Sunday, 31 May 2009

Stocks, Bonds, Oil and everything else is up!

We had worse then expected GDP, and a declaration of GM bankruptcy, and another Government investment of over 40 billion, but despite all of this we spiked over 100 points in the DOW in the last 30 mins of trading Friday, which has propelled European stocks this morning. It is weird to see but everything is up, Stocks, Bunds, Bobl, Schatz, infact everything along the curve. Not something you normally see, but then again this isn't a normal market. This week is a very important week, with rate decisions from the UK and EU, as well as US jobs data on Friday.
On the Euribor front, spreads have seemed to stabilise, dont know for how long but hopefully it will make trading this week a little bit easier.

Friday, 29 May 2009

Awaiting US GDP

The bond market is leading the way lately as all eye the 10 year bonds across all markets as they continue to drop. Falling bonds leads to a rise in yields which is dictating where we go in the equity markets.
We rallied yesterday on the DOW as a 7 year treasury auction went off without much surprise and in line with the previous 2 auctions, and gave the signal to buy again.
There is a lack of conviction in either direction with the markets right now, but with US GDP this afternoon, a shock number either way could push this market out of its range.
Euribor action has been volatile with spreads moving down near the front end of the curve, but going up at the back of the curve. This has made it hard to trade butterflies and reversion to mean trades. Long term I think these are good sells, but you may have to take some pain for it to come good.
There are alot of markets where there seems to be a disconnect between the fundamentals and the actual price. Take oil for example which is trading around 65$ a barrel. although demand is picking up, we have come a long way from its lows and some sort of correction is in order. We are up almost 65% from its lows, and I think 68 will be a sticky area, if this price holds then I see a test of 50 again.

Wednesday, 27 May 2009

Euribor spreads reach new highs

Long term bonds sold off again yesterday with a breach of 119 in the Bund this morning, we have gone as low as 118.82, with 118 the next target. This has filtered through along the whole curve with Euribor spreads at highs with Jun10-sep10 trading at 26s, Sep10-Dec10 trading at 32s with the far end of the curve on the rise too.
It is hard not to go short right now given the lofty levels of these spreads , but it is wise to hedge using butterfly strategies as there seems to be no stopping this move upwards. I'm relying on a more staggered move upwards in spreads to give me opportunities to take 1/2 ticks in these spreads as I short new highs, but I am quick to scratch should it go against me.
Stocks sold off as long term yields rise resulting from the subsequent sell of on the long end. Higher borrowing costs are deemed as a risk to an economic recovery. This is the third time we have tested the 8500 level in the Dow and until we break one way from this small range forming, it will be unclear as to where we head from here.
Markets are also nervous from the impending GM bankruptcy and the auto sector also got a hit from the bankruptcy of Visteon the auto parts company, this surely will continue to put pressure on the jobs market.
High light of the day today will be the durable goods number from the US at 1.30pm GMT and new home sales at 3pm.

Dow Jones tests 8500 again

After trading lower in stocks and higher in bonds for much of the day yesterday, a surprisingly strong consumer confidence number turned the tide totally and pushed us up big across the board, with the Dow up 200 points testing the 8500 level again. S&P 500 flirting with 900 and could it be third time lucky for the markets. The consumer confidence number has put a new push to the upside, and stock look strong again the morning, and it wouldn't be surprising if we reach DOW 9000 in June.
As much as I bang on about thinking this market is going down, which I still believe is where the market should be, sentiment is the only thing that matters right now, and there is still plenty of cash on the sidelines to push this market higher.
Bunds have broken out of the decending channel range and is now making a run for 119, as I stated yesterday, the short term target is 118 in Bunds, as we have broken the channel, unless stocks fail to break the resistance levels and make another attempt downwards.
Euribor spreads coninue to move upwards especially at the front of the curve, but the far end seems to be stabilising. Although there was some volume, spreads were very tight and it proved to be a difficult day. Today morning has presented alot more opportunities to enter spreads on euribors, on short sterling there continues to be a lack of real trading opportunities as liquidity is low.
US home sales at 3pm London time will be a market mover today, which could add more fuel for a push to the upside.

