Friday, 30 January 2015

Euro Stocks keep rising underpinned by QE

So the past week or so is all the evidence you need to see QE is all that is needed for markets to smash to all time highs. The Dax which traded as low as 9600 two weeks ago, is trading at 10800 now which is a move of over 12%! Eurostoxx is trading close to 3400 and CAC is up there too. All this despite deflation, worsening data, and a possible Greek Exit.
Decoupling from reality is insane at this juncture, and while we see this one way action from these Indices I couldn't help but try a short play in the DAX which isn't really working out right now. I currently shorted the 10350/10500 call Spread for a credit of 75 ticks and bought the 10050/9800 put spread for 59 ticks, given me a credit of 16 ticks, with max risk of 135 ticks, and max profit of 260. I have till February expiration for some kind of pull-back in the Dax, which in my opinion is way overdone. Its outperforming everything right now, so if it continues higher especially over 11k then I think probabilities of a snap back is much higher.
Volatility in the Equity space has been unrepresented, with the amount of 1% swings in major averages so far this year seeming to be more then there were the whole of last year.
Bunds continue to race higher, and the Yield curve is as flat as you can get. Short Sterling continues to rise as UK GDP came in slightly weaker and inflation falling, with Mar17/June17 now trading at 7/8. I think its good value around here, so I've taken a small long position.
We see how it all pans out.

Monday, 26 January 2015

ECB does QE, what next?

So the ECB done what many wanted it to do and embarked on a 60 Billion Euro a month QE program till 2016. They have pulled out all the stops and now it’s all or nothing for the ECB, apart from continually cutting rates there’s not much more effective tools in the arsenal left for the ECB.
It is a matter of time to see whether this program works, but one thing for certain is that those exposed to the market will benefit in the short term the most from this QE announcement as the only thing it will have an immediate impact on is push Equities to higher levels decoupling with fundamentals, and is likely to continue to push higher to new all-time highs simply because it has to. Money will be flooding the system, German 10 year as I write yields 0.3% many other European yields are the lowest on record, thus the Equity market presents the best yield.
Another problem with undertaking QE is that it also needs commitment from the individual member states to act with fiscal reform to help their respective countries, and many will shy away from real reform as the ECB has taken the plunge for them.
Other countries in the European area including Switzerland and Denmark are drastically cutting rates as the Euro gets smashed and it is a stimulus overload at the moment as countries try to stave of deflation and struggling economies. Talk is that Sweden will undertake QE as well.
The difference with the QE about to be undertaken by the ECB and that which happened in the US and UK was that they began buying bonds at much lower levels, and in fact the FED and BoE must be very nicely in the green on their holdings. Whereas the ECB will be buying Bonds at record low yields and they even said they will buy bonds with negative yields. When the unwind does happen the ECB will be loaded up to the hill overpriced Bonds, surely not good for their balance sheet.
Going forward the play will be to buy the dip in Equities as the path of least resistance is up. We have seen from the past that QE is the main driver of the market, the question is how low can the Yields go in Bonds.  Bunds are touching 159, a level  I never thought I would see, but at the rate the Bunds are going higher negative Yields is a real possibility.

My longer term view is that there the massive amounts of money printing will lead to a disastrous unwind, as we saw with the removal of the Swiss cap.  There is only so much the market can be bought up on cheap money, and there will come a time where fundamentals will take over. 

