Day of reckoning

is it just me or today will be the day of reckoning for global markets? everything does remind me about 2008.

the question is, has crude risen high enough to knock out the floor under base metals and equities. we'll see by the end of today.

one worrying chart

stopped on all fx trades (CAD and GBP)

one of the rationale behind long usd vs other currency pairs was that there were catalysts in the market that were going to lift USD off its long term support:

No fx trend for the time being as this support line is worth watching. EUR, CAD, GBP, AUD are all about to finish February on the highs, some we might see follow through in March. dollar weakness is likely being attributed to interest rates differential as most of the central banks, with the exception of the US, either started raising rates already or started preparing the market for rate hikes. Still I doubt ECB or BOE will raise rates anytime soon given ongoing problems in Europe. 

There are plenty of catalysts, unresolved questions going forward arguing for a trend change in USD. debt, revolutions, inflation, etc...  I have to admit though that FED's stubbornness regarding "there is no inflation" theme is astonishing. Feels like FED is 6 month behind the curve... Will March be the month when inflation will finally filter through? price inflation is already there. the question is in my opinion, whether it will be stagflation like in the US, or out of control bubble like in China? sorry still have no faith in this "recovery"

and on the good note, here's the market that had been underloved by many... NYMEX natural gas

Spec net short position is standing at all time high (people are very short):

 however front month is up 25 cents already since last friday low... the one who covers his short first - wins!

update on open trades

-moving short Brent @119 to 115, that daily candle has the biggest shadow I've ever seen, a long term top?
-moving short GBPUSD to breakeven at 1.6230 (didn't you get it? this economy is rubbish... and you still want to raise interest rates? oh please do and watch the consequences.
-leaving long USDCAD as is: entry 0.9880 s/l 0.9780, open target - there was little follow through on lower oil prices - getting nervous there

Egypt stock exchange is closed, Italians kept the exchange closed during bad news, now LSE... keep people happy at all costs.

timing is everything

stopped on short EURUSD trade at 13760 (didn't I say that I didn't like the technicals on this one... hmm), still sticking to short GBPUSD, but it looks shaky as it feels like USD is loosing safe heaven ground. so what's next safe heaven currency (apart of PM). Euro? will never buy it. Periphery is revolting again.

Middle East is likely going through boom bust scenario when it comes to oil. Short Brent at 119, s/l at 122, target sub 100. Libya exports 70% of its oil to Ireland, Italy and Austria (weak periphery). And it is very unlikely that rumours of unrest in Saudi Arabia will have effect on supply: 1. Saudi King is seen as reformer (already spent $34 billion on social programs). 2. he will likely to find dialogue rather then confrontation. 3. he is too important for the US for them to live this issue alone, so they will pressure him to give away.

working through boom bust theory, long USDCAD at 0.9880 s/l @ 0.9780, open target

too late to short base metals and stock indices...

good luck all....

IBEX 35 daily reversal at year highs.... tuf luv with IR shocks

Selling GBP and EUR...

put your money where your mouth is...

this is just my view and not necessarily view of my company. Although I do not trade FX, but follow it closely, the developments over the last weeks in Europe, such as increasing talk of interest rates hikes, continuing political uncertainty on how the future would look like should expose the dark side of the "recovery". Simply betting that any further IR hike speculations for the economies that just plugged the wholes in their sinking ships and not solved them (keyword debt) would scare markets going further and $ will benefit from this (despite I don't like Ben's policies either). Out of two evil you choose the smallest one. Technically I like short GBP more then Euro, but European periphery will be devastated by IR shock...

I will be working on hypothetical portfolio, rationale and charts, but for the time being:

short EURUSD @ 1.3630 stop 1.3760 target under 1.30
short GBPUSD @ 1.6230 stop 1.6330 target under 1.58

time to be contrarian... looking for a good entry in the equity indices and commodities....

is the UK falling into stgfltn

Over a month, correction, over three months, I didn't want to write anything I did not believe in.

the above line was in drafts of this blog waiting to be published since end of November. If I kept everything I wrote which then was  deleted it would make for a good sized book.

I have been reading a lot other people's thoughts though and it appears to be I belong to a small group of people called "permabears". And while we continue talking how bearish we are, making money if you were a permabear would have been difficult in this environment. Yet there were ideas during last year that that fit both bear and bull camps, e.g. rising bond yields - some said it was a sign of economic recovery, others meant inflation and in case of some countries increased risk of default or outright punishment for irresponsible spending. A reminder for myself - know your "enemy".

