2010 May 10 - Note for today

Markets continued to be jittery throughout Friday trading despite some reassurance on recovery in job market in North America. However all things changed on Monday as Europe has created first ever TARP for countries amounting to 600b Euro. This morning I am getting all sorts of emails as banks try to forecast next market move. And the most striking thing is that views on commodities are different to FX. Come on! When will people realise that commodities are no more different from equities and FX? If you say that Euro is going to 1.20 in three month this not a buying opportunity for commodities! Start talking to each other, people! Have a look at the following intra day correlation matrix:




Only Nymex gas stands out from the crowd as it is probably the only market in this matrix that trades according to its own fundamentals. Everything else is trading in tandem.

Time will tell if I was right.

Off the topic idea:

Has anyone tried to build a market indicator using bullish/bearish news ratio published on CNBC website? I did not try to calculate it, but looks like bullish sentiment peaked probably a week before market collapsed. I think quantifying this can be an interesting topic for a research paper? if nobody thought about it before, I want to have it named after my name. In fact I liked this idea so much that I think I would suggest this to them. let's see if they get back to me.

have a good day

2010 May 07 - Note for today

Have electronic trading just saved us?

For those who do not know what happened yesterday, check any financial or general news website.

I mentioned already that since Tuesday this week it was fear that was driving the market. In normal conditions it would take weeks to hit that many stop loss orders and margin calls. Now many people that were invested suddenly aren't any more. So it is time to reassess your views and decide which way to invest your money.

But the story goes on, which country will investors choose to test its credibility? Mr Trichet did not say anything meaningful yesterday about EU crisis. I actually think it is a computer that writes speeches for him.

Looks like markets will take a breather for today and focus on NFP instead.

Trading note for today

Everything is going just wrong... all asset classes that a week ago were the best performers are the worst ones today. Feels like this is the end of the world.

But, there is a way out of this, a temporary solution though. I do not believe things will get better in Greece, Portugal and Spain. I actually think that France, UK and US will have troubles servicing its debts as well. Higher taxes, no economic growth will bring deflation and nobody will be able to hide from it. But my opinions never mattered for the markets.

Over the short term I am willing to give Mr. Trichet a chance to talk us out of this. I even consider the possibility ECB will cut interest rates. Why not? This is the last ace we have in the sleeve to temporary support the economy and hopefully it will buy us some time for this recovery to be sustainable. Most of the currencies and commodities are overstretched so there are some nice entry points with tight stop losses out there. I like buying commodity currencies and oil as technical picture there is not so bad as it is for base metals. Have a good trading day!

How do you price uncertainty?

Coincidently I decided to start writing this blog the day before markets collapsed. And this is big for me since last time I wrote something bigger then an email was five years ago in the university.

Next day markets dropped on good economic news and something we new already for quite some time but chose to ignore. Why was market reaction different this time? The answer is as old as the market - fear itself. Assets that were linked to a macro story that developed over the last two years got hit the worst: forex, equities and commodities. The exception was US natural gas that nobody likes but it is one of few commodities that trades according to its fundamentals.

I said before that I was not going to make economic forecasts as there are people with experience and resources to do that. So here is a question to forecasters. How do you incorporate uncertainty into your forecasts? How can you be sure of supply - demand balance forecast for commodities? Constant need to have a view on the market makes it is almost impossible. Therefore you have people making price forecasts as close to forward curve as possible. And that's why you cannot make hedges based on these forecast as most probably they will be wrong. You need flexibility to be able to get in and get out of your position given the market conditions and not forecasts.

Are we commodity traders?

I don't think so. over the last two years I personally went from a commodity trader to a trader of everything else. Simply because market environment changed to a global "risk on / risk off" trading. While in the beginning people had difficulties accepting it (including me), smart ones quickly accepted the rules of the game. Macro trading dominates these days for most of the assets ignoring individual fundamentals. Here is an example of 4 hours correlations of some commodities, currencies and equities for the last 120 trading days:



over the recent days more short term correlations broke down. But until above values hold we continue in a macro trading mode. So companies with significant commodities exposure have to follow equity, interest rates, forex markets as well.