Monday, January 24, 2011

Euro Pause

You remember last week TMM were wondering what the motivation for the Soothsayer to break his cover was to go mainstream with his calls? We were wondering if he was going "Taleb" in making himself a public name by putting in a big call. Well, it would appear we were right to be suspicious as today all Bloomberg users have had a message that the so far free Soothsayer service will soon be charged at a price of thousands of dollars per year per user. Now it all makes sense! We bet he was hoping that the equity market would have tanked by now though.

On Friday we mentioned that we still see the picture for Eur/usd and equities to head higher and indeed Eur/Usd put in a new high in early far east time. Call it gut feel rather than proven, but we have always had a feeling that early far east new highs or lows without major news often mark turns. And when we add that to CFTC data back to flattish (well, small long) now, we get the feeling that the market has started to want to JBTFD rather than sell JSTFR. Finally. a soothsayer signal, probably one of the last free ones we are allowed to see, is showing a sell signal maturing on the daily charts today.

TMM have been steadfastly calling Eur/Usd higher but now think there are reasons for it to at least pause. EUR/CHF and EUR/AUD and the trusty XAU/EUR all showing signs of Eur weakness returning.

Whilst we mull over things during an otherwise quiet day, our attention was attracted to the performance of everyone's favourite trade of the year, namely Long Oil. We know that short term corrections in Macro trades are almost a welcome sign of overall health. You only have to look at the bullish palladium calls of last Feb, as an example. May and June looked disastrous, but by year end the macro view prevailed. But the price action in oil over the past few days has us concerned that a move sub 88.10 on the front WTI contract leaves fresh air below, which could well be painful as it's an obvious stop loss level. But our question remains - is anyone out there actually bearish crude? If so, would love to hear from you in the comments section.


Anonymous said...

From SocGen:

For instance, while peripheral spreads spiked during Q4, the price of Brent rose from around $75 on September 1 to the current level of $98. This sharp rise has caused many comparisons with 2008, prompting questions about whether oil will follow a similar path (the 2008 peak was around $145). SG's Oil guru (Michael Wittner) gives three reasons why not: first, OPEC spare capacity is now much higher (4.9 Mb/d, compared to 1.0-1.5 Mb/d in 2008 H1); second, we expect refinery capacity utilisation to average only 80% during 2011, whereas it was close to 85% in 2008 H1 and, finally, OECD crude and product inventories finished 2010 close to 5 yr highs, whereas they were close to 5 yr lows during 2008 H1. Oil Drivers

Michael believes the long term fundamentals will drive oil higher ($115 by 2015) but expects the above factors to limit the rate of progress. For instance, the first chart confirms how different was the crude inventory situation in the US at end 2010 versus that at the start of 2008. Despite some recent improvement, stocks remain on the generous side and are broadly consistent with Michael's price forecast for the rest of the the year (WTI and Brent are expected to average around $95 during 2011 H2). Even worse, Michael feels the oil price has recently run ahead of fundamentals, driven by a range of temporary factors (a cold winter, rationing of coal-fired electricity in China, which led to a surge in demand for diesel, and the build up of non-commerical net long positions). This makes it susceptible to a short term correction, with Michael suggesting that Brent could fall by as much as $10 by February/March.

As shown in the second chart, oil sector shares have now "reconnected" with the oil price, the majors having benefited from "safe-haven" status during late 2008/early 2009. If Michael is correct about the longer term, it is worth holding on to the sector, though there may be disappointment in the immediate future. More nimble footed investors may want to lighten positions to avoid the short term risks and buy back once Brent has returned to $85.

Leftback said...

So difficult to be short ANY of the smaller markets that can, and have been, so obviously manipulated by leveraged players and an influx of small short-term speculators. Even after the cold winter, stocks of crude are near to record highs, yet that isn't being translated into delivery prices for a variety of reasons.

It's all ONE TRADE, innit? If the dollar makes a move up and China gives any significant indication, then we will see all the commodity/EM trades unwind. If the unwind is sharp and disorderly, then the price of crude may correct far more than appears sensible on supply/demand considerations alone.

