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Wed, 24th May 2017

Anirudh Sethi Report

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Archives of “futures contract” Tag

How Hedge Funds Play The OPEC Deal Extension

We’ve had a good two-way crude oil market since the first of the year which has helped hold crude oil in a relatively narrow range as aggressive traders continue to play the long side, in anticipation of a balance between supply and demand.

This year began with an oversupplied crude oil market, but with a bullish tone set by OPEC when they decided to start reducing output in an effort to trim supply and stabilize prices. On paper, the idea seemed bullish. What they didn’t expect, however, was the surge in U.S. production that skewed their forecasts and timetables for global supply and demand to reach a balance.

For nearly six months, traders have been pelted with stories nearly every day telling them about OPEC supply cuts and increased U.S. production. The stories seem to have neutralized the markets to a point where crude oil prices have become range bound.

In order for a market to become range bound, some major market player has to be selling enough crude oil to stop a rally and some major market player has to be buying enough crude oil to stop the decline.

However, inside the trading range we’ve seen several pockets of volatility and these moves can only be blamed on the speculators and namely, the hedge funds.

If you’ve traded speculative markets, I’m sure you’ve noticed that markets come down faster than they go up. Essentially, this is because speculative buyers tend to be very careful about where they buy or enter the market, but when it’s time to sell, they don’t care what they pay to get out.

An Update for Forex ,Crude Oil -Positions

It was feast or famine in the adjustment of speculative positions in the currency futures market during the CFTC reporting period ending May 2. Speculators either made large adjustments or very small adjustments, and little in between.  
Speculators covered 17.7k previously sold euro contracts to reduce the gross short position 161.1k contracts. It has been reduced by around 46k contracts over the last few weeks.  The gross long position edged 1.6k contracts higher to 159.4k.  It has fallen by around 16k contracts in the past few weeks.  The net position was reduced primarily due to buying related to short-covering and now net short by 1.7k contracts, the least since June 2014.
Speculators liquidated 11.0k long yen futures contracts to 37.5k contracts.  The gross short speculative position fell to 68.0 contracts, a 7.4k decline.  The result was the net short yen position increased to 30.5k contracts from 26.9k. 
The Canadian dollar was very much in play.  Some bulls tried picking a bottom and added 14k contracts to the gross long position, which stood at 66.6k contracts at the end of the statement period.  The bears were still in control.  They added another 19.1k contracts to the gross short position.  It stands at 114.3k contracts, which is the most since at least 1993.  
It has been a rapid accumulation of gross short contracts.  It has doubled, for example, since the end of March.  The gross short position has increased for three weeks in a row and eight of the last nine.  Some of these late shorts are in weak hands.  The key reversal posted in spot before the weekend warns of their vulnerability.  This vulnerability is best understood by looking at gross positions, not net.  
 
Outside of a 9.6k contract reduction of the gross short sterling position, speculators did not make any other gross position adjustments of more than 5k contracts.  Nearly a third of the 16 gross positions we track were adjusted by less than one thousand contracts.  
Overall, speculators showed a penchant for reducing the gross short currency exposure.  The only exceptions were Mexican pesos and Canadian dollars.  There did not appear to be a clear pattern among the gross long position adjustments.  
The bears in the oil market pressed their advantage while some bulls bought into the weakness.  The bears added 50.6k contracts to their gross short position, lifting it to 257.5k contracts, the largest of the year.  Almost 12k contracts were added to the gross long position.  It stands at 630.7k contracts. The net long position fell by 38.7k contracts to 373.1k.  
The bears in the 10-year Treasury note futures tried picking a top ahead of the FOMC meeting and US jobs data.  They added 38.7k contracts so the gross short position was lifted to 6506k contracts.  The longs stayed pat, adding a mere 4k contracts to round up the gross long position to 830.4k contracts.  The net long position fell to a little less than 180k contracts from 214.6k.

