Tag: Futures contract (page 1 of 10)

Think Bitcoin Is A Bubble? Here’s Your Chance To Short It

Has the fact that the price of a single bitcoin has risen nearly eight-fold so far this year prompted you to turn bearish on the world's most valuable digital currency?

Well, here’s your chance to short it. 

A Swiss asset-management firm called Vontobel launched a new futures product on Friday that will make it easier for retail investors to short bitcoin.

Bitcoin of course recently bounced back to all-time highs after a more-than $1,000 drop last week. Traders who were short made a killing on their positions. But cashing in on the drop would’ve been far easier with new futures products designed to let customers bet against the bitcoin price.

The contracts, which will trade on the SIX Exchange, will enable investors to profit even if the currency – which has proven vulnerable to vicious selloffs – falls in value. According to Reuters, the company will release two mini futures, a type of derivatives instrument that represents a fraction of the value of standard futures, making it easier for retail traders to access the market.

According to Eric Blattmann, head of public distribution of financial products at Vontobel, the news comes at a time when traditional traders are simply looking for more options when it comes to trading cryptocurrencies.

Swiss investment solutions provider Leonteq Securities AG also announced the launch of a separate product. Leonteq’s product has a two-month maturity, while Vontobel’s is longer, but investors can of course exit their positions early since each product will trade on an exchange.

He said in statements:

"We have seen big demand for our long tracker certificate from investors interested in playing the upside potential of bitcoin and now they have also the possibility to hedge their position or go short."

Manuel Durr, head of public solutions at Leonteq, said clients appreciate being able to open long or short positions in bitcoin.

“The initial feedback has been extremely positive,” said Manuel Dürr, head of public solutions at Leonteq. “Clients do very much appreciate the possibility of choosing between a long or a short investment in bitcoin.”

The move comes after US derivatives exchange CME Group announced it would start trading bitcoin derivatives next month.

Already, New York-based startup LedgerX is offering live cryptocurrency futures trading, with $1 million traded in its first week.

While some exchanges have allowed customers to open short positions on margin, the Vontobel contract has become the easiest way for retail traders to short the digital currency. We wonder: Could this help inject more two-way volatility and slow, or perhaps even reverse, bitcoin's meteoric rise?

But if you’re looking to short the world’s most valuable digital currency, The Vontobel mini-futures are probably your best bet.


Financial Times: Sell Bitcoin Because The Market Is About To Become “Civilized”

On 31 October 2017, we discussed the announcement that the CME Group was responding to client interest and launching a Bitcoin Futures contract before the end of this year. CME stated that the contract would be cash settled based on the CME CF Bitcoin Reference rate, a once-a-day reference rate of the US dollar Bitcoin price at 4.00pm London time. In the run-up to the launch of the futures contract, the Financial Times has written a piece on the likely impact of futures trading on the Bitcoin price.

The title of the piece makes the FT’s view clear, “Prepare to bet against bitcoin as it becomes civilised”. We disagree with using the word “civilised” in this context (see below), but here is the FT’s take. 

In recent years, bitcoin has been the wild west of the financial world. Now, however, it is being civilised — a touch. In the coming weeks, the Chicago Mercantile Exchange plans to start listing bitcoin futures, with a centralised clearing mechanism. Cboe Global Markets may follow suit. That will enable investors to bet on the coin’s future value without actually holding it — just as investors can use the Chicago exchange to bet on hog prices, say, without ever handling a pig.

To its credit, the FT reflects the concerns from some CME participants that there is insufficient regulatory oversight and Bitcoin’s stratospheric vol could lead to significant losses for some traders.

Is this a good idea? Some of the CME’s members do not think so. This week Interactive Brokers, an important clearing firm in the exchange, took the extraordinary step of using a newspaper advertisement to ask for more regulatory oversight. It fears that bitcoin is potentially so volatile that these futures will create huge losses for traders, which might then undermine the health of the CME and hurt other brokers, given its part-mutualised structure. The CME — unsurprisingly — dismisses this as poppycock: it argues that any risks will be contained by rules that allow traders to charge more so as to generate fat margins (of about 30 per cent) and thus absorb losses, and by circuit breakers that would stop a trade in the event of wild price swings.

Our suspicion is that CME Group has seen the volume of Bitcoin trading and is determined to get its “cut”, whether or not some of its members take some big hits or not. It can deal with those issues if or when they occur. Anyway, the FT moves on to the more interesting subject of the impact on Bitcoin’s price. We should note that when the futures contract was announced the price surged more than $100 to a then all-time high of $645.

But while the regulatory debate bubbles on, there is a more immediate question facing investors: bitcoin prices. Until now, it has been an article of faith among bitcoin evangelists that if — or when — the currency became more “civilised”, this will boost the price. After all, the argument goes, assimilating bitcoin into the mainstream investment world should boost its appeal and demand, making it more valuable.

As the FT alludes to in the articles title, it expects the Bitcoin price to fall.

It is highly likely there will be an opposite effect. Until now, investors have not had an easy way to bet against bitcoin — the only “short” was to sell coins. But the CME futures contract will let investors place those negative bets. You do not need to be a conspiracy theorist to imagine that some bitcoin cynics will be doing just that.

To support its case, the FT cites the example of Japan launching equity derivatives in 1989, just before the bubble burst.

Think, for example, about Japan. Before the mid-1980s, its stock market seemed to exist on a planet of its own, subject to its own valuation rules. But when Japanese equity derivative contracts were launched, and then integrated within the wider global market system as a result of financial reform, that sense of “otherness” broke down. The change in how Japan was seen through a comparative investment lens was not the only reason for the 1990 Nikkei crash, but it contributed.

We have a slight problem with using this as an analogy for Bitcoin. Firstly, an ultra-hawkish BOJ-governor was nominated in mid-1989 who announced his intention to crackdown on house price inflation and the shadow banking system which was facilitating much of the leverage. Secondly, all bubbles burst and Japan’s was extreme. For example, depending on whether you use the highest per square metre property deal in the Ginza district, or one in the Chiyoda district, the land underneath the Imperial Palace was valued between $852 billion and $5.1 trillion at the time. Futures trading, we would suggest, played a tiny role.

The FT cites the launch of trading in the ABX Index prior to the sub-prime crisis, as another example.

So too with US mortgages. Until 2005 or so, outsiders could not easily assess or price the risks of America’s subprime mortgages: mortgage-backed bond prices were opaque, and the only way to short the market was to sell bonds. But when mortgage derivatives, such as the ABX index, were launched, it suddenly became easy to make negative bets. Then, the ABX index was published in newspapers, such as the Financial Times, in 2007, creating a visible barometer of sentiment. That helped a sense of panic to feed on itself after 2008.

Once again, we would suggest the FT is confusing the impact of derivatives with an inevitable reversion of market price of an asset in a bubble as expectations regarding the outlook changed. In the case of sub-prime, housing prices in the US had never fallen, then they did, the AAA-ratings of the bonds were manifestly incorrect and the dramatically overpriced sub-prime bonds were pledged as collateral in all manner of other risky, leveraged trades.

From our perspective, the impact of the futures launch is difficult to gauge as it depends on the interaction of two opposing forces.

Firstly, as cryptocurrencies gradually become accepted as an asset class, more institutional money is likely to enter the sector and holding long futures positions is one way to do it.


Secondly, as the article notes, Bitcoin futures will be settled in cash, which means there is potential for the volume of futures trading to vastly outweigh the buying and selling of “actual” Bitcoins. If this occurs, then the “tail can wag the dog” as price discovery is dominated by futures trading. This permits all manner of market abuse via naked short selling by investors, major banks and any “official” players who deem it necessary to manipulate the Bitcoin price.

For this reason, we don’t agree that adding a futures contract will necessarily “civilise” Bitcoin, indeed, it might have the opposite effect.

The second scenario precisely describes the state of the “gold” market today. According to the Reserve Bank of India’s estimate, the ratio of “paper gold” trading to physical gold trading is 92:1, meaning that the price of gold on the screens has almost nothing to do with the buying and selling of physical gold. This makes the gold market and, therefore, the gold price something of a mockery. As Zero Hedge has highlighted time after time, the gold price has frequently been subject to waterfall declines, as huge volumes of gold futures are dumped on the market with no regard for price. See "Gold Slammed After Someone Pukes $4bn Notional In Gold Futures" on 10 November 2017. Perhaps the FT journalist, Gillian Tett, could write an article on gold, instead of Bitcoin, explaining how the price of the former – a widely viewed indicator of financial risk – is being suppressed by derivative trading. Indeed, Tett was present at a private dinner in Scott’s of Mayfair several years ago when the Gold Anti-Trust Action Committee gave a presentation on exactly the same process which she expects to lower the Bitcoin price.


