Crude breaks the pincers

Yesterday went just about as planned.    European equities enjoyed another solid day while the S&P took a breather and a little dip, justifying calls for Turnaround Tuesday.   Meanwhile, it looks like the pincers were broken in crude oil, which put in a very nice day to break through the little downtrend line...and unlike last week, it sustained a nice close above it.  If crude can break above the late-August highs (about a buck and a half away), expect CTAs to get stuck in to close their positions, which could be fun to watch.



By the time you read this, the BOJ will have announced policy, with relatively little expected for this meeting (but something like a 50/50 perceived chance of more easing at the month-end meeting.)   Recall that it was last October that Kuroda supplied the market with ammunition to drive the rip in USD/JPY and the Nikkei; both they and Japanese CPI have stalled, largely for reasons outside of the BOJ's control.  While Kuroda is undoubtedly clever enough to understand this, by the same token he faces pressures to keep the ball rolling; his press conference will be interesting in terms of any hints given as to the near-term prospects for policy shifts.

Readers will recall that Macro Man suggested selling the Nikkei just as the wheels were starting to come off of global equities; while obviously a shock easing is a risk to that view, other than that Macro Man finds the Japan trade to be really quite uninspiring at the moment.  If you feel like USD/JPY is stuck in the mud, you're not wrong; it's traded on both sides of 120 every day but four since the beginning of September.   Zzzzzzz.

Now, on to China.   YUM brands is reportedly considering a name change to YUK, not only because of the dismal quality of their culinary offerings, but also because of its tepid growth and disappointing earnings...which they laid squarely at the door of the Chinese consumer, as Chinese revenues only increased 2% y/y.   Given the contradictory message from this report and Nike's, it's hard to know how much this says about the consumer's spending power and how much of it is disenchantment with the Colonel's chicken.

Meanwhile, there was an interesting paper recently published by the SF Fed on China.   The ostensible purpose of the paper was to determine if China has a history of fudging its GDP figures via looking at other countries' export figures.  (The conclusion was that it used to, but the data is more reliable since the crisis....perhaps less pressure to grow at breakneck speed implies less pressure to lie.)

In any event, the authors identify a range of ancillary indicators, and various combinations of them, that offer a good (and reliable) proxy for Chinese activity.  Macro Man used an amended version to create a little indicator of his own (if anyone has access to a time series of the 5000 enterprises diffusion index of raw materials supply, by all means share!)  In any event, the indicator seems to track the recent trend of published GDP fairly well...

...albeit showing lower growth than the official number.   Then again, that's the widespread view the true state of Chinese growth, so it's no bad thing.  Interestingly, the high-frequency version of the indicator suggests a flat trajectory of growth over the past few months, which jives nicely with Macro Man's general view that China has slowed but isn't collapsing.


We're due to get the report on September's FX reserve data in the next day or so (EDIT: It was released last night, and showed a smaller than expected decline of $43 bio; while not sustainable ad infinitum, it certainly doesn't convey any sense of a rapidly deteriorating situation.)   this should be closely watched for clues to the severity of capital flight and the degree to which the current account is mitigating its impact.
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Anonymous
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October 7, 2015 at 8:46 AM ×

Margin call time for equity bears.

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AL
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October 7, 2015 at 10:36 AM ×

On the oil theme, maybe long NOKSEK worth a punt given the historical levels reached.

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Anonymous
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October 7, 2015 at 11:51 AM ×

The 7-day 18% rally in European oil stocks is the biggest since 2008...

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Booger
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October 7, 2015 at 12:04 PM ×

yep, that is a nice break in oil. Even has me long wti for a punt to 52.

Lots of trades lining up now.

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Polemic
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October 7, 2015 at 12:38 PM ×

Lots of blow outs on popular shorts as expected oil things most ramped. The likes of bombed out Tullow and Premier oil are up 50% from a few days ago. But it's looking a bit rapid now and so may pause. The big battle is going to be over SPX around the 1990/95 level ( sry typo in yesterday's comment as 1890) where a lot of technicals converge. So far it's been failing. Only have to look at Macro HF returns against SPX to see they are hurting in this rally. The macro outlook may look rubbish but as ever, its a game of reading how much is already in the price.

Rio Tinto has busted a LOT higher +8% today. That is impressive in a very large corp that represents everything that is currently meant to be doom - EM, funding, China and commodities and growth.

waiting for the battle of 1995. ( not the year)

Pol

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Booger
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October 7, 2015 at 12:54 PM ×

Pol: It will be interesting to see if this commodity rally lasts longer than another day or 2. I am not banking on more than 2 days.

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Polemic
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October 7, 2015 at 12:59 PM ×

YEs it will be interesting. Mostly to see who is going to sell who hasn't already.
macro hasn't changed, price has. And price and money management rules regularly combine to force people to do things they don't really want to, or actually believe are correct.

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Anonymous
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October 7, 2015 at 1:20 PM ×

Could you somehow strip it out from the China Conference Board LEI?

