Trading Desk Notes - February 16thSubmitted by Polar Futures Group on February 19th, 2019
From the Desk of Victor Adair
The leading American and Canadian stock market indices have closed higher for 8 consecutive weeks as central banks around the world , led by the Fed, have reacted to slowing economic growth signals by “backing off” any tightening plans and in some cases (China, for instance) have decided to go back to priming the pump. The DJIA, S+P 500 and the NYSE indices are up ~18% from their Christmas lows, the TSE is up ~15% while the Russell 2000 small cap index is up ~26%. The cap weighted Dow Jones World Index is up 15%.
Stock markets around the world have rallied despite a number of sharply lower-than-expected economic data points, despite continuing political chaos nearly everywhere you look and despite enormous uncertainty regarding the US/China trade talks. Implied volatility in the stock options market has dropped more than 50% from its Christmas highs.
The USDX hit a 2 month high this week with European currencies especially soft. It’s been interesting to see the Swiss Franc drop ~4% against the USD in the last month while gold has rallied ~2.5% against the USD.
Gold closed at a 10 month high this week up nearly $160 from last August lows. Gold has been advancing against nearly all currencies...a true bull market. Falling real interest rates have been friendly for gold, as has commentary about central bank bullion purchases...read a great gold commentary by our friend Kevin Muir: https://www.themacrotourist.com/posts/2019/02/14/gold/
The bond market had a powerful rally in Q4 2018, perhaps sniffing out early signals of slowing global economic growth, perhaps in reaction to the falling stock market and certainly in part due to the covering of massive speculative short futures positions placed in anticipation of the Fed stepping up the pace of their “auto-pilot” sales of bonds and mortgages. YTD the bond market has trended broadly sideways...perhaps more than a little skeptical of the impetuous “risk on” sentiment in the stock market...and surely sensing a deflationary risk in the trend of economic data.
Price change in the crude oil market since the 4 year high made last October has been broadly “tick-for-tick” with the US stock market with front month WTI ending this week at a 3 month high near $56...up >30% from the Christmas low. Significant OPEC production cuts (especially Saudi) helped buoy crude prices.
My macro view for the next few months has been that slowing global economic growth will be the BIG story...that market sentiment will become increasingly risk adverse which means 1) lower bond yields, 2) wider credit spreads, 3) lower share prices, 4) lower commodity prices and, 5) a stronger USD.
My short term trading: I’ve traded in line with my macro views but my risk management rules ALWAYS override any opinions I may have about where markets are going.
Last week I bought puts on the stock market and sold them for a small loss a couple of days later when the market rallied back from a dip. I came into this week with futures/options strategies that were essentially bullish TNotes, bearish WTI, Copper, NZD and CAD. I closed all of those positions on Monday Feb 11/19 at a profit (the TNotes were a breakeven) and went flat because I sensed that “risk on” sentiment still had some legs. I bought NZD Tuesday thinking the USD might weaken against all currencies and if so then NZD might bounce because it had been sold heavily the previous week. Overnight NZD rallied more than a full cent on a surprisingly hawkish RBNZ statement and I took profits (I’d been right for the wrong reason...just take the money and say thank you!) I have NOT tried to top-pick the stock market this week even though I think its “overdue” for a roll-over. I’m going into the weekend long Yen thinking it might bounce after falling more than 4% YTD.