As Oil Heads For Down-Week, Crude Stakes Are Huge

After five straight weeks higher – read by many as confirmation of how awesome the global coordinated recovery must be – WTI and Brent dropped this week as inventories rose, demand outlooks dimmed, and OPEC hope faded.

As Alhambra Investment Partners' Jeffrey Snider notes, there is a titanic struggle going on right now in the oil market.

On the one side of the futures market are the usual pace setters, the money managers. Last week, the latest COT data available, they went the most net long since March. If it continues, it will close in on the most positive futures position since the record long they established back in February.

Normally that would be insanely bullish for oil prices. But just as in February/March another part of the futures market has intervened on the other side. Back then it was the oil producers who rising inventory forced into a larger and larger offsetting net short (hedge).

This time, however, it is the swap dealers who are short for reasons that aren’t really clear. The weekly COT report for the last week in October showed a record net short for dealers, just beating their most extreme position from the middle of 2013 at -424k contracts. In the first week and November, they blew away that record at -470k.

It clearly matters because in 2017 the oil market has changed. It may be the inventory story, or it may be the exit of producers from hedging that inventory and other products. Whatever the case, money managers just aren’t setting the price like they used to. And it could be that managers have changed their market activities, too, where other parts of the futures market are now cueing off (shorting) this possible difference. I honestly don’t know what it is, but I can safely point out where it is.

Now with swap dealers apparently showing very, very strong conviction on the short side, oil prices can’t gain any traction beyond the $57 established by in all likelihood geopolitical risk.

The fundamentals of oil continue to favor the dealers over the managers, with oil inventories remaining at the same crisis “rising dollar” levels. Being slightly better than 2016 is not a real achievement toward clearing the leftover physical imbalance, not when oil inventories are instead still consistent with late 2014. With 2017 nearly over, there should have been much more progress toward 2013 levels of stock long before now if there was ever going to be a realistic chance to balance the oil market next year (at the most optimistic).

Instead, it indicates yet again a demand problem, as in lack of materializing upside demand due to, as always, economic constraints that in the mainstream aren’t ever considered real (like when the oil crash was called repeatedly a “supply glut”). Pushing the expected rebalancing date into 2019 or even (more realistically) 2020 creates greater downside not upside risks.

That may be why dealers have jumped all over the shorts; if it is geopolitical risks driving oil prices higher, and maybe what managers are betting on now, then if or when they fade the negative fundamentals of oil will be re-imposed on the price. That seems to be what the futures curve is saying, too.

Backwardation indicates expected balance, but at a very low price rather than a rebounding one. In the latest oil pullback since last week, the curve has moved lower in unison, with the same almost identical indicated backwardation rather than toward any serious rewind toward contango.

One additional factor to consider is those record and near-record opposite futures positions. What happens if the oil price starts to move in either direction? There may need to be a whole lot of covering by whichever side ends up on the losing end, perhaps turbocharging the price as it begins to move whatever way it decides to go.

There is right now a lot at stake in the crude market, and it’s not just about oil.


Dollar Slammed, USDJPY Roiled On Trump Campaign Subpoena Report

it has been a rocky session for the dollar which has dumped to a 4-week low, dragging with it USDJPY, the Nikkei and Treasury yields – and to a lesser extend US equity futures – all of which have slumped in the Japanese am session, following a WSJ report that Robert Mueller’s team “caught the Trump campaign by surprise” in mid-October by issuing a document subpoena to more than a dozen top officials.

The campaign had previously been voluntarily complying with the special counsel’s requests for information, and had been sharing with Mr. Mueller’s team the documents it provided to congressional committees as part of their probes of Russian interference into the 2016 presidential election. The Trump campaign is providing documents in response to the subpoena on an “ongoing” basis, the person said.

If confirmed, this would be the first time Trump’s campaign has been ordered to turn over information to Mueller’s investigation, even if subpoena has not – for now – compelled any officials to testify before  Mueller’s grand jury.

According to Citi, and a handful of other desks,the news of the report is what initially sent the USDJPY below 113, at which point stop loss selling accelerated and has seen the pair tumble to 112.50 at last check. 

While it took the other major currencies a while to catch on, the dollar eventually did selloff across the board, with cable and EUR leading the AUD and kiwi.  Meanwhile, the Korean won has surged, sending the USDKRW below 1,100, ignoring the latest jawboning and verbal intervention from Korean central bankers.

Still, not everyone is convinced and Citi for one, thinks the sell-off in US assets has been exaggerated due to diminished liquidity conditions and stop runs, especially since the news that Mueller issued a subpoena “doesn’t really have any implications for markets.”

Others, such as Westpac’s FX strategist Sean Callow, agree: “USD/JPY’s apparent fatigue is consistent with a speculative market already very short yen”he said, adding that “USD/JPY seems to have already factored in not only a Fed hike in December but some form of tax cut package as well.”

Furthermore, while the subpoena news may seem surprising, Citi’s Ding notes that “we already know that the investigation is ongoing and links between Russia and the Trump campaign are under scrutiny”, in other words the WSJ report was to be expected, even if the market appears to be overplaying it for the time being.

In any case, at least for now the mood is one of risk off, and in addition to the dollar, Nikkei, yields and US futures all heavy, Chinese stocks are also down with the Shanghai Comp -0.7% lower, although that may be more a function of the sharp reversal in PBOC liquidity injections, because after yesterday’s gargantuan 310Bn net reverse repo – and 810Bn net this week – today’s 10Bn liquidity drain once again prompted fears that the PBOC just may be serious about the deleveraging after all.


Options Traders Furiously BFTD!

Via Dana Lyons' Tumblr,

Despite the down day yesterday, one indicator from the equity options market recorded a massive spike in bullishness.

We like to track metrics from the various stock options exchanges as a measure of stock market sentiment. Generally, when too many calls are being bought versus puts, it is a warning of overheated bullishness, and when put volume becomes extreme relative to calls, it can be a sign of excessive fear. One particular indicator we used to track closely was the International Securities Exchange’s Call/Put Ratio on equity options (ISEE). For years, the ISEE was particularly helpful in signaling bullish or bearish extremes. We’re not sure what changed, however, in recent years the indicator has been of little to no value in that regard (in our assessment). We do still continue to monitor it, though, just in case it gives readings that raise our antennae. Yesterday’s reading did.

In the past, ISEE readings above 200, i.e., 2 calls bought per every put, have arguably been considered excessively bullish. There have not been nearly as many of these readings in recent years, so yesterday’s number was alarming to say the least. At a reading of 334, it was the highest ISEE recorded in 5 and a half years – and just the 10th ever above 300 since its 2006 inception.

Now, given the fact that we haven’t seen any ISEE readings close to this level in several years, it is possible that this figure was skewed irregularly by activity in a particular stock or stocks. If that’s the case, it may not be a true reflection of trader sentiment, in this case excessively bullish.

However, if we can take this ISEE figure at face value, there are a few potentially concerning aspects to it. First off, as the reading came on a solidly down day in the equity market, it would be concerning that traders are a little too comfortable B.T.D., aka, Buying The Dip. To us, that would be a telltale sign of complacency and a warning that more serious losses may be in store in the market to rid traders of said complacency.

The other concern, obviously, is the sheer magnitude of the reading and what has occurred following similar readings in the past. Again, there have been 9 other readings over 300, all occurring between 2010 and 2012. As the chart shows, a few readings occurred almost precisely at intermediate-term tops, e.g., prior to the Flash Crash in 2010, April 2011 and March 2012. The others occurred during the rally in late 2010 to early 2011, building to the 2011 top.

So, *if* this ISEE reading is to be taken at face value, it is not necessarily a death knell for the rally. But it would suggest that if an intermediate-term top was not at hand, then any further upside may be limited and temporary.

Then again, if the reading is a fluke, long live B.T.D.

*  *  *

If you’re interested in the “all-access” version of our charts and research, please check out The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering that we may well be entering an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!