Monday, 25 May 2009

Debt ratings downgrade threat hits Bonds

Over the past week we have seen a big drop in Bunds, Gilts and US 10 year as the threat of a possible downgrade to government debt gets investors scrambling out govies.
Bunds have dropped below the 120 level and is trading at 119.76 as we speak. Looking at the chart below, technically speaking we could be due a bounce as we are touching the bottonm of a downward channel, but a break below this could mean a test of 118.

On the short end of the curve, Euribor and Short Sterling spreads have continued upwards. As longer dated yields continue to be sold of relative to the front end. We are trading above 30s on the Sep10-Dec10 spread, and on the short sterling front, we are trading 44s on the sep10-dec10 spread. In terms of trading, I will maintain an emphasis on going long on pullbacks, but am trading smaller size as there is still quite a risk that there will be a big pullback in these spreads soon as they have come up too far in my opinion.
Stock wise we look to be consolidating around these levels. The fact we have hit 8500 in the Dow twice and not gone further suggests, downside is more likely. We shall see what happens...

Friday, 15 May 2009

Long term Yields rise

After a sharp bounce on the Bund, it was back to selling again, as we touched 122, and have retraced back to 121.18 again as I write. Schatz has barely moved as the Schatz Bund Spread rose big rising almost 70 ticks.
This was also the case in Euribors too but to a much lesser extent, as we inched up on the spreads across the curve.
Euro zone GDP was worse then expected, but US CPI was slight stronger then expected which gave rise to the market as the risk of deflation has eased.
Even though we haven't caved in yet on the stock front I still maintain my longer term view that we going for another big down leg, but for now, even though more downside is due technically, there's still buyers out there holding this market up.
Im away next week, will be updating again on the 26th.
Good trading!

German Bunds go higher

Yesterday we saw bunds push up, and this is being continued today as we touch 122. We have risen over 150 points in the last few days as long term yields fall. Despite the rise in Bunds, Stocks showed some strength with technology leading us higher.
Spreads along the Euribor and Short Sterling strip have stabilised some what, as we have pulled back to levels we were trading before the Trichets comments last Thursday. I tended to be more long the spread yesterday, and is what I will continue today, but still hedge with another spread if necessary.

I have come across a piece by Jeremy Grantham on Business Insider, who is a bull about the short term and a depressive bear about the long-term. So what does that mean exactly?

It means there's 0.56 probability the market will eventually plunge to a new low. (See details below).

How's that for precision!

Wednesday, 13 May 2009

Dow Technicals

After another sell of yesterday, what does the charts tell us next?

Well as we see we have a downward channel after the initial break out through resistance through 8200, after touching 8600, it is likely that we will at least test previous resistance of 8200. We also have a cross on the MACD indicator as indicated above. This could also signal a technical move down further, with the next step being around the 7800 level.
Volume on the run up on this rally has been low relatively which suggests that there wasn't much participation from the big players, which suggests this rally is less believable in terms of sustainability, and a break of 8200 could signal another down move. We are still trading above the 50 day moving average, but unless we have some positive fundamentals out of the economy, technicals point to a downside.
As I write stocks are down again in Europe with Euro Stoxx is down 30, and FTSE 100 down 30.
Bunds are trading 121.50 bouncing sharply from the low, outperforming the short end, as spreads across the bored continue to come off.
Euribor spreads continue to come off as we trade 19.5s on Jun10-Sep10 spread coming off from 22.5 yesterday. I remain cautious in my approach choosing to trade butterflies as it is a better hedge then the outright calendar.

Retail sales fall

A fall in US retail sales have added top the downside on equities this afternoon. As catalysts for this market rally continue to fade, government bonds have come back in favour, with the bund now back above 121.
We down 115 points in the Dow as a write, which is a 4% pullback from the recent high.