The six components of The Conference Board Leading Economic Index® (LEI) for China include:

Total Loans Issued by Financial Institutions (source: People’s Bank of China)
5000 Industry Enterprises Diffusion Index: Raw Materials Supply Index (source: People’s Bank of China)
NBS Manufacturing PMI Sub-Indices: PMI Supplier Deliveries (source: National Bureau of Statistics)
Consumer Expectations Index (source: National Bureau of Statistics)
Total Floor Space Started (source: National Bureau of Statistics)
NBS Manufacturing PMI Sub-Indices: Export Orders (source: National Bureau of Statistics)

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abee crombie
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October 7, 2015 at 1:55 PM ×

EM FX having a ripper of a day. All the bad children are seeing big moves, IDR, BRL, MYR, RUB. Of course its all related to oil, but also positioning.

Perhaps mr Hasenstab was on to something? Though I think it will be a slow move back

Templeton Betting on `Multi-Decade' Emerging-Market Opportunity http://bloom.bg/1FTeD0a

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Skippy
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October 7, 2015 at 2:37 PM ×

Equities usually don't rally 18% over 7 days in a bull market. Look back to the price action in the NASDAQ on the way down in 2000. Moreover, the recent price action in the bonds of commodity traders probably tells us that there is a genuine or legitimate reason to fear something more sinister is underway. JPY-Asia, perhaps JPY-SGD is worth monitoring closely in this regard. Once a credit bubble starts to fold in on top of itself, it is unlikely to stop until it is cleared.

I will also be surprised if the commodity rally lasts more than a few days. However, I have to respect price itself, for now. It is plausible that the US and European economies are not about to collapse and China has stabilized. It is also possible that commodities tell us something about the potential for more quantitative easing (god forbid). Recall, the 1998 and 2011/12 episodes were arguably assisted by more easing. However, as per my point above, I am not convinced that more liquidity would help that sector now that the "perpetual motion machine" has already gone into reverse.

On the China reserves, while it is a fact that there was less capital outflow than feared, it is plausible from what we hear that the authorities' have tightened up the various means of moving capital offshore. That is in contrast to their stated aim of "liberalization".

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Polemic
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October 7, 2015 at 3:15 PM ×

Skippy - No. But a big rally in a short space of time can set up 'Zweig Breath Thrust' Bull indicator !

http://humblestudentofthemarkets.blogspot.co.uk/2015/08/a-possible-but-rare-bull-market-signal.html

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Anonymous
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October 7, 2015 at 4:06 PM ×

re pol 1238-"The macro outlook may look rubbish but as ever, its a game of reading how much is already in the price." have to say looking at spoos at 2000 not much....especially given earnings and margins.....there's hope that this is a v shaped pop but I'm leaning short from this am ...spoos 2000 are a sell and am scale seller all they way to 2050....

still staying long ez but have to think they have a higher beta on way down but will wear it i guess!!

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Anonymous
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October 7, 2015 at 4:10 PM ×

I would love to see spooz fall back to 1950 or lower so that I can buy them all.

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rp
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October 7, 2015 at 4:25 PM ×

Agreed, once they close the gap c.1950 (/ Stoxx c.3150) they are mine. It owes me.

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Anonymous
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October 7, 2015 at 5:34 PM ×

http://www.zerohedge.com/news/2015-10-07/nasdaq-tumbles-red-spoofer-sparks-sell

Wonder if the SEC/CFTC/DOJ etc will imprison this guy, or do they just prosecute retail traders?

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Polemic
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October 7, 2015 at 6:37 PM ×

The battle of 1995 still rages ..

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Anonymous
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October 7, 2015 at 6:45 PM ×

Every dip getting bought on equities. Shorts hemorrhaging money again... at this rate US equities will be back to all time highs soon.

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abee crombie
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October 7, 2015 at 6:51 PM ×

I'm glad everyone here has so much conviction about where the market is going bc I sure dont. Kinda no mans land here till we can make some higher highs and higher lows in a bunch of indexes, IMO. Otherwise we are still under the 200day let us not forget

Nico where you been chap? nice call on the turnaround in stoxx at 3000. you selling here?

I'm looking at silver. Hoping CTA's and fast money do something stupid like drive the price way up. But its not for the faint of heart

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Anonymous
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October 7, 2015 at 6:52 PM ×

All it'll take now is for APPL to get a bid.

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CV
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October 7, 2015 at 7:07 PM ×

Jeez, bulls on parade here! Well Nothing goes up in a straight line of course, but the price action in EM and its derivatives are quite startling, and shouldn't be ignored I think. This week's German manufacturing data were abysmal (albeit tainted by base effects), the EZ is in "deflation", etc ... Mr. Draghi is under pressure to at least extend QE beyond September next year.

In the end, I am a regular Munger/Buffet here with my six-month "horizon", and I think FTSE 100, Stoxx and EM will be the winners, and then "sell in May, go away", comme d'hab!

What I want to know from LB and the rest of you ... where goes the long bond?