Most likely we bounce around in a $75-90 range based on whether the dollar or the Euro is being beaten with a stick at the time.

FX said...

TMM, I'm out "ALL" longs when Dow hits 12200....Can't be bothered following Oil etc anymore.....this market is soooooooo boring at the moment, it shits me.I have'nt even made a intraday trade in fx this year,WTF!

ps.....I find out soon enough if its just lazyness or my synapes are finally developing into a macro trader, heres hoping.

Anonymous said...

emerging markets are in correction long-term or short, no one knows, jakarta is my guide - exporter de preference of every commodity from palm oil to pulp to iron copper coal cocao to Chindia. when my favourite hedgies flee that market, the slowdown is happening; and chindia matters far more than uncle ben or trichet le fou. take the marginal demand away from commodities and the oil table is left with dumb money.

abee crombie said...

well i guess there are still some bears in oil..havent heard from Shork in while but that guy was bearish for a while.

The blow out in the brent-wti and the calander spreads is also probably playing a big role in the outright futures... pretty massive discount at the moment in brent - wti at $8

Leftback said...

Danny Blanchflower and El Gordo on CNBS this morning discussing how UK austerity policy was anticipated and resulted in this morning's negative GDP print. They expect more QE from The Swerve while some others have been calling for a hike, what sayest thou, TMM? A nasty dose of VAT has pushed up UK inflation, so it's getting a bit stagflationary, eh?

Leftback said...

Interesting macro food fight developing on Mark Thoma's blog after Krugman essentially denied the existence of the bank recapitalization mechanism in a ZIRP/QE environment:

Krugman wouldn't be so bad if he was stupid but he is actively misleading people about what is going on, and as such is a sort of intellectual propagandist of the worst sort....

FX said...

Don't want to sound off to soon, though anyone out there tipping my little baby hitting 1.80 this year.....please direct yourself to the front page and give to a greater cause.

Skippy said...

While the China policy tightening is clearly well flagged (as Nemo noted) it still has not had an impact on the teflon currency (a.k.a. AUD).

Perhaps that is because it is a phantom tightening? China's growth was 12% annualised in Q4 afterall. Perhaps it was because credit growth hasn't really slowed that much (if off-balance sheet lending is included).
Does the correction in the other previously teflon-like precious metals provide a red-flag for other commodities and commodity-linked assets and currencies?

Right Field said...

Wed, 9:30 a.m. EST

Confusion is High...Again Many Calling Corrective Scenario --- The combination of last Friday’s option expiration (45% of open interest closed) and P/L duress due to rotation has forced a reduction in professional net length, to what degree is hard to handicap but psychologically it is clear many are being forced to forfeit opportunity cost in exchange for a more defensive profile. It is well known that favored longs or sectors have seen the greatest negative price impact, either from disappointing earnings, technical factors or that of related commodities and are at risk of trading through key moving averages. The problem for many is recon reconciling this portfolio adjustment against Index level prices which are multiple percentage points away from their respective averages. This internal/external confusion has only increased the group think of a greater correction. The problem is that so much has already been invested in protection this year without success that outright risk reduction is becoming the only outcome. This leads to the question have many names traded back to value levels or opportunity. The answers coming back from your peers, especially in Basic Resources, is “how can I put risk back on in front of a possible China rate hike Friday morning and into month end when these are the sectors that have given back my month.” Conclusion: Today is not going answer any of these questions and sentiment around selling the FOMC is pervasive for risk. The only issue is when risk does not correct further and professional’s need to re-evaluate their length if the Index technical’s begin to argue the move above 12,000 in the Dow and above 1300 in the SP are valid.

Leftback said...

As a child of 1959, I enjoyed the Sputnik reference in the State of the Union speech. Of course, Kennedy pledged to put a man on the moon before the end of the decade. Obanana is more likely to send an unmanned probe to Uranus.