Fri, 27th November 2015

Anirudh Sethi Report


Archives of “futures contract” Tag

After Arresting Hundreds Of Stock Traders, China Cracks Down On “Malicious” Metals Sellers Next

The result of all these ridiculous interventions was two-fold: China effectively killed the market, as can be seen by the following chart of volume on China’s futures market, until recently the world’s biggest which overnight evaporated after China made it practically impossible to trade anything…

… and as a result of the PBOC being the last standing player, the Chinese “stock market” would now trade precisely as its central planners demanded it to. Too bad nobody else will participate.

But now that China has gotten its stock “market” under control, it was time to focus on a market that is far more important to China’s economy – that of commodities. After all, while several dozen million may have gotten very rich and then very poor over the summer, the implications of the Chinese stock bubble and subsequent burst were mostly contained. However, when it comes to plunging commodity prices, these have a far greater impact on both China, where fixed investment is about 50% of GDP, and as a result impact everyone, as well as the world.

And as we reported yesterday, China will soon commence “fixing” the commodity market (which has seen its worst collapse since 2008 in the past year) by engaging in what will be the first bailout of its domestic metals producers since 2009:

PIMCO says baseline view in markets is a very high probability of December liftoff

Futures markets are setting the probability of a December ‘lift off’ at 74%, and Pacific Investment Management Co. agrees a move is likely

The probability of a December hike was less than 30% recently as mid-October

But now, says PIMCO’s global strategic adviser Richard Clarida:

  • “The baseline view in markets and at Pimco has converged to a very high probability that — at last — the Fed begins the process of liftoff”

Adds Bloomberg, at the article:

  • The rising odds of a Fed shift in the futures market combined with the advance in short-maturity yields reflect a growing consensus among traders that the central bank is about to move

F&O volumes plunge after increase in size of minimum contract

Graphic: Ajay Negi/Mint

Volumes in the derivatives market have seen a sharp dip in November after the market regulator raised the bar for participation in the equity derivatives segment in an attempt to curb retail investor activity in this relatively high-risk segment.

The change, announced in July, came into effect in October end.

For the month of November so far, the average daily volumes on National Stock Exchange (NSE) have dropped sharply to 3.37 million contracts from 8.78 million contracts in October.

On BSE, the average daily volumes so far in November declined to 0.09 million shares from 0.41 million shares in the previous month.

The average daily volumes in derivatives trade in 2014 on BSE and NSE was 2.14 million contracts and 5.97 million contracts, respectively.

Derivatives trading in stocks and indices refer to the availability of futures and options (F&O) contracts linked to a particular stock or an index as the underlying measure.

On 13 July, the Securities and Exchange Board of India (Sebi) raised the minimum contract size in the equity derivatives segment to Rs.5 lakh from Rs.2 lakh, effective the day after the expiry of October contracts.

This was done due to fears that retail investors were becoming more active in this segment and could be put at risk.

Earlier, Sebi chief U.K. Sinha had cautioned that complex products such as derivatives should not be sold to uninformed investors who do not understand the risk in such products.

However, since charges for trading in the cash market are 8-10 times higher than charges imposed for trading in the deravative segment, the overall hit may be limited.

EURUSD shorts increase in the current week

Data from CFTC commitment of traders report as of the close on November 10

  • EUR shorts 143K vs short 134K previous
  • GBP shorts -16K vs flat last week (188 lots long)
  • JPY short 67K vs short 44k last week
  • CAD short 18K vs. short 19K last week
  • CHF short 9K vs short 7K last week
  • AUD short 53K vs short 39K last week
  • NZD long 6K vs long 7K last week

The biggest change was the JPY which saw shorts increase by 23K in the current week.

GBP which went from virtually flat (188 lots long last week) to short 16K in the current week – an increase of 16K short.

AUD shorts increased by 14K in the current week and the EUR saw shorts increase by 9K.

Gold Miners Index Down 30% Since 1993 Inception

If you wanted to own gold in the bad old days, there were only a handful of choices: You could take physical delivery (but if you needed any size, you would incur costs for storage and security); you could buy futures contracts, but they also incur steep expenses; or you could buy the gold miners, with their “proven reserves.”a

The change occurred when the SPDR Gold Shares Trust exchange-traded fund gave professional and amateur investors a fast, cheap and easy way to gain instant exposure to gold. Sure, the ETF has internal costs and an expense ratio of 40 basis points, but it is simple and clean and has far less hair on it than the miners did. Why bother investing in a company saddled with the overhead cost of running a mine and error-prone, overpaid management, when you could instantly buy a stake in gold without any of the complications?

Incidentally, in August 2011, the Gold ETF had assets of more than $77 billion, surpassing the S&P 500 ETF for about 11 seconds. GLD was, for a very short time, the world’s biggest exchange-traded fund, as the SPDR Gold Trust’s market capitalization rose to $76.7 billion and gold topped $1,880 an ounce. At the same time, SPY’s “capitalization” was a mere $74.4 billion. I wonder how many people caught the world’s biggest contrary signal (I noticed it way after the fact).