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Anonymous
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October 7, 2015 at 7:24 PM ×

Nico where you been chap?
I think he's been margin called being short a massive spooz rally.

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Polemic
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October 7, 2015 at 7:26 PM ×

To be fair Nico said he was closing things down and heading off to Brazil for a holiday. Perhaps the market only rallied because he lifted his offer.

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Leftback
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October 7, 2015 at 7:36 PM ×

The long bond.... a very good question, my friend.

LB will quote WB Yeats today:
"The best lack all conviction, while the worst
Are full of passionate intensity."

Indeed we have no idea just now, but our bias is toward slightly higher rates - we wouldn't be long that instrument at present as the Reflation Train seems to be rolling ever so gently out of the siding.

Lately the market has lacked conviction at the long end of the curve. We ourselves have not had a position in the Long Bond long or short) since selling in February, except for an occasional one or two day options punt to anticipate traders moving to relieve overbought/oversold excess.

So, whither the long bond, you ask? Might I suggest to you, "pincers", with the jaws to close in December?

A boring long bond trade, of course, is positive Nirvana for investors in rate-sensitive sectors. REITs, preferreds, some higher quality junk bonds. Yield Hogs of the world should all take advantage of this lagoon of rate stability before the winds whip up again. This is a part of our five part argument for global equities, a) rate stability in the US/EU, with the other components being b) a slow low volume squeeze, c) reach for yield d) performance anxiety and e) TINA.

Bears clearly clutching at straws, sure we haven't reached the 200 day, and it will provide resistance but that is miles away from here, and in the meantime we did cross the 50 day! Equities will struggle when this (squeeze?) higher in crude finally runs out of steam and/or the dollar rallies strongly again. That might not be for a while.

In the mean time, "Do ya feel lucky, punk?"
If you'd like to short emerging markets, for example, "Go ahead. Make my day"

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Anonymous
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October 7, 2015 at 8:20 PM ×

Not to overlook that the "squeeze" higher in crude may have something to do with the 15 to 26 billion barrels of oil taken out of projected future global supply when Shell through in the towel in the arctic.

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Polemic
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October 7, 2015 at 8:44 PM ×

Anon 8.20 - not sure that anyone is trading near end on that far forward supply concerns. they cant even make their minds p on short term data. EIA data came out today with a rip roaring +3m build and yes it has tipped things lower but the market has been ignoring fundamentals for a while so why stop now. I m still thinking this is short covering in oil too driven by price, rates and kicked off by a thought ( false in my eyes) that Russia in Syria is going to cut off supply somewhere soon.

Actually the trigger for this rally was GS calling $20 bucks again 3 weeks ago,

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washedup
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October 7, 2015 at 9:09 PM ×

There u go Pol - the battle of 1995 ended with a push - so the fate of the $25 TN US equity market rests in the hands of Shanghai when it opens tomorrow - you could argue they have some catching up to do for the last few days, or you could argue its a basket case wrapped in rotting offal sprayed with skunk juice, and will open limit down, reducing its own market cap by $100 BN, and the rest of the world's by $1 TN.

How so comforting - the only way things could get more idiotic would be if they stayed the same.

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Anonymous
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October 7, 2015 at 9:19 PM ×

hmm DB....not going to help my eu longs....dont know why i bother with this eustoxx...take a hit in oils, autos, banks ( again!!!)

anyway...

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Boris Kurgan
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October 7, 2015 at 9:27 PM ×

What do you see when you look at silver?

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Polemic
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October 7, 2015 at 9:35 PM ×

Indeed washed, Remarkable the level it closed at huh? Whowuddathoughtit .. 1995.

Btw .. this captcha thing is going mad to post a comment - 'identify the construction machinery"? Yes, that's what I had to do. What's next "identify the levorotatory isomers"?.

Couldn't they put this to some use with 'identify your friends that are avoiding tax' or some such?

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river
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October 7, 2015 at 10:43 PM ×

Sell..the volume bar.

http://stockcharts.com/h-sc/ui?s=$wtic&p=D&b=5&g=0&id=p41298869661

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Anonymous
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October 7, 2015 at 11:13 PM ×

Quality, my dear.

The Talibans also drove them!

http://www.marketwatch.com/story/us-to-toyota-how-come-isis-drives-so-many-of-your-trucks-2015-10-07

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Macro Man
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October 8, 2015 at 12:22 AM ×

Unreal. MSF to US: How come you blow up so many of our hospitals?

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CV
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October 8, 2015 at 6:46 AM ×

Thanks LB, that kind of confirms my own view. Same thing with the bund. I think inflation is going up, but right now, the spectre of deflation continues to weigh on it. Q1 could be interesting for bonds, though, if the reflation train gathers pace. You did see "Unstoppable", right ;). Will next year finally be the year the "steepener brigrade" is right, or will the curve just flatten. Not easy to tell that one!

I completely agree that the absence of a taper tantrum alone should be enough to get the ball rolling on yield chasing. All we need is a hapless Fed, and that seems to be a guarantee.

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