Trading Desk Notes - Oct 14thSubmitted by Polar Futures Group on October 16th, 2017
From the desk of Victor Adair
Global stock markets keep making new highs with total capitalization now around $80 Trillion. Since US markets are so “richly priced” investors are “reaching out” to other countries, and other markets, in search of “cheaper” valuations. Volatility is at record lows (selling vol is apparently the no-brainer path to financial freedom) and credit spreads are amazingly narrow. Reaching for yield has been handsomely rewarded...and I’m the guy who thought reaching for yield was a big mistake! (I still think it’s a big mistake...one of these days there’s going to be a real penalty for taking on an unknowable level of risk in exchange for a marginal pickup in yield.)
This tremendous rally in share prices has been fueled by a $15 Trillion tsunami of Quantitative Easing from the Big Four central banks (and who knows how much “accommodation” from the People’s Bank of China) and even though the Fed has announced a very modest program of “Quantitative Tightening” the ECB and the BoJ will continue with their “stimulative” programs.
The new Fed: There may soon be a wholesale change of personnel at the Fed that could have a big impact on markets. Yellen’s term as Fed Chair ends in February and since I believe President Trump loves to be “the disruptive boss” my bet is that Yellen doesn't get reappointed. Vice-Chair Fisher has already resigned so Trump will have the opportunity to “re-shape the Fed” with as many as 6 nominations to the FOMC over the next year. (Who says he can’t get anything done?)
The Big Question is, “What kind of Fed does Trump want?” Perhaps the easy answer, given his personal success with borrowed money, is a Fed that will maintain an “easy money” policy. Such a policy would probably weaken the US Dollar...which the President seems to thinks is a good thing. But I’m thinking that his vision of “Make America Great Again” requires throwing out the old ways and going with something dramatically different. His nomination for Fed Chair will give us an insight into how he wants to re-shape the Fed...and if there are big changes coming at the Fed there could be big changes in the financial markets too. (Maybe S+P puts catch a bid?)
NAFTA: If indeed President Trump relishes the opportunity to be “disruptive” then markets should anticipate NAFTA will get wacked. Mexico seems more at risk than Canada with the Peso down ~8% over the last 4 weeks while CAD is down only ~3%.
The Canadian Dollar: has been relatively quiet this past week...with a little bounce from last week’s lows. The Bank of Canada Business Outlook Survey is scheduled for October 16 and a weak survey could bring positioning risk into focus given that futures markets speculators are holding their largest net long position in 5 years. I was wondering why the specs have added to their net long position for the past 4 weeks even as CAD fell 3 cents. That seemed counter-intuitive! So I took a close look at what the specs did following the major low this past May. It was interesting to see that following the May 5 low the spec net short position actually increased for 4 weeks while CAD rallied about 2 cents. The specs started cover their short positions after that but remained net short until early July...9 weeks after the May low...by which time CAD had rallied at least 6 cents. So what? My deduction is that the people behind these trades are operating on a longer time horizon than me...they initially see a reversal as only a set-back in the major trend, and therefore an opportunity to add to their position. They clearly don’t reverse their positions “on a dime” but if the market continues to go against them they will gradually unwind their position. So what? If the Sept 8 high was the major reversal I think it was, and if CAD trends lower from here I want to be short CAD while those spec longs are liquidating their positions!
The US Dollar Index: was also relatively quiet this past week...giving up about 1/3 of the rally from its September 8 low. I’ve got a bullish bias. I’m seeing a possible “head and shoulders” bottom forming on the daily USD Index chart (left shoulder end of July / early August.) An upside breakout through the 94 cent “neckline” would complete the H&S bottom pattern and confirm the break of the trend line that has defined the USDX decline since March. Classic chart analysis of the H&S bottom would project a target price of around 97 cents. Positioning risk is also a significant factor since the aggregate USD spec short position in the futures market is at a 5 year high.
Europe: Last week I wrote that I expect more “distinct society” referendums like Brexit and Catalonia to keep pressure on the Euro. Not surprisingly, given that European currencies are a huge part of the USDX, the Euro looks to be developing a H&S top on the daily chart. The downside price target would be around 112.75.
Japan: There is a Federal election Oct 22. Abe is expected to maintain or increase his power. I’m looking to get short the Yen.
China: The 19th Communist Party Congress (held every 5 years) begins Oct 18 and runs for a week. This is an opportunity for Xi Jinping to consolidate his power and lay out his vision for the future. Chinese markets have probably been “managed” to avoid any embarrassments ahead of this Congress. I wonder if anything “busts loose” after the Congress is over.
Crude Oil: Chinese September imports were strong at ~9 mbd...YTD imports are running ~12% above year ago levels. American imports from Saudi Arabia hit a 30 year low (are the Saudis trying to manipulate the weekly American inventory reports or do the Americans just not need the Saudi oil?) Both Brent and WTI forward curves are in backwardation for 2018 and beyond. American frackers have been hitting the WTI back months with hedge selling...flattening the curve. They apparently have hedged about 30% of their anticipated 2018 production so they are substantially under-hedged and will probably become more aggressive sellers if prices rise. Front month WTI has trended $10 higher from the June $42 lows. I wonder if some people are buying crude because they think it’s “cheap.” Speculators are net long 417,000 contracts up ~ 27% from the June lows while open interest (OI) is at All Time Highs up 18% from the June $42 lows. Classic OI analysis says that rising OI with rising prices is bullish. I’ve traded WTI almost exclusively from the short side since 2014 based on a bearish view of supply/demand/inventories. I’m happy to be out of the market now. I think if prices rise another couple of dollars we could see speculative buyers back up the truck...but if prices roll over from here we could see selling from both speculators and hedgers!
My short term trading: I began this past week short WTI and long CAD. I exited both positions with small gains and I’m flat.
What do I do when I have no position? I look at my charts. I have 100’s of them on my CQG. All kinds of different markets. I look at a chart and ask myself, “Why is that?” I look at different time frames, everything from hourly to annually. I look at individual contract charts Vs. continuation charts. Why are they different? I especially look at intra and inter market spreads. I’m looking for relationships...looking for “if/then” opportunities. What I’m really looking for is an early indication of another major move...like the CAD I’ve been short for 6 years, or the WTI shorts I’ve had (on and off) since 2014, or the USD longs I’ve had (on and off) since 2011.