Trading Desk Notes for September 19, 2019Submitted by Polar Futures Group on September 19th, 2019
The attack on the Saudi oil processing facilities caused WTI to jump $8 to ~$63 when markets opened Sunday afternoon...but within a couple of days WTI fell back ~$5 to ~$58. The price jump was attributed to a risk premium build, fears of more attacks and/or retaliation, talk of $100 oil, as well as to the assumed loss of 5% of the world’s daily production for an indefinite time. The fall back to ~$58 was attributed to lack of more attacks and/or retaliation, and word from the Saudis that they would draw down reserves to maintain exports and would have the facilities more-or-less back to normal within a couple of weeks.
Uncertainty about the source/cause of the attacks, the tempered response by the Americans and the Saudis (well, tempered in terms of what we might have heard!) and the “self-sufficiency” aspect of American oil production also contributed to WTI falling back from its highs. I have to think that some American producers saw an $8 jump as a gift and sold into that rally to hedge production.
The reaction to the Saudi attack in other markets was relatively muted. Gold jumped ~$20-25 but fell back ~$30 within a couple of days...US stock market indices fell off a bit but recovered quickly and were trading above last week’s close by Thursday. Safe haven bonds, which had tumbled the previous week, got a small safe haven bid and the US Dollar rose a bit...but quickly gave back those gains and chopped sideways for the rest of the week.
The Federal Reserve cut the Fed Funds target rate by 25 basis points, as expected, but the FOMC was certainly not unanimous in making that decision nor are they unanimous in their forecasts of future activity. That reflects the “mixed bag” of economic reports...for instance, the global economy looks to be slowing, the US trucking industry is slowing, Fedex shares have tumbled back to last December’s lows on weak forward guidance...but employment remains strong, consumer confidence is strong and housing is strong...the Home construction ETF (ITB) is up >50% from last December’s lows at its best level ever save for January 2018.
The net takeaway was a “hawkish” cut...meaning that the widely anticipated 3rd cut from the Fed this year is no certainty.
The Quote of the Week: When Powell was appointed Chairman I said, “It’s going to be a new Fed under Powell...he’s not going to be an “easy money” Chairman like Greenspan, Bernanke or Yellen.” But during the past few months I wondered if I’d been wrong about that...maybe he was going to “cave” as the uncertainty from the trade wars weakened the global economy and markets called out for MORE cuts. But at yesterday’s presser he didn’t look like a guy who was going to be rushed into slashing rates. His behavior reminded me of Danielle DiMartino Booth recently telling Keith McCullough that, “ Powell is a Bond Vigilante at heart.” I liked that. I think the world needs more bond vigilantes.
My short term trading: I took profits on my short TNotes early this week but gave back half those gains when I covered my gold puts at a loss. I think I was right to buy gold puts last Friday with the market near its lows of the past month and looking like it could break lower. I could see gold following the break in bonds...I had thought the tumble in real rates the past few months had been “the” cause of the gold rally and now that real rates were rising gold was at risk of falling. I also thought that the huge net long spec position added to the risk of a snowballing break.
When I saw the news of the attacks on Saudi oil facilities I thought both gold and bonds could jump on a safe haven bid. I was glad I had somewhat hedged my short TNote position by shorting OTM puts and I was really glad I owned gold puts and wasn’t outright short! I was surprised (and grateful) at the more-muted-than-expected reaction in bonds and gold on Sunday afternoon / Monday morning. I felt like I’d ducked a bullet. By Tuesday, as markets calmed, and knowing that I was going to traveling by Thursday I decided to just get flat.
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