Peter Lynch’s Rules

Find your edge and put it to work by adhering to the following rules:

  • With every stock you own, keep track of its story in a logbook. Note any new developments and pay close attention to earnings. Is this a growth play, a cyclical play, or a value play? Stocks do well for a reason and do poorly for a reason. Make sure you know the reasons.
  • Pay attention to facts, not forecasts.
  • Ask yourself: What will I make if I’m right, and what could I lose if I’m wrong? Look for a risk-reward ratio of three to one or better.
  • Before you invest, check the balance sheet to see if the company is financially sound.
  • Don’t buy options, and don’t invest on margin. With options, time works against you, and if you’re on margin, a drop in the market can wipe you out.
  • When several insiders are buying the company’s stock at the same time, it’s a positive.
  • Average investors should be able to monitor five to ten companies at a time, but nobody is forcing you to own any of them. If you like seven, buy seven. If you like three, buy three. If you like zero, buy zero.
  • Be patient. The stocks that have been most rewarding to me have made their greatest gains in the third or fourth year I owned them. A few took ten years.
  • Enter early — but not too early. I often think of investing in growth companies in terms of baseball. Try to join the game in the third inning, because a company has proved itself by then. If you buy before the lineup is announced, you’re taking an unnecessary risk. There’s plenty of time (10 to 15 years in some cases) between the third and the seventh innings, which is where the 10- to 50-baggers are made. If you buy in the late innings, you may be too late.
  • Don’t buy “cheap” stocks just because they’re cheap. Buy them because the fundamentals are improving.
  • Buy small companies after they’ve had a chance to prove they can make a profit.
  • Long shots usually backfire or become “no shots.”
  • If you buy a stock for the dividend, make sure the company can comfortably afford to pay the dividend out of its earnings, even in an economic slump.
  • Investigate ten companies and you’re likely to find one with bright prospects that aren’t reflected in the price. Investigate 50 and you’re likely to find 5.

Hedge funds slash short 10-year Treasury future positions

Hedge funds have cut their short position in 10-year Treasury futures by nearly two-thirds from a one-year high set at the start of March, unwinding a popular trade as US sovereign debt has rallied.

Leveraged funds, a proxy for hedge funds, reduced their net short in 10-year Treasury futures by nearly 49,000 contracts in the week to April 4, data from the Commodity Futures Trading Commission showed on Friday. The net short totaled 136,322 contracts, down from 365,650 contracts on March 7.

Traditional asset managers, who have taken the opposite side of the trade, have also reduced their net long to 226,655 contracts, the lowest level since February.

The central bank’s perceived hawkishness, alongside a sell-off in Treasuries after the US election, sent yields on the 10-year Treasury to a high of 2.62 per cent in December. Yields on the note have since slid, as the so-called Trump trade fades.

Confusion In Bond World, As Eurodollar Shorts Hit New Record High Over $3 Trillion

One week after we observed the biggest monthly short squeeze in 10Y TSYs in history, it was a relatively calm week in the longer-end of the Treasury curve.

According to the latest CFTC data, spec net shorts in aggregate Treasury futures was little changed from the previous week at 612K contracts in TY equivalents. While, they continued to pare net shorts in TU and TY by 18K and 14K contracts, respectively, they increased their  net shorts in FV and TN by 35K contracts and 6K contracts, respectively. Spec net shorts as share of open interest was unchanged at -5.8% over the week and was at about -2.0 standard deviations away from neutral.

While net Treasury futures shorts are now back to the lowest levels since early December 2016, traders continued to pile into the short-end betting massively on further rate hikes as Eurodollar shorts push on beyond $3 trillion: in the last week specs sold another 73K contracts in Eurodollar futures, taking their net shorts to the seventh successive week of record high of -3,129K contracts.

China iron ore prices lead industrial commodities lower with 6.7% dip

The price of iron ore in China fell as much as 6.7 per cent on Monday as markets reacted to data showing port inventories of the steel-making ingredient rose again last week.

Iron ore futures contracts traded on the Dalian Commodity Exchange had recovered slightly in afternoon trading to be down 6 per cent at Rmb545.5 per metric tonne.

The drop puts the price of iron ore at the lowest level since January 10 and represents a fall of 17.6 per cent from the most recent intraday peak of Rmb661, seen on on March 16.

Other hard commodities were faring badly in China on Monday as well: Shanghai copper futures were down 1.8 per cent and futures in Dalian for coking coal, used in steel making, dropped 3.8 per cent.

Futures on the Zhengzhou Commodity Exchange for thermal coal, used to generate energy, were down just 0.5 per cent.

