through that level, especially if the USD was also going up, it might signal a strong “safe haven” bid in the market. (For instance, gold and the USD rallied together January to March 2009 as the stock market fell to 10 year lows.) I own gold puts...a limited risk trade in case gold goes up through $1400.
Crude oil: The massive spec long position is REALLY at risk if WTI drops through $60. American oil shares may have been dragged lower with the rest of the stock market but they look to be pricing sub $60 oil. Front month WTI has made a “double top” just above $66 with the 1st top in January coincident with the peak in the stock market while the 2nd top was made on the “Bolton will push for re-sanctioning Iran” story. That story sees a half million barrels of Iranian production taken away from the market. I have my doubts, and so, apparently, does the market with the recent decline to $62. If the stock market keeps falling then Crude oil demand estimates are at risk of being downgraded while supply estimates will keep growing. My WTI puts have doubled in price...I hope to find a spot to add to the trade.
The risk you don’t even want to think about – but maybe you should: For decades traditional money managers have believed that the best formula for a balanced portfolio has been to own a combination of stocks and bonds. The theory was that if the stock market fell then bonds would go up...and vice versa. The current jazzed-up version of this theory is called Risk Parity. But what if that formula doesn’t work anymore...what if, after a 35 year bull market, bonds began a major bear market in 2016...and now we also have a bear market in stocks?