Thursday, 15 January 2015

Market shows vulnerability on the back of SNB

This morning we had one of the biggest moves that I’ve seen in my trading career, could be one of the biggest moves ever in terms of the time frame it took place in. The Swiss National Bank decided to remove the 1.20 floor on the Eur/Chf, which led to a 2200 pip move up in the Swiss franc future, and an even bigger move of 3700 pip move down in the Eur/Chf from 1.20 to 0.83 at its lows.
The trading which ensued was super volatile but what was more worrying was the absolute disappearance of liquidity in pretty much all markets. The ES was looking as thin as the Dax, the NASDAQ was trading 5 to 10 ticks wide with 1 and 2 lots on the bids and offers. After an initial sell off in Stocks, they bounced back, but with liquidity disappearing that quickly suggests that any major event that could occur could lead to a bigger flash crash type scenario, where big orders are getting out at market with literally nothing in the book, leading to massively exacerbated moves. This is what happened with the Swissy, where the CME halted trading a number of times, as the market was so thin, and large stops were getting triggered. Given that pre announcement we had 6S (Swiss franc) future trading at roughly 0.99 and I saw up the ladder large orders getting executed up until the 1.21 region.
This type of move was the type that could put firms out of business as proper stops couldn’t be executed and so risk controls at many brokers being left vulnerable which left many accounts with a losses far exceeding their deposit. One of the firms which has been reported to have this problem is IG index, which reported a loss in the origin of £30 million on that move, as the hedge wasn’t large enough to cover the excess losses in client accounts due to low liquidity.
I personally have had a 6k floating profit on an MT4 broker turn into a 13k loss instantly as the spread on the NZD/CHF which was already 400 pips at the time, (usually 15 pips) go out to 7000 pips!!! Triggering the account stop out leaving me in a huge loss. This surely will have to be sorted out with the broker and their liquidity providers as its simply market manipulation, and there is no way I could be paying a price that high above the underlying price at the time but the point being is the number of accounts this must have happened to must be enough to bring many brokerages down.

So the question is how prepared is the world for an unexpected event such as one today. Sure doesn’t look like they are. With no one willing to take the other side in times of extreme volatility, and with so much stimulus in place, the eventual unwind could be nasty. The SNB the biggest buyer of Euros, decided to pull the plug on the Eur/Chf floor today in anticipation of European QE, and the reaction was massive, when this happens on a bigger scale, well let’s hope you’re on the right side.

Monday, 12 January 2015

Choppy Start to 2015

Its been quite volatile in the Equity space as the past few days have all lead to big 3 digit swings in the Dow, as well as similar percentage moves in the other indices as bulls and bears fight it out. Markets are being kept up by the expectation of QE from the ECB this Thursday, and so far it is not a definite they will undertake the program, but if it doesn't happen this month, it is very likely to happen next month.
Data in general has been poor so far this year, with manufacturing and services data both in the UK and US coming in weaker, but this has been countered by FED comments that rates are unlikely to rise until the end of the year or beginning of 2016.
Not much movement in STIRs, as everything remains very flat, as Bunds hit over 157 for a yield of around 0.4%!
Its been slim picking so far this year to find anything to trade with much certainty, its a matter of being patient and waiting for those opportunities to come. Today is a quiet one, but data will be coming through from tomorrow with the main highlight being Thursday ECB press conference. The main benefactors will be the stock markets on any QE, and the Euro will be the victim, leaving the way for it to drop to 1.10 against the dollar.

Thursday, 1 January 2015

End of Year Review 2014 - It's been a tough Year

This year has been a challenge to say the least. Many strategies were tested to extremes, volumes have petered out in many markets, and volatility has produced wild swings in other markets.
On the Bond front, we have seen Yield Curves Flatten across European and UK markets with the Euribor Yield curve almost totally flat. Negative interest rates coupled with low inflation has put to bed any rate increase in the near future, leaving QE as the next catalyst to try lift the economy
Trading has been very difficult in Euribors as volumes have dropped off a cliff. My strategy required Yield curve movement, but with the current policies and an 80% volume drop from a few years back, has pretty much ended any trading involvement for the time being in the Euribor Space. Many Market Makers have been hung out to dry as well and Euribor Options as you would expect has also seen dramatically reduced interest. I like many others are waiting to re-enter this market but as the Euro Economy falters, the likelihood for any kind of rate action seems very limited in the near future.

Short Sterling has seen more action as inflation in the UK was above the 2% CPI target in the early part of the year, and the economy was generally on a much stronger footing. Rate rise expectations were brought forward to Q4 2014 by some banks and this in turn lifted the front end spreads. However this expectation had waned coming to year end as inflation dropped, on the back of weaker commodity prices, and now is sitting just above 1% which is below the 2% target set. This has set back expectations to late 2015. Trading Short Sterling has been mixed this year, with some good opportunities selling the Spreads at the top of the range, which was around 17-20 in Sep15Dec15 and Dec15Mar16. However as the year went on, the volume continued to drop and there were times I was stuck in Spreads for over a month, which made it very difficult to consistently make money in the back end of the year.