I think it would make sense to brand the ideas that fits all camps as "one size fits all"...

since I am just warming up for the year, I will talk about some very country specific observations rather then macro view..

The striking evidence of things getting out of control is not in Egypt or other Middle East countries, but rather in the UK. Is it obvious, that negative growth with high inflation means "...." - the word we have not heard for a while. well, not so negative growth and not so high inflation, but it feels like the trend is there. watch employment numbers today...

Once this "word we do not pronounce" gets into mainstream media, like morning newspaper, expect things to uncover quickly... will George Soros be on the short pound trade again?

Historically, interest rate differential between the UK and other countries had been very high. Sentiment is this is to stay. sorry, but I am not buying it.

Patience is a virtue

Ireland is not big enough

Despite the fact that I am a medium term bear it feels like European problems in this form is not enough to derail global equity markets and who cares about Irish, Portugese or Spanish equties that continue to slump. So turn the page but fold the corner just in case as I am sure we will revisit it in the nearest future, probably as early as next week.

The mounting social and monetary cost of bailing the US and Europe does not bode well with long term growth prospects and GDP growth for next year is likely to be zero for these countries. Coupled with monetary policy imbalances the risk remain on to downside.

I tend to lean towards deflationary environment in the coming quarters. Strangely enough recent US inflation data showed that in majority only the prices of products with developed futures markets rose... developing world and weak dollar is keeping the US on the edge. thank you, global trade...

Too much talk

All focus on Europe these days. There's just too much talk, but it does not feel like officials will be able to talk us out of this. Looks like the markets are testing too which extent the credit markets can be stretched until long term bond investors come in. Yet the resilient equity markets in Germany and the US suggest market is not yet pricing in contagion.  But it is spreading through higher interest rates that will separate boys from men. Which country is prepared to withstand interest rates hit? Feels like only Germany will be able to...

Otherwise mixed feeling about economy. But I still have questions that remain unanswered. Why China is not raising interest rates as its peers? Is there something we do not know? Is QE in the US a failure or success? Economic data post announcement disappoints but sentiment continues to rise.

Since the news are coming out almost hourly it is impossible to run charts and to have a view as most likely I will be wrong. So sit and wait for the moment.

Verbal Rhetoric Escalates

So far it has been an exciting day, despite very little scheduled economic data. Chinese reserve requirements rate hike came just in the middle of Ben Bernanke's speach in Frankfurt to defend QE. Did Chinese plan it? It is probably just too coincidental... Same goes for a number of comments from ECB, IMF et al on debt problems. I doubt they will be able to talk everyone out of this, as anticipation of eventual deal for Ireland is being priced in. I am not sure whether the deal itself will help as it opens doors for further bailouts for Spain, France, Portugal. Yields above 5% for any country will make IMF loan look cheap.

there are few ways out of debt laden economies in Europe: economic growth (valid only for Germany), deflation (yes here it comes again), outright default and full fiscal and tax consolidation (something we should have done long time ago) or as I call it "averaging down your costs. Issuing common Eurobonds might help, but, obviously Germany is against it. Anyway, it does not look like it is going to be a quiet end of the year.

No directional opinion on the markets yet, just watching the show.

Still catching up... It is all about interest rates markets

Today's post is rather useless as it mostly discusses old news, yet for the sake of catching up with the market developments it is worth mentioning.

It is all about interest rates these days and nothing else matters. Benchmark interest rates hikes in Asia and rising yields elsewhere are weighing on the markets. Obviously the underlying factors for yields rise should be taken into account. While Asia and Latin America performed, well, better then developed world, and interest rates increase is the proper policy response to inflation, growth of monetary base, etc, the rest of the world is simply experiencing higher interest rates through bond yields. There is nothing new in rising yields in peripheral Europe, but French yields are a concern, yet it is more likely due to relatively better growth.