Tuesday, 12 May 2009

Euribor Spreads Fall

We continue to see some long end strength along the yield curve as spreads slowly come of from lofty levels. Bund Schatz spreads has come off sharply as you would expect, and this has translated through to Euribors as well. Jun10 Sep10 has come off from a high of 23.5 to trade 21.5s as I write. Sep10 has come of 2 fat ticks too as has the rest of the 3m Euribor spreads. I personally see these as small retracements and have a bias to buying these spreads into the pullback. However I have favoured Butterfly strategies in the past two days as it has been difficult to gauge the direction of these spreads. A butterfly is Buying one spread and selling another with the same month as the body of the spread. This has enabled me to then take profit on one spread and scratch the other. It is round trip intensive but it is what seems to work at the moment.
On the stock front we saw a mixed session, with financials giving way as they continue to dilute shares with new offerings to raise capital. We had a late pop up as Greenspan says housing is near a bottom. Don't really know how much we can look into that, but was enough to lift the markets. Bank of England inflation report and US retail sales later today will set the tone for the market today, lets hope they bring some volatility back :)

Monday, 11 May 2009

Is this bear market rally sucking us all in?

Well that is the opinion of exiting Merrill Economist David Rosenberg. As we retreat in stocks, David has maintained from the beginning that the recent rocket rally off the lows is just a suckers' rally, and he reiterated that view as he walked through the doors.
Published on Business Insider, David believes the Market likely to peak the end of the week [Friday]. Just as the clock is winding down on my tenure at Merrill Lynch, the equity market is winding up with an impressive near-40% rally in just nine weeks. For those that were still long the equity market back at the March 9 lows, a good ‘devil’s advocate’ exercise would be to ask yourself the question whether you would have taken the opportunity, if the offer had been presented, to have sold out your position with a 40% premium at the time. What do you think you would have said back then, as fears of financial Armageddon were setting in? We haven’t conducted a poll, but we are sure at least 90% of the longs at that point would have screamed “hit the bid!”

Are we at risk of missing the turn? Fast forward to today, and within two months optimism seems to have yet again replaced fear. Are we at risk of missing the turn? What if this is the real deal — a
new bull market? This is the question that economists, strategists and market analysts must answer.

Risk is much higher now than it was 18 weeks ago. The nine-week S&P 500 surge from 666 at the March lows to 920 as of yesterday has all but retraced the prior nine-week decline from the 2009 peak of 945 on January 6 to the lows on March 9. We believe it is appropriate to put the last nine weeks in the perspective of the previous nine weeks. To the casual observer, it really looks like nothing at all has happened this year, with the market relatively unchanged. But something very big has happened because the risk in the market, in our view, is much higher than it was the last time we were close to current market prices back in early January, for the simple reason that we believe professional investors have covered their shorts, lifted their hedges and lowered their cash positions in favor of being long the market.

The best case is that this is a bear market rally. All of this has not precluded an elastic band bounce from an egregiously oversold low in the S&P 500, and perhaps we will even test the 200-day moving average of 960 (as the 10-year note yield and NASDAQ just did). But we still do not believe what we are seeing fits the hallmark of a new bull market. In our view, the best case is that this is a bear market rally, but one that clearly has more legs than its predecessors this cycle.

Interesting reading, I'm sure his views are echoed by many, but lets see if we can get some persistent downside going.

As well as stocks pulling back, Long end gained some traction today heading up with bunds reclaiming 120.50 again. Short term interest rate spreads have also come off slightly after reaching new highs last week, but with no major news out today we will wait till tomorrow to see if this trend will continue or not.

Saturday, 9 May 2009

3m Euribor and Short sterling spreads continue to go up

So it appears Thursdays action was just a blip in this onward march in stocks, as long end bonds get sold off heavily. Stock markets around the world rose as financials lead the way on better then expected job numbers It was interesting, as Bank of America, Wells Fargo and Morgan Stanley will all be diluting their shares by offering stock at prices well below the current price, yet they all rally high single digit percentages. Is that normal? Well nothing is normal in this market environment, but continues the theme where the market is at a disconnect to the actual economic scenario. It is literally a matter of supply and Demand right now. No one wants to miss this move.