Comparing Digital Metals


Comparing Digital Metals

Written by Craig Hemke, TF Metals Report and Sprott Money News 



Comparing Digital Metals - Craig Hemke


With total Comex silver open interest near the 200,000 contract level, we thought it would be enlightening to once again discuss the total volume of physical mine supply versus digital metal supply on this futures exchange.


We’ve written on countless occasions about Comex alchemy and the fraud of digital metal. As a refresher, you might review both of these links before we continue:





Today, we just thought we should remind you of the scale and scope of the fraud, particularly as it relates to silver. Again, under this current fractional reserve and derivative pricing scheme, price is “discovered” through the trading of derivative contracts, the supply of which is controlled by The Bullion Banks. These same banks are then responsible for managing and delivering physical metal at the digitally-derived price.


Currently, the total open interest (supply of contracts) in Comex silver is 199,899. For the sake of simplicity, let’s round up and call it 200,000. At 5,000 ounces per contract, this represents 1,000,000,000 ounces of digital silver. That’s a lot…especially when you consider that Keith Neumeyer told us last week that the world is on pace to mine about 800,000,000 ounces in 2017.


If we divide 1,000,000,000 digital ounces by 800,000,000 ounces of annual production, we find that total Comex silver open interest represents 125% of global mine supply. Is this a lot? Is this extreme? Is this evidence of a gross distortion of the price discovery process? Perhaps we should consider some of the other “metals” traded on Comex for perspective.


Let’s start with Comex gold. How does Comex open interest compare? Well, the world is projected to mine about 2,800 metric tonnes this year or about 90,000,000 ounces of gold. With each Comex contract representing 100 ounces, the current total OI of 533,054 contracts equals 53,305,400 ounces or about 59% of total mine supply.


And what about platinum? A Comex contract represents 50 ounces of platinum and there are currently 78,974 of them floating around. This represents 3,948,700 ounces of digital platinum. And how much platinum does the world mine every year? About 180 metric tonnes or roughly 5.8 million ounces. So here the Comex open interest equates to about 69% of mine supply.


Lastly, and just for fun, you might consider that total Comex copper open interest is 283,153 contracts. Each contract represents 25,000 pounds of copper. This yields a total of just over 7 billion pounds of copper. That may sound like a lot until you consider that the world produces about 40 billion pounds annually. So, the Comex copper open interest represents only 18% of total mine supply.


Do you see a little bit of disparity here??? What would be the paper price of silver if open interest was cut in half to the level of gold and platinum? What would be the paper price if OI was reduced by 85% to the relative level of copper? And you wonder why we call the Bankers “criminals” and “thieves”, and why we call the Comex a “den of vipers” while using the terms “fraud” “scam” and “sham”.


One day this will all collapse as true physical demand simply overwhelms The Bankers and their fraudulent paper derivative pricing scheme. Recognizing this certainty, your best strategy continues to be the gradual accumulation of real, physical metal. When the demise of The Bullion Bankers finally comes, the
price of silver derived exclusively through the trading of actual metal will certainly not be $17 per ounce.



Questions or comments about this article? Leave your thoughts HERE.






Comparing Digital Metals

Written by Craig Hemke, TF Metals Report and Sprott Money News 



Stocks Sink On Tax Trouble As Yield Curve Carnage Continues

It's been a while…


The S&P 500 and USDJPY were utterly inseparable today…


Futures show the swings better once again…with the late day fade on Senator Johnson…


And while stocks tried their best to 'get back to even' – they failed… Another day, another BTFD parade…


VIX topped 14.5 today briefly… then was ripped lower into the european close… then towards the close at Senator Johnson said NO on the tax bill, markets weakened once again…


Financials entirely ignored the collapse in the yield curve…


High yield bond ETFs plunged today – the most in 3 months at one point – but then rallied back to unchanged…


Perhaps it was the oversold signal?


High yield bond risk surged above 400bps for the first time in 3 months…


With quite notably different short-interest…


High Yield Bond implied vol has moved notably more than equity implied vol for now…


The mixed picture across the Treasury complex is extremely evident this week…


The yield curve just keeps collapsing… 5s30s plunged to a 73bps handle today – flattest since Nov 2007


Even as 10Y spec longs have been cut…


But the Aggregate – 10y-normalized – positioning across the entire Treasury Futures complex is notably short still…


The Dollar Index v-shape recovered after this morning's economic data dump…


We do note that Senator Johnson stating he would vote against the tax bill sent the dollar lower…


Overnight saw Chinese (industrial) commodities plunge…


WTI/RBOB ended the day lower but bounced off post-DOE lows…


Gold and Silver ended the day lower as the dollar surged after Europe closed…

Finally, there's this…


But there's more… this won the internet today…


S&P Breaks Longest Period Of Calm In 52 Years As Yield Curve Carnage Continues

The S&P 500 fell 0.55% today – that is the first drop of more than 0.5% since September 5th – 50 days ago – breaking a streak of un-losing days that stretches back to 1965, according to WSJ.


It's been a while…


The S&P 500 and USDJPY were utterly inseparable today…


Futures show the swings better once again…with the late day fade on Senator Johnson…


And while stocks tried their best to 'get back to even' – they failed… Another day, another BTFD parade…


VIX topped 14.5 today briefly… then was ripped lower into the european close… then towards the close at Senator Johnson said NO on the tax bill, markets weakened once again…


Financials entirely ignored the collapse in the yield curve…


High yield bond ETFs plunged today – the most in 3 months at one point – but then rallied back to unchanged…


Perhaps it was the oversold signal?


High yield bond risk surged above 400bps for the first time in 3 months…


With quite notably different short-interest…


High Yield Bond implied vol has moved notably more than equity implied vol for now…


The mixed picture across the Treasury complex is extremely evident this week…


The yield curve just keeps collapsing… 5s30s plunged to a 73bps handle today – flattest since Nov 2007


Even as 10Y spec longs have been cut…


But the Aggregate – 10y-normalized – positioning across the entire Treasury Futures complex is notably short still…


The Dollar Index v-shape recovered after this morning's economic data dump…


We do note that Senator Johnson stating he would vote against the tax bill sent the dollar lower…


Overnight saw Chinese (industrial) commodities plunge…


WTI/RBOB ended the day lower but bounced off post-DOE lows…


Gold and Silver ended the day lower as the dollar surged after Europe closed…

Finally, there's this…


But there's more… this won the internet today…


Why We’re Buying Physical Gold with a $1700 Target

originally on marketslant.com

For What it is Worth: We are buying Gold in our small family fund. This is a trade, not an investment. Potentially a much longer term trade for us than normal, possibly a 12 month hold as opposed to our 3 day positions. We are buying physical in quantities that will not need to be sold if we are wrong, thus no leverage. We will also be swing trading gold with an upward bias as our indicators dictate below $1260 or above $1306.

Target  picking is risky in an asset whose value is largely based on sentiment and prone to being “jawboned” into its proper place. But we believe for various reasons that if Gold does not pierce $1260 spot, its chances of a rally topping between $1450 and $1700 are strong over the next 12-18 months. The wide target range reflects the emotional factor in Gold’s behavior far outweighing supply, production costs, and its lack of fundamentals to measure using tools like EBITDA, PE, and cash flows. And our own analysis is corroborated from several different disciplines from whom we did not seek out to rationalize. It’s a trade, that’s all. But it’s a very good and very rare risk reward trade. it has set up right now. Further, it will either be violently and decisively confirmed (or negated) above $1306 or below $1260.

Why are we sharing this? That same question should be asked of Ray Dalio, Jeff Gundlach and others who announce they are bullish on Gold after they have  bought. Our own position is not relevant to the market overall and we do not need to market our tiny positions to create an exit strategy a la George Soros.  The premise for the trade happens so rarely its worth writing about, if for no other reason as an exercise in outsourcing our self-discipline on the trade. 

Vince Lanci for SKG


Here is how  we came to be this way.

Step 1: Volatility is Coiling

When trading short term periods, intraday and intraweek, we use a volatility system for alerts to incipient movement. We risk 1 to make 2 and move  on when wrong. It works about 50% of the time. it is net profitable. And best of all, positions that are in limbo are closed expeditiously. This is after all a volatility system. No vol, no position. It’s been cited here many times in the past. When it is right, it is very right. when it is wrong, you are out. Past posts and a 25 year track record of use bear this out from our active days.  The bottom of this post goes into more detail on its use.