(for some reason I tend not to like the US, sorry for this) The fact is that US yields are rising as well post QE2 announcement (10y chart is below):

And, according to FED there are not supposed to. Ok, I might admit that it is also a growth story... or another insolvent country story. put everything aside, there is a trend there and the way for it is up. It is also interesting to see that rising yields correspond to stronger dollar (correlation of 10Y with Dollar index is very high):

and ,watching the markets intraday, you can feel that it just knock down a chair under the "risk assets". While it persists, stronger yields will limit a rise in oil, metals and equities.

No charts or technicals today as I am still catching up with the markets.

Silence is golden, up until certain limit though

Well, this is my first post in over a month... Not taking into account recent 3 weeks vacation, the desire to keep this blog alive was overwhelmed by the fear of saying something stupid. No, I am not afraid to start talking against the trend and neither I fear to be wrong (up to certain limit though). I just did not know what to say and I honestly did not want to say anything I did not believe in.

This break allowed me however to focus on other things and I also had an opportunity to write a small article for an university magazine. I will publish it later as soon as it becomes public. This was a tough task as anything I write in this blog is, among others, simply a writing exercise - need to express my thoughts better.


Feeling of uncertainty prevails, so it is time to go back to page one in financial theory book - risk free rate. This is probably the most commonly used "constant" in finance. So what is it now? German or US bills? Just some years ago I would have said yes without any doubt. The problem is some years ago I was still in the university. The reality now is it is much safer to purchase not the US bills, but 10year bonds as US government will buy them as part of QE. And German bills are no longer so attractive as Irish and Portuguese bonds are. You can be sure that ECB will purchase them and make sure there is no default risk associated with them as we all can count on bailout without any loss to bond investors.

The reality is we do not know any more what risk free rate is. So how does DCF and Black and Scholes models should work then, if indeed Irish bonds are safer then the ones of Germany?

Loooking at big picture

We indeed had a great September. Bucking the trend equities had a best year in 70 years and commodities followed. Most of the currencies strengthened vs dollar.

Can great September turn out to be a miserable October?

Last days of September were mainly characterised by expectations of FED easing, but recent data suggests that the economy is not yet there to employ heavy artillery. I, personally, it will take an effort to pass any additional easing as politics get involved.

Well, longer term charts suggest we're still not there to call it a winning situation and a full blown market rally. First of all, S&P monthly chart:

Long term momentum still remains down and 1155 is area where many moving averages cross. Moreover last 4 months of trading look more like a correction rather then a firm trend upwards.

This coincides with 15 month moving average in EURUSD, which worked well previously:

which currently acts like resistance. These are long term charts, so trading off them is difficult, but at least this will help to identify long term trends...

Commodities put a very good month thanks to weaker dollar and improving sentiment, however having copper at $8000 and oil at $82 still suggests long term bear trend. Faltering equities might as well put a cap on recent rally.

End of the month trading might result in bearish reversal days for equities (if we close under 1140) and EURUSD. (under 1.3560). While beginning of the month usually involves big money going onto either side of the market, I would wait until next week to have a clearer short term view on the markets...

Did we misunderstood the FED?

I mean, honestly, what did FED say during its last interest rate decision? Nothing new compared to a month prior decision, except for the fact that it acknowledged lack of inflation. Since officials are now questioning the benefit of additional stimulus I think any new ideas will run into the wall of bureaucracy. Yet weaker dollar will bring inflation so needed by FED to help it pay for its obligations among other things ... The problem is, with inflation, we will see higher yields, so here it is, the start of the bear market in bonds..... And that is exactly what FED does not want... but you cannot have both, stupid. Since demand is not there, it will be a big problem going forward... but for the moment we bought ourselves some time

Will this turn out  to be another crisis? probably yes

Do not underestimate weak dollar... last part

This is my final note that has to do with weak dollar. From now on I will focus on strength of other currencies rather then dollar weakness for a change. Just get the feeling that QE-2 will not end up good.

As mentioned earlier FED wants to have both inflation and lower bond yields. Correct me if I wrong but this does not work. Either you have inflation and high yields or deflation and low yields. Something has to give. But I have to admit until now it worked well. There is no indication of higher Bond yields yet as my favourite 10year maturity is still in the down trend:

Euro has posted another outside bullish day and is rising exponentially higher (dollar falling). Sign of a bubble, yes, but I would not try to catch falling knife. Portugal and Ireland are still a concern, but there is a greater evil out there. There is a resistance at March highs at 1.3770. Euro chart:

Oil is a boring market, base metals mainly follow weak dollar, so nothing interesting there. Still do not believe in higher equities, but cannot do much until we see some sort of top or fall under 1130:

To my mind while dollar weakness is substantiated, but risk on mode based just on that is a sign of bubble that will eventually burst. yet it is still not yet time to become a contrarian.