Bonds in general have had a stellar year, with Bunds trading over 155, 10 Year T-Note traded over 127s and Long Gilts touching 120. This was against what most commentators were thinking early on, with the most surprising play being the up move US bonds. Despite the conclusion of QE and a very Strong Q3 GDP number Bonds still remain relentless to the upside along with Equities. The market has seemed to price in very low rates for a while to come and in my opinion it seems like this will hold true as the FED seem very reluctant  to start tightening policy. Firstly the recovery is fragile, second with the Stock Market as extended as it is, the potential for a sharp correction is very likely and we know central banks don’t like that. It seems to me the market has the central banks in their control, and I feel the first rate hike will be a coordinated hike with the UK possibly.

In my opinion raising rates from rock bottom to say 0.75% in the US or 1% in the UK shouldn’t be enough to derail any positive momentum that has built up. It gives savers a bit of yield also, plus stop the notion that we have to yield chase since you can’t get yield anywhere else. These rates would still be historically very low but not extra ordinarily low which in turn provides some sense of normality.

Equities have been in a world of their own in the past 2 years, with new record highs being hit on something like 20% of the days in 2014 in the US. Whilst the US is benefiting from improved fundamentals Europe is still very sluggish. Although judging by the gains in the DAX, CAC and EuroStoxx you wouldn't have thought this. The decoupling with the market and reality is alarming to say the least, but cheap money has been the number one catalyst for the market, and whilst stimulus is thrown around from Europe, Japan, China to name a few, the market will continue to rally because “There is nowhere else to get Yield” so they keep saying.
Many smart fund managers have been on the side lines looking for that elusive pullback, but we have seen time and time again that any pullback that does occur is followed by a very sharp reversal back to the upside. The action of the week on December 12th was remarkable, we had a 4% correction in the SPX in 3 days followed by a gain of 38 points and 48 points for a two day rally of almost 90 points! The DOW in this same two day period moved up over 700 points, the DAX moved over 600. These type of gains is what you mite expect after a longer term correction, but not around all time highs. These sharp moves have made position trading very difficult, as you are almost certain to be stopped out.  With many fund managers under invested, any dip is swallowed by the large influx of cash on the side lines. Coupled with the reduced liquidity on the books, and increased volume at that time this created more exaggerated moves making it a casino like environment to trade.

Coming to 2015 I can imagine more of the same type of action, as multiples continue to increase with minimal earnings growth all on the back of low rates, QE and “Patience” from the FED.
What is clear though is that this epic bull market rally has been on the back drop of sluggish worldwide growth, super low rates, QE from many central banks, and falling commodity prices underpinning low inflation. However the longer this continues the more out of sync with reality this market will become, and history has taught us that this doesn't end nicely.

Personally this year I have had to change my strategies a lot and going forward I will be using a lot more options to create synthetic longs and shorts, as it will give me time to be right rather getting whipsawed out. The key to being profitable right now is to survive the sharp swings when they come, and being patient. While markets continue to be at highs, the risk to reward for going long in both Equities and bonds is a high risk trade in my opinion, so my bias will be to the downside. Although the bears have been killed the last two years, the key is too stay small, and play many occurrences.
I can see 2015 being similar to 2014 in the early part of the year, with buy the dippers pushing Equities up on any pullbacks, and Bonds pushing up on any sell offs, coupled with more declining volume. Although I think if this pattern continues and macro data continues in its current trajectory then we could get potential rate announcements from the fed which could put the brakes on the rally and provide some big volatility. What happens in the commodity space will also have an impact, as the continued decline in Oil will bring down the energy sector as well as many Oil producing countries which rely on Oil as their main source of income.

As far as trading Is concerned it is likely we going to see the market continue to be increasingly dominated by Algos with human activity in the day trading space becoming less and less. Either way the next few days is a time to reflect and adjust those strategies to deal with the new normal that is among us.

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,...