What we never did at Echobay or its predecessor fund CIS Energy, was use it on long term charts. We certainly looked at them, but only for bias in shorter term trades.  Last month we took a serious look at our VBS algorithm on a monthly chart. Here is what we found:

Updated from : Gold Macro Analysis: A November to Remember

Gold has a  tremendous risk reward setting up above $1306 or below $1260….. which way from there is not known but can be handicapped once either number is breached

for a nexplanation of VBS see bottom Appendix

Step 2: How Equity Funds Play Gold

Portfolio managers at large equity funds who have contributed here anonymously use systems that advise them when being in cash as opposed to long stocks is prudent. What is also known is that funds like these  punt gold positions with their discretionary in-house money for fun.

They use similar systems for entry and exit, and never risk much in their positions. Gold is a hobby to these guys. As a result, they like to buy and walk away with long term trade orientations and firm stops. This means using long  term moving averages to avoid noise. We know this is true.  And here is an example of how that type of positions is implemented:

 In a recent interview a vocal critic of the Gold industry explained why he was buying Gold

…Gold is poised to close above its 12-month moving average for the second straight month. Going back to 1970, the average monthly return for gold following a close above the 12-month moving average is 1.47%. The average monthly return following a close below the 12-month moving average is -0.15%.

If you used the simplest of trend-following methods, investing in gold when it was above its 12-month moving average, and going to cash when it is below, the results would have been far better than just buying and holding gold. He continues:

The chart below shows when you would have been invested in gold and when you would have been out. Granted, prior to GLD, this could only have been done with futures contracts, or gold bullion, with the former adding a degree of leverage that I would not have been comfortable with, and the latter adding a degree of paranoia that also would have made me uncomfortable.

Full post : Vocal Critic Explains Why He is Buying Gold

About Physical vs. ETF: While we agree with the rationale behind GLD vs futures if you are trading and not investing, we feel for multiple reasons the physical gold market is going to open up and become a serious competitor to ETF allocations within 12 months. Specifically, blockchain products are coming,  and if properly implemented as a pipeline, owning physical gold not held in trust by a GLD custodian will be as easy as clicking a mouse. You will buy and sell physical Gold that will be yours and verified via the blockchain system.

So for us, physical gold now has the benefit of increased  liquidity on the horizon, which means increased transactions and exposure. Which ultimately means decentralization of the Gold market from a few large firms to grass roots stackers, owners, and value preservers. We view emerging technologies as putting physical assets in a position to  have their true value unlocked. Whether that be the tea farmer in India who can’t currently get a loan on his land due to government rules, to Silver whose value is somewhat disconnected from its  price. The effect will not be unlike when a private company goes public. Accessibility and liquidity creates safety and increases demand. Owning physical metals is like owning a beneficiary of technology down the road.

Monthly Chart Through July 2017 using the 12 Month MA described above


Step 3: Optimizing the Simple 12 month MA Tool

by optimizing the MA with one factor we back tested greater successes when in trades. Conversely, we were also in less trades. On balance it was a wash. But right now the employed filter says the 12 Month MA has bigger upside than the average if profitable at all. A rare chance to buy close to the level the fund punters did with a statistical chance of greater profits than the  1.47% monthly average  generated by the original backtest.

Updated and Optimized by the Author


The chart below shows the hypothetical results from each of the 30 exits following an entry (going back to 1970). Using these rules would have resulted in a loss two-thirds of the time. But as you can see, the losses have been relatively shallow, not exceeding 10%, while the gains have been good to extraordinary.

Step 4: Using VBS for Confirmation of Direction

Simply put: If we get a VBS signal trigger when $1306 trades, a decision must be made to add, sell, or hold based on the data that comes with the signal. If we get one on a $1260 print, the same must be assessed. 


Step 5: Actions

  1. We are buying Gold now based on the “Fund Finder” signal with a monthly stop out below the yellow line in that chart above.
  2. $1306- we will consider adding a shorter term amount in a rally if the monthly VBS is triggered higher
  3. $1260-  we will consider either adding physical, or selling paper Gold for swing trading purposes if the VBS is triggered lower.
  4. Per #1- we will close or hedge the first physical purchased on a monthly settlement below $1244 – the wide berth on monthly exits necessitates no leverage 


Bonus: Moor Analytics comes to a similar conclusion from a different perspective.

Moor Analytics: Gold Downside May Finally be Exhausted

Within the overall bearishness I noted that a possible area of exhaustion for this move down from 13624 comes in at 12732-644.  We basically held this, but with a $1.6 violation, and rallied to 13084 before rolling over and rejecting from it again (although this time down the 12628 was simply support, not exhaustion)

And Michael’s most recent weekly report of Nov. 10th

Via Moor Analytics:

I would note that we broke above a well-formed macro line in the week of 8/7 that came in at 12629. The
break above here projects this upward $183 minimum, $501 (+) maximum—the maximum to be attained likely within 9-12
months. This line comes in at 12357 today. I am late to the game on this, but we were only $18 from the original breakout
when I mentioned this, and have a lot of room to go in the projection.




What is VBS?

  • Volatility Based Risk Reward Generator

+ Originally developed as an alert to when the risk of being short implied volatility is larger than being long it, and vice-versa
+ It is a probability model that handicaps risk reward
+ As a by-product of its original purpose, it gives risk/reward scenarios in market direction. 
+ Due to its accuracy in predicting volatility expansion, directional applications are right or wrong quickly and is very useful in efficient use of capital


How VBS Works

  • Time is precious, Price is noisy, Volatility is less so.

+Volatility is less noisy than price, therefore more reliable as an indicator. 
+Volatility cycles more cleanly and  can be seen to “inhale and exhale” when viewed graphically with Bollinger Bands
+VBS is based on several relationships between historical and implied volatility  across different time frames
+ It can  be applied by traders on any time frame


VBS and Direction

  • It doesn’t predict price, only speed of movement

+It gives non-directional alerts and was initially developed for optimizing option portfolio risk.
+While not predictive directionally, VBS gives as a by-product excellent risk-reward setups for directional plays


VBS Process

  • Radar, Alert, Trigger, Entry, Exit
  1. Radar- VBS generates 2 prices, one above and one below current prices for a “breakout” in market volatility 
  2. Alert- One of the prices is breached and closes its bar/ candle beyond that price level.
  3. Trigger- Real volatility will expand
    • Market direction does not have to continue in the direction the price in #1 was broken
    • volatility based risk- reward prices are generated for directional use. I.E. Risk 1 to make 2
  4. Entry- using the  VBS risk/ reward generated levels, a decision is made to either go with the directional trend, against it, or do nothing
    • The trigger gives 2 bites at the apple if the trader so desires.
    • In “first way, wrong way” scenarios reversal levels are generated (N.B.- our preference is to not play the reversal and have left money on the table in favor of the trauma of being “chopped up”. if compelling, we have used options to remain in the game on reversals)
  5. Exit- is either from a stop-out, a profit capture, or a time limit
    •  Stop-Loss- are generated by VBS and adhered to religiously. Profitable trades trail stops higher based on expanding volatility
    • Profits- exits can be subjective, we prefer taking 90% of position at target and leaving a tail if the VBS is not signalling Vol is overbought
    • Time Exit- trades  that are neither profitable  nor stopped out are exited  in 3 bars/ candles. The signal is designed for quick confirmation / rejection of the trigger

Good Luck


Credit Crashes, VIX Tops 14 As Stocks Open Lower For 7th Straight Day

Something changed…

Futures were weaker overnight but dumped at the cash open…


As the collapse in HY credit accelerated… worst day for HYG in 3 months


HYG is now negative year-to-date…


With spreads crashing back abopve 400bps…


USDJPY was unable to save stocks and VIX is now topping 14…


VIX is starting to catch up to credit…


Equity markets are down at the open for the 7th straight day… Trannies (blue) and Small Caps (dark red) are the worst performers but Nasdaq (green) is plunging today…


It seems like the Saudi debacle broke something…


Or is this why?

Did the buyer of first and last resort just disappear?


