Death, taxes, and bank holiday rain

It's nice to know that like death and taxes, there are certain immutable features of modern life- such as rain on a UK August bank holiday.  One thing that does change, however, is the trend in financial markets.   These days, if you don't like the price of your favourite financial asset, just wait a few hours- it's bound to be radically different.

Yesterday's post noted a favourable set-up to fade the recent rally in equities, and so it's turned out to be thus far.   Once again Asia has sent equity futures sharply lower (Spooz down 20 at the time of writing) after giving them a battering Sunday night as well; interestingly, New York didn't do much of anything with equities during its trading hours.

While yesterday's UK holiday may have had a little to do with that, volatility fatigue is perhaps a more likely culprit- either that, or equity punters were staring slack-jawed at the oil market to worry too much about trading their own books.  Yesterday's rip carried on the price action of late last week; the correction has been so substantial that WTI futures actually closed up on the month of August after apparently teetering on the brink of the abyss a week ago.



The monthly candle looks to be delivering a classic reversal signal, with prices rejecting the move below $40 in the strongest possible way.  Yesterday's catalyst was of course the rumbling that OPEC may finally be ready to act; 'twould be poetic justice if a collapse that was kick-started by OPEC's standing pat were to be ended by a (long overdue?) supply response.

Whatever the long-term fundamentals dictate as an equilibrium price (and there are a lot of moving parts there, both on the supply and the demand side), in the shorter term obviously tactical considerations such as positioning come into play.   One has to assume that the CTA complex has not enjoyed this little turnaround any more than they enjoyed last week's volte-face in the dollar or US equities.  It would be logical to assume that the market generally and CTAs in particular will continue to cut positions as VaR models scream "no mas!"

Finally, it's worth noting that USD/HKD is now locked at the bottom of the band at 7.7500.   After the ruptures caused by the SNB and PBOC this year, it may be difficult to find too many people willing to fade this one, even if the HKD peg has a much more substantial history of stability than the other two.  One would hope, at least, that markets have learnt a little better to trade off of expected return rather than probability of positive return.


That having been said, there's usually a bit of opportunity in HKD FRAs as the HKMA floods the domestic money market with Honkie as they defend the peg by bidding USD at 7.7500.  Sadly it's tough for Macro Man to get prices without a a Bloomberg terminal, but it's perhaps worth looking at receiving some 3 x 6 HKD versus selling, say, December eurodollars if the current pricing looks good.

The HKD peg is not an immutable fact of life...but as pegs go it's closer to death, taxes, and bank holiday rain than it is to the Swissie or RMB.
Previous
Next Post »

17 comments

Click here for comments
Anonymous
admin
September 1, 2015 at 7:50 AM ×

Things are going to get interesting if jobs numbers come in weak....

Reply
avatar
Anonymous
admin
September 1, 2015 at 12:28 PM ×

Hi mm I can get levels from you. I'm curious at why you chose 3x6 spread and not fra outright ag eurodollars. Or be received 3x6 usdhkd swap?

Reply
avatar
Polemic
admin
September 1, 2015 at 12:50 PM ×

Nicely thought MM and nicely expressed. Tx.
Pol

Reply
avatar
Macro Man
admin
September 1, 2015 at 12:56 PM ×

Anon @12.28 yeah, what you realluy need to do is duration match, so do a Dec IMM HKD FRA vs Dec ED. Curious where that spread is now...

Reply
avatar
Anonymous
admin
September 1, 2015 at 1:39 PM ×

Even during the robust bounce we had during part of last week, the $VIX curve has been saying this isn't over

Reply
avatar
abee crombie
admin
September 1, 2015 at 2:10 PM ×

The price action in oil feels pretty similar to that of the bund in may. Same type of CTA positioning I assume as well. A trend is your friend, until it ends!

But some good points were brought up in the previous post about oil and the shoulder season coming/ demand slowing down. I have also heard that Chinese demand was earlier stoked by topping up strategic reserves which are now almost full....

