Politic Toc

US30 Weekly

As sure as summer turns to autumn, the market domination by economists and monetarists gives way to party political supremacy. Regardless of affiliations we are grateful for the volatility we receive.

It is popular to speak out against the leader of the free world. Dick’s Sports is now anti-NRA and assumed to line up with the Democrats. This may lead to a red/blue wall of quotes alongside the familiar red/green. It isn’t hard to imagine Republicans boycotting Dick’s, where will they go? Has a niche opened up for an enterprising Republican gun seller? Perhaps that market is already saturated but the principle extends. We don’t yet have Republican doughnut shops or Democrat stationery stores. Opportunities abound.

The anticipated Whitehouse exodus is in full swing. The new hires are mouthy populists with no substance, experience or credibility. That is the consistency. Other consistencies may be more tradeable:

Brent Monthly

Republicans will push up oil prices to benefit their fracking and drilling wing. The USA has become a net exporter and is on target to pass Russia as the biggest oil producer this year. The next step will be the failure to sign off the annual Iran paperwork in May, then sanctions against Venezuela.

Gold Monthly

Gold market bulls have been hoping to cash in on volatility but the payday hasn’t come. Impending inflation often drives people to Gold but that isn’t a factor yet. We haven’t returned to pre-crisis lows either, it may still be inflated. Downside risk is Indian and Chinese attempts to get people to put money in banks rather than in gold. Jewellery and private investment makes up 68% of the world market. Upside risk would be a serious economic downturn, caused by trade wars perhaps. However, most analysts are only looking for market corrections at this stage.

US10Y Monthly

Bonds can only continue downwards, Central banks have been the biggest buyers for 10 years, now the only question is how aggressively they will sell. It is a buying opportunity for pension funds and the like, cheap AAA+ assets don’t grow on trees. The questions is, do they have the nerve to buy in falling market? ‘Nerve’ isn’t traditionally the hallmark of a pension fund manager.

Charts by Oanda Metatrader. Copyrights apply.

Disclaimer

Brexit Baiting

07 January 2018

UK Wages & Inflation

UK economic figures stand up surprisingly well given all the gloom in the press. Notably inflation and wage growth. The two things the Americans have been grappling with throughout 2017 remain strong in the UK. Wage growth is not stronger than inflation but inflation is set to fall, with the post Brexit devaluation priced-in, and GBP strength returning to the charts. GDP growth remains weak but this can only improve as Brexit uncertainties wane.

Phase 1 of the talks was signed off in December, analysts are pleasantly surprised to see that we are ready to begin Phase 2 in early 2018. The driver here is that the fiscal year of the UK ends on April 5th and many businesses set theirs to 31 March. A lot of investment has been held up pending clarity on Brexit. This March is the last budgeting round for Business prior to the March 2019 exit. If May & Co get it right they can trigger an avalanche of investment.

This sentiment is reflected in the markets, selling is yesterdays news, buyers now need an excuse to trigger. Politicians need to start talking about the big ideas of the trade deal; tariffs, regulatory equivalence, the customs border and the big one, Financial Services Pass-porting. The primary weakness in The UK right now is the government, they’ve had a quiet Christmas but have yet to show any mettle since the election disaster.

Grandstanding and Posturing in Brexit Talks Phase 2 will be much more exaggerated than in Phase 1. This signals a lot of market volatility in the near term but the end result should be a stronger pound, just on the basis that clarity is better than uncertainty. The actual outcome of the talks is largely irrelevant, barring some catastrophic walk-out or unexpected British success.

Interestingly, now that we can stand back and apply hindsight, the fractures of Brexit and the October Flash look less extreme. You might think the EURGBP chart is more illustrative, but it only confirms the fallacy:

 

Disclaimer

 

Overview, 7 January

07 January 2018

Corn Weekly

Nothing happens in January. Nothing changes anyway, the stock markets will inflate, the pound will gyrate, bitcoin mania will maniate. It is a little reported fact that the most likely outcome of any scenario is that ‘it will probably stay the same’. It is the job of talking heads to feed us daily scenarios of unprecedented gains and catastrophic collapses, but those scenarios are rare – which is why they surprise us when they do happen. One of the tricks to trading successfully is to look for the most likely outcomes, not the most profitable. The most profitable outcomes are almost always built on hope and best cases, the most likely outcomes are where you make your, usually modest, daily gains.