Gold Bounces Off Key Technical Support On Massive Volume

The last 48 hours has been quite a chaotic one in precious metals markets with massive volumes of 'paper' gold flushed in and out of the futures markets. This morning – shortly after the US open failed to spark a panic-bid in stocks – gold futures bounced off their 200-day moving average on huge volume (around $4.5 billion notional) breaking above the 100DMA…

The last day or so has seen a plunge below the 100DMA (on 33,000 contracts – around $4.2 billion notional), then another flush to the 200DMA as Europe opened overnight (on 22,000 contracts – around $2.8 billion notional) and then shortly after the US equity open, a 35,000 contract ($4.5 billion notional) rip higher off the critical moving average…


Once again the moves in gold appear to mirror manipulation in USDJPY…


Silver is echoing Gold's moves today but yesterday's standalone move remains…


Bank Of America: “This Is A Clear Sign Of Irrational Exuberance”

The latest monthly Fund Manager Survey by Bank of America confirmed what recent market actions have already demonstrated, namely that, as BofA Chief Investment Strategist Michael Hartnett explained, there is a “big market conviction in Goldilocks leading to capitulation into risk assets” while at the same time sending Fund managers’ cash levels to a 4-year low, and pushing “risk-taking” to a new all-time high, surpassing both the dot com and the 2007 bubbles.

BofA’s takeaways from the survey, which polled a total of 206 panelists with $610 billion in AUM, will not come as a surprise to those who have been following this survey in recent months, and which reaffirms that while investors intimately realize how bubbly assets have become, they have no choice but to buy them.

The latest survey highlights:

It’s still all about FAANG froth: the biggest market conviction is in Goldilocks (+ price action in FAANG/BAT, Bitcoin) resulting in bull capitulation; A stunning chart shows that risk-taking among Fund Managers hit an all time high in the lastest period…

…  even as cash levels grind lower despite a record high number saying equities overvalued. Indeed, as the next chart demonstrates, while the number of respondents saying equities are overvalued is at 48% – a new record high – cash levels continue to fall. Coupled with the record high number of “risk takers”, Bank of America concludes that this is a sign of irrational exuberance.

Hartnett’s next observation is a carryover from the October Fund Manager Survey, namely the prevailing belief that the economy has entered a Goldilocks state. One month later, this view is now consensus.

Calling it “Consensilocks”: Hartnett notes that there is an all-time high Goldilocks expectations (56% expect “high growth, low inflation”); which contrasts with tumbling bear view of secular stagnation as macro backdrop (was 88% Feb’16, now 25%); US tax reform expected to sustain or inflate Goldilocks. Just as importantly, goldilocks is now the consensus view for the global economic outlook, while the “below-trend growth/ inflation” outlook fell 9ppt to 25%, the lowest since May 11 & a total reversal from Jun’16.

Since this is fundamentally a Hartnett report, a mention of the Icarus rally was inevitable, and sure enough, the chief strategist points out that markets find themselves “ever closer to the sun”.  The reason: cash levels among fund managers dropped to 4.4% in November from 4.7%, the lowest since Oct’13 & no longer a “buy signal” according to BofA’ proprietary indicator; FMS hedge fund equity exposure at 11-year high. And while BofA’s Bull & Bear indicator has risen to 7.2, but cash did not fall sharply enough – yet – to trigger 8.0 “sell” signal.

So if this is an “irrationally exuberant” bubble, the next step is clear, only the timing is uncertain. As such, BofA notes that the key correction catalysts are inflation & market structure, while the biggest FMS risk to EPS = wage inflation;

Meanwhile, there are rising fund manager concerns over “market structure” (seen as the 3rd biggest tail risk); strategies most likely to exacerbate correction: vol selling (32%), ETFs (28%), risk parity (16%).

* * *

Her are some of the more notable survey takeaways: crowded trades are #1 long Nasdaq, #2 short volatility, #3 long credit…

… while “Long Nasdaq” is now the most crowded trade for the 6th time this year…

… while allocation to global equities in November rose to net 49%, the highest since Apr’15, 

… Highest Japan OW in 2-years, an epic FMS UW in UK assets, and big Nov

As a result, for any wannabe “contrarian stagflationists” out there, here are the BofA recommended trades: long UK, short Eurozone; long pharma, short banks; long utilities, short tech.

Putting it all together, here is Hartnett’s conclusion: “Our conviction in winter post-tax reform risk asset correction hardens.


One Trader Warns “To Ignore All Around You Is Playing With Fire”

Something changed in the last week or so. Several markets that had hitherto been unstoppable examples of central bank recklessness dominating rational thinking suddenly 'stopped'. Of course this is seen by many asset-gatherers and commission-takers as 'a pause that refreshes' but what if it's not? As former fund manager Richard Breslow warns, "you'd better believe things can change on a dime," and we suspect they just did…

Via Bloomberg,

I freely admit that I have a lower threshold for finding things funny at 3 AM than later in the day. But after laughing out loud over this line in a story, I actually thought it may contain some real wisdom. Especially, because there are so many alternate explanations of why various asset prices trade where and in the fashion they do.

The Nikkei 225 posted its biggest drop in seven months, as investors found no new reasons to buy after driving benchmarks to their highest in a quarter century.

You are starting to hear more and more people writing the rest of this year off, because of course, volatility is low and nothing will change. Markets are locked into tight ranges that presumably will break out on cue come January. If I knew that, I’d be trading up a storm in late December.


So many people are off and running forecasting just what to expect next year. It’s not worth dwelling on the obvious folly of claiming to have a solid handle on what’s coming down the pike. Especially when it’s broken down by quarters.


I read one today that laid out what to expect the currencies of the CE3 nations to do by the end of 2019. Read that while thinking about what the world looked like two years ago.


Forecasts do have their legitimate purposes, and at this distance are reasonably harmless. But unless you are strictly in day-trading mode for the duration, don’t fool yourself that what you have on now can be set to auto-pilot through year-end.


Over the span of just a few days, the Nikkei has gone from impulsively moving higher to providing a perfect technical set-up for those wishing to short it while controlling their risk. Who could ask for anything more? And it didn’t take some cataclysmic event. My theory is that local traders may have quickly reconsidered all this buying in light of learning how much of it was from overseas. And just how good a Japanese stock-picker are you?


But it’s not just Japanese stocks. The whole mood of the day changed during the last half hour of the Japanese trading day. People are overly blase because they’ve gotten used to manic mood swings signifying nothing. However sometimes from little contagions, mighty maelstroms grow.


Chinese money supply and credit numbers were clear misses, today. Not a problem: special factors and claims of opacity will keep this at the level of interesting debate for now. With enormous influence on how all those forecasts will pan out.


Now, ask yourself, for more immediate import, what a beat or miss from Wednesday’s U.S. CPI has the potential to do? Is anyone watching the Middle-East? What does your portfolio look like at $45/barrel versus $70?


Commentators look at the surface numbers and declare everything in Europe to be great. Best numbers in many years. Utterly forgetting, not understanding, or not caring that some of the disaggregated numbers are dangerous.


Lost generations have voting patterns that don’t fit what top-line numbers would suggest. Next year’s problem? Maybe. But like the Nikkei today, things can change, and quickly.

But Breslow sums it up perfectly as slowly but surely reality is peeking its head out from under the central bank boot of repression:

We live in interesting times. Better as well as bad. To ignore all around you is playing with fire…


From “BTFD” To “Sell The Rip”: Global Stocks Slide, Nikkei Tumbles, Pound Plunges

S&P futures gave up early gains and were trading down -0.2%, as Donald Trump completes his first Asian tour and as pressure mounts on U.K. Prime Minister Theresa May, sending the pound plunging. European stocks fell, tracking many Asian shares as the Nikkei plunge accelerated.

In Europe, the Stoxx 600 fell as much as 0.4%, resuming last week’s pull-back. 17 of 19 industry groups fall, with financial services, retail and banking shares leading the selloff; the broad European index is down 2.7% from the intraday high hit on Nov. 1. The Stoxx 600 drop also triggered a key technical level, with the Stoxx 600 sliding below the 50-DMA for first time since early September, while the Stoxx 600 Bank index dropped below the 200 DMA following a downgrade of European banks by Kepler Cheuvreux.

“Nothing has changed in the past few weeks in terms of fundamentals. Investors are just looking for excuses to book some profits after what has been a pretty strong year,” Fabrice Masson, head of equities at BFT Investment Managers, told Bloomberg: “Some of the stocks have risen 50% since the start of the year. If their earnings are good but don’t show a clear acceleration in the trend, it’s tempting to just sell.”