The move along the yield curve is continuing to steepen as short end is being bought up and long end is selling off. Bunds breached the 120.50 support and it is now likely that will act as a new resistance, as we hit it twice and came back of in Fridays trading. My assumption that we will hit 124s before 120.50 failed to materialise, but it is very unlikely we going to see 124 any time soon, unless things take an unexpected turn for the worse.
Euribor spreads and Short Sterling spreads continued its march upwards as long end continues to be sold off. Trading was slightly easier then Thursday as the Euribor was moving in a more orderly fashion. I remained a seller when we breached new highs on the spreads, but bought any pullbacks, which seemed to work. I'm expecting these spreads to stabilise at these levels for the next few days, before coming off a small bit.
As for stocks, I would think that next week we maybe give some back after a 6% on the DOW, but don't bet against another few hundred point move on the upside as we aim towards 9000.

Thursday, 7 May 2009

Long term Bonds sell off

In a very volatile day, Bunds sold off over 140 points, as it tested february support of 120.50.

As risk appetite continues to enter the market government bonds continue to sell off. Spreads across the board have been marching higher, with Schatz - Bund spreads breaking new highs, Euribor spreads moving up 2 to 3 ticks in each 3 month spread, as well as short sterling. It was a painful lesson for those who were trying to short the spread on the move up, as many got hit including myself. It is just common practice that we trade the spread to revert back to the mean, and despite knowing better we tend to short new highs assuming small pullbacks which did not materialise. The move in spreads on short sterling have been the most aggressive with the 6 month jun10 sep 10 spread trading at 77 BP!
It is clear that market participates anticipate early recovery and a pick up of rates sooner rather then later.
Stress test results released yesterday pretty much confirmed all the rumours and has removed alot of uncertainty surrounding these banks. In turn many are showing double digit gains premarket, after being hit by profit taking yesterday after a poor auction take up. The reversal in equities yesterday in my opinion was merely a blip on its march upwards as the path of least resistance still seems up unless we have a very bad Job number today.
Risk is returning and for now its here to stay.

Wednesday, 6 May 2009

Stress test reveals that capital is needed

Despite showing that the major banks need capital, financials rallied through the roof as it wasn't as bad as feared. Bank of America after being down 10% in premarket turned it around and ended up a whopping 17%. Not meaning to be the a doom mongerer but this rally is getting a bit out of hand, and so do another 90% of people out there, who are stunned at the sustainability of this rally. But as long as it keeps going up, better to be on the right side then stand in front of a speeding train.
it is likely we will breach 9000 in the Dow pretty soon at this rate, as there is no sign this rally is to be halted.
The rally in stocks was also due in part to a better then expected ADP jobs number which is often a preview to what the main non farm payroll will be. The data showed job losses of -491k rather then the expected -600k +. This sparked a sell of in bunds as we went below 122, and this morning the sell off is continuing as we are trading 121.86 down 23 points for the session.
All eyes are on the interest rate decisions from UK and EU, as well as results from AIG and official stress test results due later on today.

Although things look rosy on the stock front, this is a little piece on inflation, and a reminder that the problems haven't gone yet, and there is still an uphill mountain to climb.


Inflation is the furthest thing from most investors’ minds during this deep recession and financial crisis. It should not be. The unprecedented size of the government’s spending programs, entitlements, guarantees, and its lack of strategic thoughtfulness, point to an inflationary potential that is unique in the history of this country.

Preserving the long-term purchasing power of fiat currency is really hard. Even when government officials understand the dangers and are determined to avoid debasing their currency, the drift toward inflation in fiat money regimes is virtually inevitable.