Dissociative Identity Disorder

Well, I admit, I might be having a dissociative identity disorder. Ask where market will go next and I can give plenty of reasons for them to go up or down and risks to either direction. And I will be right in both cases.

Here is the story from optimistic identity:


Technically S&P did not have a breather since end of August lows and went through range resistance, bounced off it and posted a new high. Fundamentally we will not have a double dip for the moment and FED will step in to support the markets if it happens. QE-2 (according to Goldman Sachs) will start as early as November. Companies sit on piles of cash saved from cost cutting and M&A activity is picking up. As a result of QE expectations dollar is falling and this will supports commodities.

A pessimistic part of me says:

Stupid, technically this is still a bear market as we have not reached post flash crash highs and weaker dollar is not a sign of healthy demand growth but rather then trying to pump a balloon with holes in it - you can try to make it bigger, but so will be the holes in it and it will eventually burst. This is still a bear market as real incomes will not rise to 2007 levels and we all know what will happen when inflation hits the market without underlying demand strength. Most likely FED's money printing is to end up with big kaboom...

You have countries that borrow money to finance economies with negative GDP growth at 6%. How long will they last? FED wants to have both inflation and low bond yields at the same time. Something have to give. Moreover, these days everyone wants to have their currency weak, especially vs dollar, but this is not the case. What started with Japan, may soon be followed by Switzerland, Europe. Brazil, Canada and other commodities exporters will follow. Currency wars? Protect your own - make life difficult for importers. 


A real me simply says WTF?!?! well, in fact you're both right,  while the optimist is assessing more short term views, the pessimist is looking at a slightly longer time frame. I am personally the pessimist and I think this is not a healthy environment for natural economy growth so I think these market will implode, probably this will be worse then 2008-2009 drop, but timing of this is uncertain. So instead of screaming this is the end of the world I will follow the winners...

I am asking myself, we remember what happens when dollar gets weak... Are we so stupid to repeat these events again?

Why I think Portugal will go bust or get bailed out...

I mean first of all simply because it will not be able to afford debt repayments... There are also dangerous signs in equity index, which to my mind is about to break down, whether it is because people are to realise above debt problems or economic data to get worse. But this descending triangle does not look good:

And momentum is not yet in oversold territory. So it is another bailout?

Is this a start of something big? PART2

Put it simply, I got it wrong. Last Friday's bearish reversals in European Equity indices did not materialise as we posted new highs.

As I said the problems will not come out of Ireland, but Portugal instead. And Portugal did not come off from the table. While 10 year yield has put a new high at 6.45% the chart looks concerning as we continue exponential rise. Only a move under 5.5% would stop the rise:

Now, this is a long term chart and effect while we can be taking clues from this market on active days rather then trying to anticipate the moves. bottom line this is a market to watch and risks remain for further yield rises.

Is this a start of something big?

a small note before I go home. There are multiple daily bearish reversal formations in most of the European equity indices. Does this confirm a top? well, you know where your stop loss is... Monday will be a real test for Europe. As I said Ireland was not something new, watch Portugal instead. 10y yield is at 6.10%

Have a good weekend.

If only everything looked ok

The 1 million dollar question today is whether equity markets will break higher out of recent ranges. While trends are intact, there is one potential threat in the short term that can derail the rally. and the name of it "Poortugal"

I think there were comments made today that bank of Portugal was effectively shut off from long term financing sources. 10 year bond yield is rising above 6 as a result. Time to get defensive? Not sure if it is the case I spoke earlier that market decided to tests other banks balance sheet by actually brining another country on the verge of default. Here is a Reuters graph for your info:

 

Well, good news is that markets other then credit and financial equities. Amazingly, I do not see any news covering Portugal on the front page of Bloomberg/Reuters/CNBC... Ireland is not new, but Portugal is... 

Resilience in equities and commodities can also be attributed to the weekend effect and that everyone is heavily long these assets... This week's Euro move also cleared lots of shorts in the market. So there is not enough selling power. I start to believe that Portugal might actually be a catalyst for new crisis...