Well, something did change: earlier in the session, investment bank Kepler downgraded European stocks to underweight, saying last week’s pull-back marks the point at which equity markets shift from “buy-on-dip” to “sell-on-strength.”

In equities, the big mover overnight was Japan, where shares slumped and the Nikkei 225 tumbled by 1.3%, down to 22,380.99, its biggest drop since April 6, as investors found no new reasons to buy after driving benchmarks to their highest in a quarter century just one week ago. The Nikkei is now down 4.3% from the intraday high on Nov. 9. The Topix index slid for a third day and the Nikkei 225 retreated for a fourth session following gains last week that pushed them to levels unseen since 1991 and 1992 respectively. A combination of solid quarterly results, positive economic data and massive foreign buying had driven the rally. U.S. shares fell Friday after U.S. consumer sentiment data unexpectedly dropped by the most in a year amid expectations for faster inflation and higher interest rates.

“Investors who were hoping for the market to stage a rebound during the day may have sold in disappointment towards the end” exacerbating the decline, said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. “With corporate results behind us and no major economic data in sight, the market is in for a tussle between those waiting to buy and those trying to take profits.” The benchmark indexes finished at the day’s lows as declines accelerated in the last half hour of trading. “Stock futures, which started declining in late afternoon, dragged down stocks and the leveraged funds,” said Mitsuo Shimizu, deputy general manager at Japan Asia Securities. Next Funds Nikkei 225 Leveraged Index ETF, an exchange traded fund product managed by Nomura Holdings Inc., fell 2.7% , the most since April 6. As investors and market observers try to gauge the extent of a downward correction in domestic equities that begun late last week, optimism has yet to fade among some participants.

“I don’t want to use the word ‘correction’ — it’s too tough to predict these markets,” Chris Ailman, chief investment officer of the California State Teachers’ Retirement System, said in a Bloomberg Television interview. Markets have gotten ahead of themselves and “I’ll call it a pause to refresh.” The yen is a concern, but the fund is very optimistic about Abenomics and in favor of Japan’s corporate governance overhauls, he added.

Elsewhere in Asia, equities also retreated, with industrial and material shares leading declines, after tax-cut pessimism weighed on U.S. equities Friday. The MSCI Asia Pacific Index declined 0.6% to 170.25, falling for a second trading day. Industrial stocks led losses, dropping the most in almost a year. Hyundai Heavy Industries Co. fell the most among South Korean shipyards after losing an offshore order to a Singapore rival. Iida Group Holdings Co. plunged by record in Tokyo after first-half results missed the company’s targets. “Uncertainties over U.S. tax cuts are prompting investors to take profit after big rallies in the last few weeks,” said Linus Yip, Hong Kong-based strategist at First Shanghai Securities.South Korea’s Kospi lost 0.5%. Hong Kong’s Hang Seng Index climbed 0.3% to close at its highest in almost a decade after reversing an earlier loss.

Curiously, the Shanghai Composite ignored the noise from its neighbors, and staged an impressive comeback, closing up 0.4% at 3,447, the highest level in 22 months, led by banks, steelmakers and chipmakers.

More interesting, however, was the plunge in China’s government bonds: the 10Y yield rose to the highest level in 3 years, while 10-yr treasury futures plunged 0.67%, the biggest since the end of October, as bond yields kept climbing and the curve kept inverting with the 5-year yield breaking 4% at one point this morning, while the 10-yr yield approaches 4%.

In FX, the big mover was the pound, which came under heavy selling pressure as the U.K.’s political and Brexit troubles mount (see below); the dollar inched modestly higher, shrugging off stronger Treasuries; Gilts pushed higher from the open, providing support as European bonds gained across the board; the euro and the yen steadied on gamma trading.

The UK Brexit drama reached new heights over the weekend. As discussed earlier, 40 Conservative MP’s are reportedly calling for UK PM May to step down. This number is 8 short of the amount required to trigger a leadership challenge Other sources also suggest that UK PM May is facing a rebellion from pro-European Tory MPs who have vowed to vote against her “crass” plans to enshrine the date the Britain leaves the European Union in law. Sources suggest that a menacing secret memo from Boris Johnson & Michael Gove to UK PM May dictating terms for a hard Brexit has triggered a new Cabinet rift. Britain must not cave in to EU demands for a bigger Brexit divorce bill after Brussels set a two-week deadline for the UK to concede, allies of Boris Johnson have warned. Brexit Secretary Davis stated that he still believes that a trade deal with the EU can be negotiated within the given timeframe. However, separately, Chief EU Brexit Negotiator Barnier noted that the EU is preparing for possible collapse of Brexit talks. 

The U.K. data won’t be the only numbers on investors’ minds. U.S. inflation and growth numbers are also on the docket, and they could be key to the Federal Reserve’s determination to lift rates next month. Talks on tax legislation may also play into market thinking; pessimism over the likelihood of successful reforms helped drag global equities down from this month’s record high late last week. Measures of equity-market volatility have risen, albeit from low levels.

Over in Catalonia, Spain PM Rajoy visited the region for the first time since the government retook control. He called on “the silent or silenced majority” voters that oppose secessionism to “convert its voices into votes” in the upcoming 21 December regional election. Further, he noted “it’s urgent to return a sense of normality to Catalonia” and that he “ask all companies that have worked in Catalonia not to leave”.

In rates, the yield on 10Y TSY dropped two bps to 2.37%, the largest drop in more than a week. Germany’s 10Y yield fell two basis points to 0.39 percent, also the biggest fall in a week. Britain’s 10Y gilt fell three basis points to 1.309 percent.

In commodities, gold and most industrial metals rose, and West Texas oil dropped below $57 a barrel.

Market Snapshot

  • S&P 500 futures down 0.1% to 2,578.20
  • MXAP down 0.6% to 170.26
  • MXAPJ down 0.3% to 558.68
  • Nikkei down 1.3% to 22,380.99
  • Topix down 0.9% to 1,783.49
  • Hang Seng Index up 0.2% to 29,182.18
  • Shanghai Composite up 0.4% to 3,447.84
  • Sensex down 0.8% to 33,061.20
  • Australia S&P/ASX 200 down 0.1% to 6,021.77
  • Kospi down 0.5% to 2,530.35
  • STOXX Europe 600 down 0.4% to 387.11
  • German 10Y yield fell 2.2 bps to 0.388%
  • Euro down 0.1% to $1.1649
  • Brent Futures down 0.1% to $63.43/bbl
  • Italian 10Y yield rose 3.0 bps to 1.58%
  • Spanish 10Y yield fell 2.4 bps to 1.552%
  • Gold spot up 0.3% to $1,278.27
  • U.S. Dollar Index up 0.2% to 94.58

Top Overnight News

  • Trump attends two days of meetings on regional security affairs hosted by the Association of Southeast Asian Nations before heading home
  • Sterling fell for the first time in three days; May has a bad start to the week following a Sunday Times report saying 40 of her own Conservative lawmakers have agreed to sign a letter of no confidence in her, nearly enough to trigger a leadership challenge, just days after the EU gave the U.K. two weeks to make “clarifications” so Brexit talks can advance
  • The U.K. Labour Party offered May a cross-party Brexit deal saying she’s lacking the support within her Conservative Party to deliver the Brexit she aims for
  • AT&T’s Merger Fight Is Said to Head Toward Thanksgiving Showdown
  • China Credit Growth Trails Estimates as Deleveraging Prioritized
  • Tesla Model 3 Depositors Staying Put as Wait in Line Lengthens
  • Noble Group Is Said to Lose Key Bank Prop as DBS Cuts Loans
  • Trump Hails ‘Great’ Ties With Duterte, Skirts Human Rights
  • Trump Is Shattering His Own Tweet Records With Non-Stop Barrage
  • Russian President Vladimir Putin meets Turkish counterpart Recep Tayyip Erdogan in Sochi, Russia
  • It prompted the opposition Labour Party to question her ability to deliver the Brexit transition period she’s proposed
  • Fed Bank of Philadelphia President Harker said he’s looking for another rate increase this year and the balance sheet unwind will be “boring”
  • “With a labor market this tight, inflation is likely to reassert itself at some point,” he says in text of speech in Tokyo
  • There’s been a marked turnaround in Europe’s economy. The 19-nation euro-zone bloc is already enjoying the strongest growth in a decade; economists at Credit Suisse Group AG and Oxford Economics are declaring that it’s heading toward a golden period of low- inflationary expansion
  • ECB Vice President Constancio said on Monday the recovery was broad-based, robust and resilient

