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.