Trading Desk Notes - June 23Submitted by Polar Futures Group on June 23rd, 2017
Key events this week:
1) major US stock market indices hit new All Time Highs (again)
2) US Treasury bond yields hit their lowest levels since the November election
3)WTI futures dropped to a 10 month low
4) the CRB commodity index fell to a 14 month low
WTI: prices have closed lower for 5 consecutive weeks, falling ~$10 (19%) from ~$52 to ~$42, following OPEC’s May 25/17 announcement that production cutbacks would be extended. Wholesale US gasoline futures have fallen ~16% during this same time period. Front month futures for both WTI and gasoline hit their lowest prices in about a year. We have been short WTI for the past three weeks. We remain short but have written WTI puts to lock in profits on the trade.
CAD: rallied almost 2 cents from May 5 (14 month lows) to May 25 as WTI rallied ahead of the OPEC announcement. However, since May 26 CAD has been steady to higher while WTI has fallen sharply. We believe CAD has rallied while WTI fell because
1) USD has been generally weaker against all currencies
2) the Bank of Canada signaled a significant change in their monetary policy (take back the “emergency cuts” made last year,)
3) a reversal in the extremely bearish sentiment against CAD
We covered our long held short CAD positions in late May as it rose from 14 month lows and are now aside. Markets are expecting at least 1 x ¼ point interest rate increase from the BoC this year, maybe as soon as July!
CRB Commodity Index: is down ~12% from its January highs even as USD has fallen about 7%. Crude oil is a significant part of the CRB Index and would have contributed to the weakness of the index but prices of a number of other commodities have also been falling. On a month to month basis there is a very strong correlation between CAD and the CRB, it’s interesting that they have gone in separate directions for the past month as CAD seems to be marching to a “different drummer!”
US Dollar: hit a 14 year high in January and fell ~7% to 7 month lows in mid-June. We are long the USD Index thinking that negative sentiment against the USD is overdone.
Gold: We bought OTM calls on gold this week thinking that it is turning higher. We think that ultra-low volatility across markets means that options are relatively cheap and give us a low cost limited risk opportunity.
S+P: We bought OTM puts on the S+P this week. We are “top-picking” this market by buying (what we think is cheap) limited risk put options.
Interest rates: The US treasury curve is the flattest in 10 years as 30 year yields have fallen much faster than 2 year yields over the past few months. Inflation expectations across the G5 have been falling faster than bond yields which means that real yields have been rising. Credit spreads have started to widen the past couple of weeks.
The market doesn't believe the Fed: last week the Fed announced plans to continue tightening monetary policy throughout 2017, 2018 and 2019. The market doesn't think the Fed will raise rates nearly as much as they forecast because wage growth remains tepid and inflation is well below the Fed’s target. The market is currently pricing only a 50% chance that the Fed will raise s/t interest rates once more this year. Is it possible that the Fed is announcing plans to tighten because they are targeting “financial conditions”? i.e. rising asset prices?
This week’s “Reaching For Yield” award goes to: the people who bought US$2.75 Billion worth of Government of Argentina 100 year bonds. The auction was over-subscribed 3.5 times and demand was so strong that the original target yield of 8.25% was dropped to 7.9%. The bizarre aspect of this sale is the fact that there has never been a 20 year period of time in Argentina’s history when the country did NOT default on their government bonds!