Asian indices were mixed, with no fresh catalyst for a decisive move. Japan’s Nikkei 225 (-0.1%) continued to edge away from the multi decade highs set last week. Elsewhere Australia’s ASX (-0.1%) ebbed lower, while China’s Shanghai Comp. (+0.4%) and Hong Kong’s Hang Seng (+0.2%) tiptoed higher supported by a record breaking Singles’ Day event at the end of last week. Fixed income dealing was rangebound with Treasuries edging away from worst levels in a modest bull flattening move, despite FOMC voter Harker reiterating that he had pencilled in a December hike and three further hikes in 2018, inflation dependent. JGB’s moved lower as the BoJ refrained from engaging in Rinban operations today, with the long end experiencing a degree of mild underperformance. PBoC sets the CNY mid-point at 6.6347 vs. Prev. 6.6282. RBA Deputy Governor Debelle said that there is a risk that wages will stay lower for longer, although he did concede that some pockets of the economy are exhibiting wage pressure, and that he expects the recent uptick investment to last a while.

Top Asian News

  • Alibaba’s Rise Creates 10 Billionaires Not Named Jack Ma
  • Widening Citizenship Fiasco Threatens Aussie Confidence
  • Hong Kong Stocks Rise to 10-Year High as AAC Tech and AIA Jump
  • Noble Group Shares Extend Slump to 16% as DBS Said to Cut Loans

European bourses have kicked the week off modestly higher/flat (Eurostoxx 50 +0.1%) with outperformance in the FTSE 100 amid the softer GBP. In terms of sector specific moves, health care names have seen a modest bout of outperformance with Novartis at the top of the SMI following a positive drug update. Elsewhere, financial names underperform after Italian banks have seen little benefit from news on Friday that ECB can only impose capital requirements on banks to provide for bad loans on a case-by-case basis. Bunds and Gilts have slowly extended their respective recoveries from last Friday’s closes and intraday lows, the former finding traction when intraday tech support at 162.18 held, and gathering a bit of momentum when 162.34 (resistance and 50% retrace of the previous session sell-off) was surpassed. The next upside objective on some charts is the 162.50-56 area vs a  162.49 high so far, and if that is achieved then 162.73 will close a gap. Market contacts suggest that longs may not get twitchy unless Friday’s 162.13 low is breached. The 10 year UK debt future has traded up to 124.66 for a  35 tick gain on the day, and aside from short covering after the pre-weekend there has been plenty of incentive for bulls to step back in on the latest PM May/Government turmoil. US Treasuries also stabilising following recent bear-steepening that was deemed to be at least partly due to re-positioning (ie flatteners unwound).

Top European News

  • Ultra Electronics Drags Defense Stocks on CEO Ouster, Forecast
  • Four in 10 London Homesellers Cutting Prices in Tough Market
  • U.K. Labour Says May Lacks Power to Deliver Brexit Transition
  • European Stocks Downgraded, Seen as Vulnerable Zone at Kepler

In FX markets, GBP has been the main mover overnight with pressure mounting on UK PM May amidst reports of a rising rebellion within the Conservative Party ranks. Cable has now retreated through 1.3100 and bears will be targeting the post-BoE rate hike low of 1.3040, if 1.3050 is breached on the downside (reportedly an objective for one major bank). Elsewhere, the EUR is firmer vs the Greenback as the pair consolidates recent gains above 1.1650, but a confirmed topside break of the 1.1550-1.1170 range only seen if 1.1690 (21 DMA) near term chart resistance is breached. Comments from ECB’s Constancio this morning have come in on the dovish side, stating that “Much-feared inflationary pressures have not materialised, nor can they be foreseen in the immediate future”. AUD is currently capped below 0.7700 after dovish or bearish on balance comments from RBA deputy Governor Debelle (wages to remain low for some time).

In energy markets, WTI and Brent crude futures trade modestly lower with reports of an earthquake in Iraq and tensions in the Gulf
region ultimately doing little for oil prices. Additionally, press reports from over the weekend suggested that the Saudi King has no
plans to step down while the Iraqi oil minister has ordered an acceleration of repair works at the Bai Hasan and Avana oilfields near
Kirkuk; exports remain at a halt. In metals, gold prices have ticked higher in recent trade in a mild retracement of Friday’s losses.
Elsewhere, Chinese steel rebar futures were supported overnight amid output reductions in some of the nation’s lager steelmaking
cities. Finally, Chinese iron ore demand is forecast to fall by 6mln tonnes in November as China plans to curb steel production
during the winter to meet air pollution targets, according to the CISA (China Steel & Iron Association)
Oman Oil Minister says does not believe there will be deeper production cuts. (Newswires)
The Iraqi oil minister has ordered an acceleration of repair works at the Bai Hasan and Avana oilfields near Kirkuk. However,
exports remain at a halt

US Event Calendar

  • Nov. 13-Nov. 17: MBA Mortgage Foreclosures, prior 1.29%
  • Nov. 13- Nov. 17: Mortgage Delinquencies, prior 4.24%
  • 2pm: Monthly Budget Statement, est. $58.0b deficit, prior $45.8b deficit

DB’s Jim Reid concludes the overnight wrap

It’s almost a pleasure to get back to work to see what happens next after a fascinating last couple of days for markets (ok it’s all relative). Although 2016 marked a turning point for our structural view on rates and inflation (higher) due to populism (more fiscal), peak QE, demographics (peak labour supply around middle of this decade), and perhaps peak regulation, we must admit that the dovish taper from the ECB over two weeks ago made us wonder whether the next leg to our trade might delayed for a few months. We still felt the unfunded US tax cut was under-priced by markets which was still the main avenue for higher yields. However up until Wednesday evening everything was becalmed – equities continued to hit new record or multi-year highs, bonds were moving towards multi-month lows in yields and volatility was low again with the VIX back below 10 and the MOVE index (Treasury vol) back down around all-time lows. Then Thursday started with a wild (in today’s terms) swing in the Nikkei and we then saw a rare simultaneous sell-off in equities, rates and spreads.

Just for ease, below we’ll detail the 2-day sell off in a number of assets with Friday’s move in brackets. All bond market moves are 10yr yields. USTs +6.4bp (+5.7bp), Bunds +8.4bp (+3.5bp), Gilts +11.7bp (+7.9bp) and BTPs +9.9bp (+3bp). In equities, DAX -1.91% (-0.42%), CAC -1.66% (-0.50%), FTSE -1.28% (-0.68%), FTSE-MIB -1.18% (-0.36%), and the Bovespa -2.96% (-1.05%). In credit, Crossover +10.6bp (+1.4bp) and CDX HY +8.2bp (+1.1bp).
Obviously these moves are still relatively small in the greater scheme of things and only bring us back to levels days before rather than months before in most indices (HY US ETFs an exception as back to March levels) but the suddenness of the move without warning or catalyst has provoked a lot of attention. The blame has been placed on the following factors, none of which fully explain the reversal but are worth highlighting. Weak EMFX and (US) HY over the last few weeks, continuous flattening of global yield curves since the ECB meeting, difficulties in the tax reform plan, and Saudi tensions from last weekend and the associated rise in Oil that this has encouraged.

Indeed Oil is up 9.3% over the last three weeks and up 30.4% since the lows in June. Maybe with this rise in Oil, 10 year Bunds shouldn’t be flirting with 30bps as they did on Wednesday regardless of the ECB. Given these moves, this week’s inflation numbers are the perfect opportunity for things to calm down or volatility to continue to pick up. The most significant is the October CPI report in the US on Wednesday. The consensus is for a small +0.1% mom lift in the headline and +0.2% mom lift in the core. Remember though that the latter has missed relative to market expectations in six out of the last seven months. We think we may see more positive surprises in 2018 but not necessarily yet. Also due this week will be final October CPI revisions for Germany and the UK tomorrow, France on Wednesday and the Euro area on Thursday. In the UK the older inflation measure RPI is expected to go above 4% for the first time since December 2011. Looking further back, since May 1992 we’ve only seen RPI above this level for 42 months (13.8% of the time) out of the last c25 years. Meanwhile even with the late week Gilt sell off, 10-year yields remain at a lowly 1.34%. Not a brilliant real return potential in our opinion!