Politicians make grandiose promises in order to get elected, and if the commitments are scheduled to come due years after they leave office, most civil servants are not very disciplined about making sure that those promises are paid in the purchasing power with which they were incurred. It is considerably easier to debase the purchasing power of currency, thus diluting claims, than to exact overt taxes. Inflation is a powerful wealth transfer or wealth confiscation device, because taxes are levied not on the real accretion of wealth, but on the nominal price increase or interest payment. Governmental borrowings to spend on current items that have no lasting value can have important inflationary aspects; as debt increases, well beyond the rate of actual economic growth, powerful incentives are introduced to debase the currency rather than repay the borrowings at full value. These elements and truths are universal and reinforced by history. Ignoring them can grease the path toward societal destruction. Debt collapse, massive unemployment and negative economic growth can destroy societies and lead to violence and authoritarian governments which create large changes in the basic fabric of life. However, serious inflations can have the same effects. They can be absolutely ruinous, and history abounds with examples of societies wrecked by massive debasement of currencies and the destruction of people’s savings.

It is really important to focus on this now, despite the falling prices of many commodities and assets and the lack of pricing power of businesses and wage-earners. Here is the reality of the global governmental programs meant to stem the current financial crisis and recession: if they spend enough money, they will stem the decline. If they guarantee enough financial institutions, they will prevent the fall of the global financial system like so many dominoes. The actions taken to date, and promised for the future, exceed by a very large margin all historical examples of governmental action to address economic and financial distress. Governments which have promised to do “whatever it takes” to avoid their nightmare memory of the Great Depression are certainly being straightforward about the size and speed of what they are doing. The only thing that is missing, which is far from trivial, is any real analysis of the long-term impact of their actions. We really cannot understand the thinking behind the conviction on the part of policymakers and many investment managers that the unprecedented monetary ease and governmental borrowing will not cause significant debasement of purchasing power. It is as if they think there is nothing to learn from history, but they have not revealed any basis for this mindset.

It took 20% interest rates in the early 1980s to wrestle down the inflation that kicked off in the late 1960s. It is unfathomable to consider what could happen in the ensuing stages of the current cycle, given the substantially greater excesses and lower discipline preceding this crisis. Moreover, the transition from deflation to inflation could be very abrupt. We really don’t know whether this is likely to occur in the next few months (doubt it, but not impossible), or in a year or two or later, but when it inevitably gets underway, it is bound to be a very large problem.

Tuesday, 5 May 2009

Range trading

We had a fairly quiet day day alround yesterday. Bunds are range trading in the 122-123 range, over the past month as we await the next move from the ECB. Volume has been weak, making execution a bit more difficult, especially in Euribor contracts.
Spreads have been inching upwards as we await the ECB.
"Official" stress test results are due tomorrow, which despite the hype could be a non mover unless there are any real surprises, which is unlikely since its done by the government and the last thing the government wants to do is induce panic!
Nevertheless the results will make interesting reading, but with the ultra bullish tone to this market it is unlikely that its going to stop this train in its track.
The rally in equities is reminiscent of the rally after the sell off in the 1930s, we could be going a lot higher before another smack down late in the year or early next year. But your guess is as good as mine.

Shares advance again

The market is about speculation, and this is what we have been getting the last couple of months. Speculation that things aren't as bad as they seem, there's no reason to panic, so risk appetite seems to be returning, as we sell off on bonds and return to the market. Although this rally goes against my better judgement, you can't fight the tape. The trend to the upside is very strong at the moment, and its hard to pick a top right now.
Financials continue to lead the charge, with the XLF, (financial ETF) up 10%. This was sparked by Warren Buffet comments on Wells Fargo, and speculation, that some banks wont need as much extra capital raising.
With so much money on the side lines, especially in mutual funds which are cash rich at the moment, it is easy to see how we could continue to go much higher still, as those who have not gotten into the rally already will not want to miss out.
I still stand by my belief that at some point this year we are going to have another real stab to the downside, but at the moment I remain long.

Bunds as would be expected sold off, and fell below 122. In theory downside should be capped since its unlikely they are going to raise rates any time soon, and monetary easing still seems the way to go for these central banks.

Short Sterling spreads nudge higher on hawkish Fed; Walmart blowout

As most must know trading Short Sterling is a bit of a bore, and has been for a while. Having managed to get out of my 2 month hold before,...