If that’s too ethereal for you then ignore it, just get back to basics. If you have been profitable in Q4 of 2017 then keep doing whatever you did into Q1 of 2018, until the market outlook changes. In the other case, if you haven’t been successful, now do the opposite of what you’ve been doing.

QE policy questions are in the air; when will the Fed start selling bonds?, when will the ECB stop buying them? Both answers tell us when the EURUSD pair will rise again. The rise will be tempered by US interest policy, but it will rise. Other currencies have less of a counterbalance and will find it hard going against the big two this year.

If USD does win out and the OECD economic forecasts are right, expect commodity prices to gain. The consolidation of corn prices must be a portent of something. Unless everyone has finally agreed on one price for corn. Gold and Oil have come to this party early, wait and see if they’re staying or if they go out and come back in.

Oil Outlook

EURUSD Outlook

GBPUSD Outlook

Disclaimer

The “dot plot” can be found here for the latest summary of Dollar direction CME Fedwatch Tool.

The Bitcoin Bubble

Hypothetical Price Chart

The only reason anyone is giving for buying Bitcoin is to make money, it’s speculation only. That’s how you know it’s in a bubble. Bubbles do two things, they inflate and they burst. Typically, professional traders will all sell together, causing the burst, and retail traders will be left holding the losses. Bitcoin evangelists will tell us there is another good reason to buy, Bitcoin is the future of money. So how is it different from normal assets?

Make a comparison with gold, there is a persistent fear that central banks will dump their holdings, collapsing the price. Or, a new gold field opens up and if it’s big enough, it collapses the price. That can’t happen to Bitcoin, according to the evangelists. There are 21 million Bitcoins and that number can not change. For that simple reason, the value of Bitcoin will keep going up, according to the evangelists. Demand is increasing but supply is fixed.

That still leaves the central bank dumping question. ‘Central banks don’t hold Bitcoin’, again the evangelists have the answer. What if we substitute ‘Central Bank’ with ‘Someone having Massive Bitcoin holding’? That person could dump their coins and collapse the market. Does such a person exist? Yes. Not one individual, but a small group of people. This group bought lots and lots of Bitcoin years ago, when it was cheap. Now these people are sitting on massive profits, which they will realise when they sell their coins. They know who they are, they talk to each other because they want to know before the others sell out and collapse the market.

Who is this cartel? It doesn’t matter according to the old poker maxim ‘if you don’t know who the patsy is in the game, it’s you’. Ok, the cartel is The Evangelists, the ones giving all the reasons why Bitcoin is the future of money. They have launched a Futures contract on CBOE, they are preparing ETFs next. All to make it easier for you to get into Bitcoin and inflate the price. They are stoking demand for a finite asset which they hold a big chunk of.

While it’s true no new Bitcoin mines can be found, there are other cryptocurrencies. Ethereum is quite well known. Dash, Litecoin, Peercoin, Quarkcoin, Stablecoin are among many more. The Japanese government is planning a cryptocurrency for use in the 2020 Olympic village. Ripple XRP is based on a transactional network infrastructure which already has the buy-in of some major banks. Some say that if cryptocurrencies are sustainable, governments will issue their own, collapsing the private ones like Bitcoin. When will this happen? At the latest I propose the Summer of 2020, around the time we get a new 100 metres champion.

Outlook

28 November 2017

Global economic data has taken a positive turn leading to optimistic demand projections for oil. The Eurozone is on-board with the global trend, lifting the Euro up from major lows earlier this year. Even the Greek economy is reporting healthy growth levels. The chief laggard in EU is now the UK which is on the way out, more good news for The Euro.