Speculative Positioning in the Forex & Crude Market

1. There were three significant (10k contracts or more) gross position adjustments among speculators in the futures market in the Commitment of Traders reporting week ending October 27. It covers the dovish ECB press conference and the Chinese rate cuts. The dollar rallied strongly against both the euro and yen. The bears piled into the short euro positions. The gross short position jumped 37.4k contracts to 176.3k. In percentage terms, it is the largest rise in gross short positions in two and a half years. The 20-week average gross short position is near 162k contracts.
2. The speculative position adjustment in the yen accounts for the other two significant adjustments. The gross longs were cut by a quarter, or 12.3k contracts, leaving 36.4k contracts. The gross shorts by a little more than 30%, or 18k contracts to 70.3k. Some participants apparently thought that the dovish ECB and PBOC rate cut increased the odds of further BOJ easing. The net short yen position jumped to almost 34k contracts from 3.3k the previous week.
3. In contrast to the euro and yen, where speculators reduced long exposure and added to shorts, speculators added to gross long dollar-bloc currencies and cut the shorts. The gross position adjustments among the dollar-bloc currencies were minor (average adjustment was 2k contracts).
4. While the net short euro and yen positions rose, among the dollar-bloc currency futures, the net short Australian and Canadian dollar positions were reduced, while the net long New Zealand dollar position increased. The net short Canadian dollar position of 18.9k contracts is the smallest since late-June.

Merkel: Would be pleased if IMF included yuan in currency basket

Reuters with some comments from German Chancellor Merkel:

  • Would be pleased if IMF included China’s yuan in currency basket
  • Would support “very rapid” conclusion of EU-China investment treaty

More from Reuters:

  • China, Ggermany sign three-way deal on joint venture between Deutsche Boerse, Shanghai Stock Exchange, China Financial Futures exchange

Observations from the Speculative Positioning in the Forex Market

1.  There were two significant (10k contracts or more) gross currency adjustments among the speculators in the CFTC reporting week ending October 20.  The gross short euro position was reduced by 12.9k contracts to 138.9K.  The gross long yen position rose by 10.7k contracts to 48.7k.  
2.  There was a clear overall pattern among speculators. The gross long currency positions were extended among all eight of the currencies we track.   The gross short positions were largely trimmed.  There were two exceptions.  There was a 600k contract increase in gross short yen positions (to 52.4k contracts) and a 5.7k contract increase ( to 81.7k contracts) in gross short Australian dollar futures.
3.  The large speculative short position in the currency futures that was cited earlier this year as a factor restraining the bear market has been greatly reduced.  The net short euro position of  62.6k contracts is the smallest since July 2014.  The net short yen position of 3.6k contracts is the smallest since October 2012.  The speculative market is net long 7.5k sterling contracts, the most since September 2014.  The speculative market is also net long Swiss franc futures (600 contracts), and New Zealand dollar futures (3.8k contracts).
4.  The bulls increased their gross long euro exposure by 25% since the end of September to 76.3k contracts.  The gross short position of 138.9k contracts is half of the late-March peak and the smallest since July 2014.  
5.  The 48.7k gross long yen futures contracts by speculators matches the six month average.  The gross short position is 52.4k contracts, which is nearly a third of the size that prevailed in the middle of August.

Bad cure for a racing pulse

The pulse rate of a normal and healthy human body hovers between 60 and 100 beats per minute. There can be problems if it goes any higher — and a serious threat to life over 200 beats per minute. An analogy can be drawn with the present situation of the prices of pulses in India. Retail prices of all major pulses have crossed Rs 100/ kg. In the case of tur/ arhar (pigeon pea), they have crossed the double-century mark of Rs 200/ kg in several places. The continuation of such price-rise would sound the death knell for any political party in power. Evidently, the present government’s mission to bring down food inflation has faced a severe blow. The government has, in fact, tried to use a number of tools to tame the price-spike. It constituted a committee, invoked the Essential Commodities Act against traders and stockists (hoarders), imposed stocking limits on dal mills, large retailers, warehouses, etc, imported 7,000 tonnes of tur dal, banned exports, reduced the import duty to zero, and suspended futures and forwards trading. The result: Tur prices in markets like Rajkot, Bangalore, Puducherry and Chennai have touched Rs 200/ kg (and even higher) — an annual increase of 100, 163, 147 and 141 per cent, respectively. Urad is following the lead closely. There isn’t much relief in sight. Some respite, though, is foreseeable by mid-November, when the new crop will hit the markets.

In retrospect, these ineffective policy measures appear to be knee-jerk reactions more than calibrated responses of policymakers. Scapegoating “hoarders” and “speculators” might have been effective in the 1960s. But in today’s times, it is only evidence of a rather sloppy conceptual framework of policymakers. Who in the government is accountable for the present situation in pulses? Alarm bells rang out in early September about pulse production falling by more than two million tonnes (about 11 per cent) in 2014-15 over 2013-14. The effect of the 2015 drought on the major pulse-growing states — Maharashtra, Karnataka and Madhya Pradesh — meant that future supply pressures were near-certain. While traders had their ears to the ground, the complacency of government officials has resulted in the present situation. The time to act was then. Now, the economic damage to poor consumers and political harm to the government in power have been done. Interestingly, the bureaucracy, which should be accountable for tracking production and prices, and ensuring smooth inter-/ intra-year supplies, goes scot-free. But what went wrong? We discuss next, three basic issues/ questions. First, who is a hoarder?

Meet The New Generation Of Traders

Having spent the last 5 years of his trading career “in short option spreads and Biotech,” we are sure Tyler McCain and his Fed-fueled ilk are very well equipped to deal with whatever it is that The Fed has in store for the markets next…

Good luck Tyler.

Luckily, Tyler has corrected his initial Bio which showed his spreading options from the nursery…