The information available indicates a continued though somewhat weaker economic recovery and a slower increase in inflation rates compared with earlier expectations. More recently, renewed downside risks have emerged to the outlook for growth and inflation.
However, owing to sharp fluctuations in financial and commodity markets, the Governing Council judged it premature to conclude on whether these developments could have a lasting impact on the outlook for prices and on the achievement of a sustainable path of inflation towards our medium-term aim, or whether they should be considered to be mainly transitory.
On emerging markets
We expect the economic recovery to continue, albeit at a somewhat weaker pace than earlier expected, reflecting in particular the slowdown in emerging market economies, which is weighing on global growth and foreign demand for euro area exports.
The Indian economy has low global linkages, with largely intrinsic growth. However, the markets are linked: 51% of Nifty revenues are not in INR, and of the rest banks still have risky metal exposure. As flows reverse, the seller could be price insensitive, and stocks with highest rise in FII ownership of late could have an overhang.
Commodity prices changing trade and capital flows. Commodity prices are back to 2004 levels, due to both demand (China weakening earlier than expected), and improving supply. Oil, gas, iron ore, coal, and steel are among the worst affected. This is dramatically changing global trade (and thus capital) flows.
Current account surpluses are shifting from oil exporters to the likes of China, Japan and Germany. Current account deficits shrinking in India and the UK but expanding in exporters like Brazil and South Africa.
■ Affects capital flows and global growth. Earlier oil producers exported capital through SWFs. But their combined current account at current oil price swings by US$0.5 tn to a deficit of US$100 bn: flows from them may be reversing, not just slowing (likely explaining the redemption-type selling seen lately). Beneficiaries of lower oil prices do not have mechanisms yet to deploy their surpluses. Thus, demand in stressed economies must adjust through currencies (the canaries this crisis), which must fall to hurt domestic demand. Global nominal USD GDP growth could be weakest since 2001.
■ Avoid global exposure; high FII ownership an overhang. The Indian economy has low global linkages, with largely intrinsic growth. However, the markets are linked: 51% of Nifty revenues are not in INR, and of the rest banks still have risky metal exposure. As flows reverse, the seller could be price insensitive, and stocks with highest rise in FII ownership of late could have an overhang. We also avoid stocks exposed to global growth (e.g. commodities). We believe demand for Indian IT and healthcare may not be as badly impacted. We stay constructive on domestic-focused plays.
1. The CFTC reporting week ending August 25 saw large swings in currency prices and several significant (10k contracts or more) adjustments of speculative gross futures positions. The gross long euro and yen positions jumped 19.3k contracts (to 87.8k) and 14k (to 59.9k) respectively. The powerful short squeeze in the was reflected by a 37.1k contract decline in the speculative gross short position.
2. The gross short Australian dollar position jumped by 13.6k contracts to 111.0k, making it the second largest gross short position after the euro. The euro’s gross short position was trimmed by 7.3k contracts, leaving 153.9k still short. The gross short Mexican peso position soared by 18.4k contracts to 103.5k.
3. Although there were minor adjustments in the speculative gross sterling position, they were sufficient to switch the net position from short to long for the first time since September 2014. The bulls added 6k contracts to the gross long position, which now stands at 58.1k contracts. The bears trimmed the gross short position by 1.2k contracts, leaving 54.8k. The net long position stands at 3.3k contracts.
4. The general pattern was adding to longs and cutting shorts for the euro, yen, and sterling. Speculators added to gross short Canadian and Australian dollar positions and the Mexican peso. Speculators trimmed gross longs of these currencies, except for the Canadian dollar.
5. Given the subsequent price action over the August 26-28, we suspect that some of these new positions were unwound in the euro and yen. Sterling fall in the second half of last week warns that some of the late longs may have also been cut. Sentiment still appears overwhelmingly negative toward the dollar-bloc.
6. The net long US 10-year Treasury futures slipped to 1.3k contracts from 7.3k. Gross longs and shorts were cut. The bulls sold 58.4k contracts, leaving the gross long position at 395.2k contracts. The bears covered 52.4k gross short contracts, leaving 393.9k.
7. The net long speculative light sweet crude oil futures positions were pared by 5k contracts, leaving 215.6k. Given the large movement in prices, it is surprising to see how small of a position adjustment took place. The longs added 1k contracts, lifting the gross position to 474.2k contracts. The bears trimmed their gross position by 4k contracts, leaving 215.6k.
There are no maniacs at the Fed who want to crash the market. The Fed has the easiest ‘out’ of all time here. They hadn’t committed to a hike anyway and now the market has shown them what will happen if they turn off the easy-money taps.
Fed funds futures implied probabilities are still at a 22% chance of a hike but it should be zero.
At the same time, the PBOC has a tremendous amount of ammunition and I have little doubt they will use it.
Hubris: A foolish amount of pride or overconfidence. No matter how good of a trader you think you are, the market is always bigger. You will not win an argument with its price action no matter what.
Fear: Cutting winners short because of unwarranted fear eliminates all the big wins. Being afraid to take a good entry creates loss of a potential profit. Thorough trading methodology study is required to trade confidently.
Ego: The desire to be right more than the desire to make money leads to losing a lot of money. The ego causes traders to hold losers far too long. The best traders are slaves to the market’s price action.
Laziness: Seeking to be given trades instead of doing the work to develop a system leads to failure. Trades only have meaning when they are executed within a robust system complimented by discipline and risk management.
Greed: The greedier a new trader is, the higher the probability and speed at which they lose their whole trading account. There is significant risk in going for trades with big position sizes, because the losses can be huge if when wrong.
Money is made in the market through self-discipline and trade management. If a trader does not manage risk and position sizing, their winning trades are meaningless because they will eventually give it all back. Without overcoming the sins of hubris, fear, ego, laziness, and greed, a trader is unlikely to make it at a professional level.
One of the most flagrant “conventional wisdom” market lies is that if one is positioned net short, one is doomed to be crucified, margined out and left penniless, broke and homeless in this quote unquote market, which has been micromanaged by all central banks since 2009 as a confidence-boosting policy vehicle whose only purpose is to levitate higher while creating the wealth effect, ignoring reality, and failing at what used to be a market’s primary function: discounting the future.
So what is the truth?
As it turns out one of the best performing hedge funds in the past 4 years is neither a net-long, nor a market neutral, but Horseman Capital, which as of July is -54.2 net short, and has been short since the start of 2012.