Trading Desk Notes - December 15thSubmitted by Polar Futures Group on December 14th, 2018
There have been 3 major market events since the beginning of October: 1) stock markets virtually everywhere have been hammered, 2) the US Dollar has been rising against nearly every other currency and, 3) crude oil has tumbled more than 30%. During that pivotal 1st week of October Fed Chair Powell essentially told the market that the Fed had a long way to go to get short term interest rates to “normal” and Khashoggi was killed in Istanbul.
Stocks: Lipper fund research reports that for the week of Dec 5 – 12 investors pulled a record >US$46 Billion out of stock mutual funds and ETFs. This was more than double the previous weekly record outflow since Lipper began tracking this data in 1992. Bond funds saw a near-record US$13 Billion outflow that week while money market funds received US$81 Billion. Some of the selling in stocks and bonds had to be tax related but you can bet that after seeing their October and November statements a lot of people were yelling “Get Me Out” at their broker.
The benchmark S+P 500 Index closed the week at 8 month lows - down ~11% from All Time Highs made the beginning of October and down ~3% YTD. The major Canadian and European stock indices are around 2 year lows, while the Dow Jones World Index is at 18 month lows.
The US Dollar Index closed at 18 month highs this week. It’s interesting to note that USDX rallied as US stocks rallied in the April to August period...but has also rallied as stocks all over the world fell in the October to December period. One of my key Big Picture concepts over the years is that capital flows to America for safety and opportunity.
The Canadian Dollar closed at 18 month lows this week around 7490. Part of CAD weakness was due to USD strength but weak commodity prices, a negative interest rate spread Vs. the USA and a host of domestic issues...especially aggregate national debt (household, business and government) at 290% of GDP add to downward pressure on the Loonie.
WTI tumbled from 4 year highs at $76 BBL the first week of October and has chopped back and forth between $50 and $54 the last 3 weeks. The market was probably WAY too speculatively bid leading up to the October highs on expectations of American sanctions slamming the door on Iranian exports...and the unwinding of those positions accelerated the >30% tumble. In a classic case of “it never rains but it pours” the bad news just kept coming as crude prices fell...the Americans eased back on the sanctions, OPEC and non-OPEC production soared, inventories grew and demand estimates were cut.
The Fed meets Tuesday and Wednesday this coming week and the consensus view is that the Fed raises rates by a ¼ but signals that they will go slow for the next few months. This follows the ECB meeting this week which confirmed that they will stop QE this month (but will reinvest income from their massive balance sheet holdings) and may, ever so cautiously, start to raise rates late next year.
My short term trading: I started the week short CAD, long Yen. I had re-shorted CAD Friday, Dec 7, when it jumped ¾ cent on the bizarre employment data. I bot the Yen thinking it would rally if stocks fell. I covered the short CAD mid-week for a gain of ~60 ticks when it failed to take out the previous week’s lows. I was stopped out of the Yen for a small loss even though stocks started this week down. I bought an S+P call spread Monday thinking the stock market was WAY oversold and also shorted TNotes thinking the month long rally in bonds was WAY overdone. I covered the long leg of my S+P spread for a decent gain mid-week when the stock market couldn’t hang onto gains and kept the short call leg. I bot gold mid-week thinking it might catch a bid if stocks got hammered but was stopped for a small loss when the Euro tumbled on weak economic stats and took gold down with it. I’m going into the weekend short TNotes and short S+P calls with some decent unrealized gains on both positions.