Trading Desk Notes - May 6thSubmitted by Polar Futures Group on May 5th, 2017
Our thoughts on select markets as we wrap up the trading week.
Crude Oil had a brutal week with WTI prices down more than 10% (down 20% from the mid-April highs, down 24% from the January highs) as bullish speculators begin to “throw in the towel”...creating a “domino” effect from “positioning risk” that we have been forecasting for weeks. Gasoline prices are down 18% from mid-April highs, down 24% from January highs...American gasoline consumption in March 2017 was 5% less than March 2016.
Precious Metals have also been hit with relentless selling: Silver closed lower for 3 consecutive weeks...and 15 consecutive days...dropping over $2.50 (14%) from mid-April highs. Gold also closed lower for 3 consecutive weeks...down $70 (5%) from mid-April highs.We highlighted the severe under performance of silver prices last week. Copper dropped 7% from Monday’s highs to Thursday’s low.
Commodity Indices the sharp drop in crude (especially) and metals dragged some of the broad commodity indices to their lowest levels in a year.
Canadian dollar also closed lower for 3 consecutive weeks (and for 13 of 15 days) as it fell 3 ¼ cents from mid-April highs...to below 73 cents...levels last seen in February 2016. We’ve been relentlessly bearish CAD for years. One year ago, on Moneytalks Radio...when CAD had bounced from the January 2016 lows of 68 cents to 80 cents in May we called that the “high for the year” and forecast CAD would trade in the low 70’s by the end of the year.
CAD is down more than 30% against the USD since its 1.06 highs in 2011. CAD fell along with the broad commodity indices (which dropped 50% from their 2011 All Time Highs) as the USD rallied from a multi-year low. CAD is down 9% from where it was a year ago...when the US Dollar made its low for the year and rallied to 14 year highs this past December. CAD has had the worst performance against the USD of 35 major countries in the last 4 months...and it may be due for a (short term) correction...but we think there’s a good chance we will see it below 70 cents this year.
Stocks: The major American indices made All Time Highs immediately following Trump’s February 28 “State of the Union” address then drifted sideways to lower for a month and a half...jumped higher April 24 (relief rally) following the first round of the French elections and have been eerily quiet since, (VIX dropped below 10%) drifting sideways just below the All Time Highs. Several European stock Indices are trading at All Time Highs...perhaps some investors (with an international perspective) are selling richly priced US stocks and “rebalancing” into more cheaply priced European stocks.
Interest rates: The “yield premium” of American interest rates over many other countries has helped to buoy the USD...markets are currently pricing in (95% chance) another 25 bp rise in American short rates at the June Fed meeting...yet the Euro currency has rallied ~6% against the USD since the turn of the year...closing this week at its best levels (1.10) since Trump was elected.
Our model account: We had our best monthly performance of the year in April...up over 3.5% with gains coming from our bearish positions on CAD, WTI and AUD. We continue to hold bearish positions on CAD and WTI. We initiated a small position against the Euro this week as it traded to its best level’s since Trump’s election. The huge speculative short position that existed in the Euro over the past couple of years was reduced to neutral over the last 6 months...perhaps bearish speculators grew impatient with the Euro’s failure to trade below “par” with the USD...perhaps they became more sanguine about Europe’s political and economic issues...whichever it was...their short covering and net new buying have lifted the Euro to 6 month highs. We have taken a low risk bet that the Euro rally is going to reverse.