If you look at the recent oil move and put it in context about OPEC it does make sense. Apparently Saudi is running a 20% budget deficit yet pumping at highest levels in many years makes one wonder how sustainable that is. Add in Iraq and now Iran, the real surprise the year in terms of supply hasnt been the US frackers but the amount of spare capacity at OPEC. So any reduction from them should result in a big move. Lets remember the world is not chronically over supplied, the difference is 1-2M a day, and OPEC can easily balance that if it chose to (at what price is another question, given the cost reduction by NA Frackers down to $60 apparently)

But I would really love to hear Nemo's thoughts on the post carbon era. The more i hear about solar and EV the more I think oil demand may be near a secular peak. Clearly everyone cant afford a Tesla but they are amazing cars and traditional auto makers are going to make better EV's now given the high bar set...yes Truck/ SUV sales are through the roof in the US and hybrids are in the toilet but I strongly believe that as the EV technology improves more ppl will buy them. Tesla vs a Prius is IMO a much bigger leap than what APPL did to RIMM or the motorola razor. The consequences are just starting...

Reply
avatar
Anonymous
admin
September 1, 2015 at 2:25 PM ×

More like the Nat Gas roller coaster in Jan 2014.

Reply
avatar
Anonymous
admin
September 1, 2015 at 4:01 PM ×

spot $VIX is 2.76 over M1 with 2 weeks until the board shifts. If we retest the from last Monday, VOL sellers will go bust.

Reply
avatar
Leftback
admin
September 1, 2015 at 7:55 PM ×

It's tempting for knife catchers to don the Kevlar gloves here, but the prospect of one more early morning dump of USDJPY and associated carry trades after another night of slaughter in Shanghai and a less impressive ADP number tomorrow definitely gives one pause. Given that we just had August, one can't rule out a sub 200K number. Regardless, we would expect to see this down move bottom out in the next day or two. We are adding a small punt to our long Stoxx position here, but nothing in Spoos.

Agree in principle with MM on the significant rejection of sub-$40 wti and the subsequent abrupt reversal in crude. That might indeed finally mark the bottom, not only for the oil market, but also for EMs and inflation measures in the US and elsewhere in the developed world, but we're going to reserve judgement on the issue for a little while.

Reply
avatar
Leftback
admin
September 1, 2015 at 8:05 PM ×

Interesting to note also that MM"s favorite metric of volatility was in play this morning, as the VIX bounced off the 30 level shortly after the open. The historical record provides some support for the view that this generally suggests that additional selling might lie ahead. CNXT down almost 10% again today, somewhere Nico must be smiling.

Overall, we'd rather be hammock investing... but it's getting more interesting to be involved at these levels of fear.

Reply
avatar
Nico G
admin
September 1, 2015 at 8:36 PM ×

i think the EMs are toasted for a (long) while yes crude oil was ridiculously oversold but to keep things simple world consumption hangover is here to linger it's impossible to determine crude oil fair value but i'd be surprise if it ever stabilises above $60 which is a curse from the EM sphere - i would say very cheap oil is here to stay while oil best customers go through an excruciating period of deleveraging which does not bode well for equities

good luck with stoxx LB i am covering my 3270+3300 short here as i write and taking rest of the week off the charts perhaps could borrow your hammock

Reply
avatar
Mr. T
admin
September 1, 2015 at 8:49 PM ×

Kevlar certainly required but boy those Macau casino names sure are getting cheap(er). {27 HK, WYNN, LVS} et al. WYNN @ 10x EV/EBITDA? All that new capacity coming online in the next 12 months looks like just horrible timing.

Reply
avatar
Anonymous
admin
September 1, 2015 at 9:30 PM ×

Stoxx vix gapped up today. Higher than last week.

Reply
avatar
Anonymous
admin
September 1, 2015 at 9:54 PM ×


hkd 3X6 0.54/0.64
EDz5 99.530/535

EDZ5 - HKD FRA 3x6 yield spread is at -0.125, all-time low since 2006. Is there somewhere I can send the chart to?

Reply
avatar
Macro Man
admin
September 1, 2015 at 10:35 PM ×

mrmacro@gmail.com. Thanks, anon...guess to some extent it's already in the price.

Reply
avatar
Hwa Jurong
admin
September 8, 2015 at 2:55 PM × This comment has been removed by a blog administrator.
avatar
September 12, 2015 at 11:02 AM ×

Concerning enjoyed reading your reports. It is well authored. It looks like you spend a substantial amount of time and effort written the blog. I am appreciating your energy. You can visit this site.
how to make money

Reply
avatar