So inflation is the big thing this week but we’ll also see Euroarea Q3 GDP tomorrow although no change from the +0.6% qoq flash print is expected. Also tomorrow China sees its monthly bulk activity numbers and US retail sales is out on Thursday. As you’ll see in the week ahead at the end its a packed week for central bank speakers with the highlight being tomorrow’s ECB policy panel discussion in Frankfurt which includes a star studded line up with the ECB’s Draghi, Fed’s Yellen, BoE’s Carney and BoJ’s Kuroda all participating. Elsewhere Mr Trump’s Asia tour comes to an end in the first half of the week where he will attend the East Asia Summit to discuss strategic political and security issues in the region and tomorrow Mrs May’s Brexit legislation is the subject of two days of examination in the House of Commons. The full day-by-day week ahead is available at the end and a reminder that our  new “Next Week… This Week” document from Friday includes all this and an easy to read cut-out and keep of all upcoming events.

Now on to the US tax plan, the House’s version of the tax bill is expected to go to a full House vote this week (either Thursday or Friday), while the Senate’s plans will begin its mark-up process today with an expectation for a full senate vote before 23 November. Over the weekend, there was more rhetoric across the spectrum. The House and Means Committee Chairman Brady noted he will not budge on certain things, noting that “I’m committed to” a compromise that would preserve the deduction for state and local proper taxes vs. the Senate’s plans which expect a full elimination. Elsewhere, President Trump’s top economic adviser Gary Cohn said he expects the tax bills go to a conference committee that reconciles differences between the House and Senate versions before returning a report to both chambers for final passage. He noted that the conferees “will decide what stays and what goes” and they’ll pick and choose the different parts that they think are important”. Indeed, it feels like both versions of the tax plans are opening gambits and the hard work begins when the bills are reconciled. Our US economist believes there is a decent chance that some version of tax reform can be achieved, but this is likely to be a Q1 event with potential stumbling blocks along the way.

In the UK, the Sunday Times reported that 40 Conservative MPs have agreed to sign a letter of no confidence in the UK PM, almost enough to trigger a leadership challenge (need eight more MPs). This morning, Sterling is down 0.56% against the USD and as mentioned earlier, PM May’s Brexit legislation will be debated in the House of Commons this week.

This morning in Asia, markets are mixed. The Nikkei (-0.68%), Kospi (-0.45%) and ASX 200 (-0.24%) are down modestly, while Hang Seng is up 0.17% as we type. Elsewhere, Bitcoin has dropped -10.21% this morning (c17% in two days), in part as Bloomberg reports that traders are buying its alternative instead (Bitcoin cash). Over in Japan, the October PPI was above expectations at 0.3% mom (vs. 0.1% expected) and 3.4% yoy (vs. 3.1% expected).

Now briefly recapping other markets performance on Friday. US bourses softened and posted its first down week since September (-0.21%) amid uncertainty over US tax reforms. The S&P (-0.09%) and Dow (-0.17%) fell slightlywhile Nasdaq was virtually flat. Within the S&P, modest gains in the consumer staples and telco sector were more than offset by losses from energy and healthcare names. The US dollar index dipped 0.06%, while Euro and Sterling gained 0.20% and 0.39% respectively. The VIX jumped 7.52% and was up 23.5% for the week at 11.29.

Despite the pull back in US equities last week, our global asset strategists remain bullish. They note the duration of the equity rally “without” a typical 3-5% pullback has been very unusual. Further the speed and the size of the current rally have not been unusual and that while multiples are high relative to their historical averages, they are in line with their historical drivers. Overall, they see S&P 500 EPS growth of 11% in 2018, supported by stable robust US growth, a pickup in global growth and assuming a range bound dollar. At 19.5x PE, they have an S&P target of 2850 for 2018 but expect more regular (3%-5%) pullbacks to resume next year. Refer to the link for more details.

Over in Catalonia, Spain PM Rajoy visited the region for the first time since the government retook control. He called on “the silent or silenced majority” voters that oppose secessionism to “convert its voices into votes” in the upcoming 21 December regional election. Further, he noted “it’s urgent to return a sense of normality to Catalonia” and that he “ask all companies that have worked in Catalonia not to leave”.

Back to China’s financial sector liberalisation measures announced back on Friday, including: i) foreign investors can own controlling stakes (51%) in local securities JVs, ii) removing restriction that foreign companies can only own less than 20% of a Chinese bank and iii) allowing foreign insurance companies to own up to 51% of local individual insurance company 3 years from now (100% in 5 yrs). Our China Chief economist notes that this is a big step toward opening up the service sector to the world and consistent with the message from the 19th Party Congress. They expect the reform will help to promote FDI inflows and offset some of the capital outflows. Refer to the link for more details.

Before we take a look at the calendar, we wrap up with other data releases from Friday. In the US, the November University of Michigan consumer confidence was lower than expectations at 97.8 (vs. 100.8). At the end of last week, the Atlanta Fed’s GDPNow estimate of 4Q GDP growth was 3.3% saar while the NY Fed’s Nowcast estimate sits at 3.2% saar.

In the UK, the macro data was above expectations. The September IP was 0.7% mom (vs. 0.3% expected) – the 6th consecutive month gain, leading to annual growth of 2.5% yoy (vs. 1.9% expected). Elsewhere, manufacturing production also beat at 0.7% mom (vs. 0.3% expected) and 2.7% yoy (vs. 2.4% expected). In France, the September IP slightly beat at 0.6% mom (vs. 0.5% expected) and 3.2% yoy (vs. 3.1% expected), but manufacturing production was lower than expected at 0.4% mom (vs. 0.8%) and 3.1% yoy (vs. 3.4% expected). Italy’s September IP also disappointed, at -1.3% mom (vs. -0.3% expected) and 2.4% yoy (vs. 4.8% expected).


Eric Peters: “We Are Investing As If 1987 Will Happen Tomorrow, Because It Will”

Excerpted from the latest weekend notes from One River Asset Management, courtesy of CIO, Eric Peters


People are no longer investing, they’re speculating,” said the CIO. “Is that wrong?” he asked, not waiting for an answer. “Depends on what you’re speculating in.”

Investors are implicitly worried about further price gains, they’re not really forecasting future fundamentals. “Investing is about estimating an asset’s fair value based on fundamentals, then forecasting what others will be willing to pay for those fundamentals.” But you can assign almost any value to the latter, and this means that for periods of time, fundamentals need not matter.

“There are a number of things that you’re absolutely meant to speculate in,” continued the same CIO. “It’s just that the universe of these opportunities is rather narrow relative to what people think it is.”

Paying a lot for everything is quite obviously foolish, but that’s where we are today. The only truly cheap asset class left is implied volatility. “People should be speculating in venture capital. Which is not to say that you can ignore price and value, but at least with venture capital you have a chance to make a lot of money.”

“Unfortunately, few people have access to venture opportunities,” explained the CIO. “Unlike decades past, new companies need very little capital to execute their business plans.” Years of regulation have discouraged smaller firms from going public. So the big platform companies gobble them up in private transactions.

“By owning Google and Facebook investors get access to innovation through acquisitions. Buying these big platforms is like buying closed-end venture capital funds. It’s one of the few ways to own a piece of the future.”


“We are investing as if 1987 will happen tomorrow, because it will,” said the CIO. “But we need to be long, or we’ll be out of business,” he explained, under pressure to perform. “So we construct option trades that are binary bets.” Which pay X profit if stocks rally, and cost Y if markets fall. No more and no less.

“What you do not want is a portfolio whose losses multiply depending on the severity of a decline.” That’s what most people have today. “At the last stage of the cycle, you want lots of binary bets. Many small wins. Before the big loss.”

Are we at the start or the end of the ‘Don’t know what I’m buying’ cycle?” asked the same CIO. “No one knows.” But we’re definitely within it.

“When their complex swaps drop 40%, and prime brokers demand more margin, investors will cry ‘It’s not possible!’ But anything is possible.” The prime brokers will hang up and stop them out.

“LTCM traded things they didn’t understand. They sold volatility swaps, which they thought were tethered to reality, subject to gravity. In theory, they are. But like many such things, they’re simply numbers on a screen.”