Trading Position : Build Long Euro and Aussie Positions but Slash Canadian Dollar Longs

There were three significant position adjustments by speculators in the currency futures during the CFTC reporting week ending March 21.  
In the euro, the bears ran for cover and the bulls ran with the wind at their back.  The bulls add 11.3k contracts to their gross long position, bringing it to 159.6k contacts.  Meanwhile, the bears covered 10k contracts to bring their gross short position to 179.3k contracts.  The net short position was to 9.7k contracts from 41.0k contracts, which is the smallest since mid-2014.   
Bulls and bears were active in the Australian dollar futures, but their activity largely canceled each other out.  The net position changed by less than 2k contracts.  The gross long position rose by 11.8k contracts to 85.4k, while the gross short position rose by 10.2k contracts to 40.4k.  
The most dramatic change was in the Canadian dollar futures.  The bulls capitulated.  The gross long position was slashed by 44.3k contracts to 30.3k.  The bears were not as bold.  They added 1.5k contracts to the gross short position, lifting it to 54.7k contracts.  The net position swung back short (-24.4k contracts vs. +21.5k contracts) for the first time in two months.  
Speculators were also active sterling, but just shy of our 10k contract threshold of significance.  In contrast to the Australian dollar where speculators added to both long and short positions, in sterling, both longs and shorts were trimmed (9.9k contracts and 9.1k contracts respectively).  The net position hardly changed, a little above 107k contracts.  
Modest position adjustments in Mexican peso saw the net short position slim to 3.3k contracts, the smallest since November 2015.  As recently as the end of January, the net short speculative position stood at 73k contracts.  The decline has been due in nearly equal measure between new longs being established and old shorts being covered.  

Market Doubts of Three Fed Hikes This Year Caps Dollar

Bringing forward expectations of a Fed hike from May-June to March was worth something for the dollar, but to get more now, the market may need to recognize the risk of three (or more) hikes this year.  With the strong February jobs growth and a 2.8% year-over-year increase in hourly earnings, rarely does the market’s confidence in an event surpass current expectations for a hike on March 15.
However, the market sees around a one-in-three or a one-in-four chance of a third hike this year. The risks for the updated forecasts from the Federal Reserve seem asymmetrically tilted higher, more rate hikes than fewer by more members.  The hawkishness of regional presidents may be underestimated.  The data and the global climate are conducive for expediting the normalization process.  The hawks will likely feel vindicated by recent developments and may press their case with more vigor.
The focus of the Fed has arguably shifted.  Previously, the issue was whether the data would confirm that the economy was evolving toward the Fed’s targets.  It did.  Rather than focus on the data points per se, officials appear more confident of the direction and resilience of the economy and prices.  They now are looking for opportunities, which helps explain the campaign to prepare the market for the March 15 move.
Still, the dollar’s technical tone has deteriorated, and the risk is on the downside over the next several sessions.   Our working hypothesis is that the dollar’s recovery that began in early February against most of the majors ended and a correction has begun,   For the Dollar Index, this means potential toward 100.75 and possibly 100.40.  The former is the 50% retracement of that rally and coincides with the 100-day average (~100.80). The latter is the 61.8% retracement.  Alternatively, if the Dollar Index has carved out a double top near 102.25, the neckline is around 101.20 (38.2% of the rally is ~101.10).  On a break of the neckline, the measuring objective is 100.
The euro’s pre-weekend rally saw it surpass the 50% retracement objective of its decline from the February 2 high near $1.0830.  That retracement was around $1.0660, and the 61.8% retracement is closer to $1.0700.  The euro’s five-day moving average crossed above the 20-day average for the first time in a month.  The single currency may be tracing out a double bottom at $1.05  The neckline is $1.0630.  The measuring objective is around $1.0760.

New Fed paper finds ‘considerable uncertainty’ on FOMC economic projections

The Federal Reserve have a new research paper out:

(full piece at that link, PDF)
In brief (bolding mine):
  • Since November 2007, the Federal Open Market Committee (FOMC) has regularly published participants’ qualitative assessments of the uncertainty attending their individual forecasts of real activity and inflation
  • Benchmarks used 
  • This paper documents how these benchmarks are constructed and discusses some of their properties
Several conclusions:

Traders Throw In The Towel On March Rate Hike

As we previously noted, while speculatrs had been reducing their shorts in Treasury futures, they had added to Eurodollar shorts – pushing their bets on Fed rate hikes to record highs. However, as Bloomberg notes, signals are starting to emerge that traders who built up that heavy short, or hawkish, eurodollar base since the start of 2016 could be starting to throw in the towel on a March Fed rate hike.

CME confirmed that Wednesday saw record volume in fed fund futures of 658.7k contracts, beating the previous record of 613k on Nov. 9, the day after the U.S. presidential election. Over the course of Wednesday’s session, a total of 283k Apr fed funds futures contracts traded, largest single-day volume seen in the contract. Open interest in the contract rose by 109k, suggesting some short covering before the minutes and potential new longs after the minutes.