On the plus side for The UK, the pound has retraced half of the post-Brexit-vote dip. The full re-tracement can only happen once Brexit is complete, a good argument for a cliff-edge solution. The improving global economic climate is softening the blows and heralding a return to investment in The UK. More details here.

 

Disclaimer

Cable Flash

There will be a lot of speculation about what happened to the pound overnight, even after the analysts have given their answers. The difficulty of doing a conclusive analysis is that Forex transactions are not channelled through exchanges like stocks and shares, it is a dispersed market.

Nevertheless, there are a finite number of possibilities, including these:

1. Fat Fingers. Someone put too many zeroes in their order.

2. Algo Frenzy. The machines doing rapid fire selling, because the other machines are doing rapid fire selling.

3. Stop Hunt. People speculating on the pound rising, “the longs”, would have protective stops below the current price to defend against a sudden shock. If all those stops are tripped you get a cascade down.

4. Traders and/or hedge funds running “night raids” on the pound while the Bank of England is literally in bed.  This is similar to the George Soros attack in 1992.  If this is the case it is a perilous time to be in any GBP trading.

Certainly long speculators have had their stops taken out and suffered serious losses. It is possible that someone did this deliberately to clean out the speculators and get a clearer picture of what business thinks of Brexit. Only someone with a lot of money, like a Central Bank, would be capable.

The truth is likely a combination of the above. In the dead of night, a sleepy fat fingers trade or a hedge fund raider launched the Algos into a frenzy and tripped the stops of all the Brexit speculators. A perfect storm, or rather a sort of strange noise in the night that we’ll never really understand.

If that isn’t exiting enough, here are some charts:

Fig 1. on a typical day the pound moves 0.011 in dollar terms. During The Flash, it moved 0.098. In trader terms, we usually move 110 pips per day, here we had 980 pips in 5 minutes. Each bar in the chart shows 15 minutes of trading. This is a very ugly chart.

gbpusd_20161007_flashm15

Fig 2. Compare it with the worst move in recent memory, on Brexit night, 1790 pips over 5 hours, this is how human traders deal with a shock. The Flash is a much sharper move, it looks machine made.

gbpusd_20160624_brexitm15

Fig 3. Just to emphasise the extreme nature of The Flash, this chart shows each individual price move, “tick”, as it happened. In the first 26 seconds there are lots of ticks and a 250 pip move. It’s already scary. Between 01:07:16 and 01:08:41 it looks like one huge trade moved 600 pips. That would cost around $6 billion. That goes beyond scary, open mouthed staring happens here. To get another perspective on the size of this Flash, look at the “aftershock” at 01:13:04, that vertical jump is slightly bigger than a normal trading day.

gbpusd_20161007_flashtick

Fig 4. Contrast that with typical price moves at that time of day/night, 24 hours earlier. Look carefully at the price scale, it moved 4 pips during the same period on 6 Oct.

I don’t have enough detail to work out exactly what happened and no information on who did it. Until someone confesses it is unlikely anyone will have concrete answers.

The wider analysis points to a combination of a government happy to let the currency suffer the fallout of their conference posturing and currency traders who persist in trading best case scenarios. To the second group I can recommend Nassim Taleb’s article  explaining how a government with a thin majority can only deliver a hard Brexit and why it will be worse than the worst forecasts.

Day Trader

A defining trait of the Day Trader is he starts each day with a clean slate, there are no trades running overnight.  This is because short term trades follow daily borrowing rate fluctuations.  It follows that a position entered on this basis can not be held overnight.

Many institutional traders are using the same trading and risk management tools as each other, this leads them to take similar day-to-day positions.  When this happens the price charts show consistent moves at certain times of the day.  The Retail Trader can benefit by spotting these moves as they develop.  There is no need to attempt predictions using technical analysis tools.

It is sufficient to be aware of the opening price of the day and the trading direction, which will be set during the opening session.  Entries and exits can be taken when momentum fades and prices form highs and lows.  14 day ATR levels and monthly highs and lows provide additional exit points.  Economic data releases can be disruptive, trading those periods is a matter of experience.