Thu, 29th September 2016

Anirudh Sethi Report


Archives of “futures contract” Tag

Nickel prices continue to rise as Philippines threatens to shut down 20 more mines

Global nickel prices spiked on Tuesday after the Philippines, the world’s top supplier of nickel ore, announced that 20 more metals mines were at risk of being shut down for violating environmental regulations.

The 20 mines, which include the Philippine unit of Australian miner OceanaGold, were ordered to explain why their operations should not be suspended. Environment and Natural Resources Undersecretary Leo Jasareno on Tuesday said most violations were related to siltation, soil erosion, dust emissions and lack of relevant permits.

 Jasareno said only 11 of 41 metal mines passed the review, which was conducted from July to August. The government earlier suspended operations at 10 mines for violating environmental regulations.

Suspended mines and those that have been recommended for suspension accounted for 55% of the value of nickel production last year, he said. UBS said shutting three-fourths of Philippine metal mines will cut about 11% of the global nickel ore supply.

Speculative Position in Euro ,Sterling ,CAD ,Mexican Peso ,Crude

There are a few notable exceptions.  First, over the past several weeks, speculators have reduced gross short euro positions by more than 20% since the end of July.  It stands at 173.3k contracts, after the bears covered 16.7k contracts in the CFTC reporting period ending September 13.
If the bears were pulling back in the euro, they were showing their claws on the Mexican peso.  The gross short position rose by 10.4k contracts, after increasing by 22k contracts the previous reporting period.  At 85.7k contracts, the gross short position is the largest since April.  The net short peso position has more than doubled to 65.7k contracts in the past two weeks.
Although the position adjustments in sterling has been modest, the market has turned and has stopped extending gross and net short positions. Both have fallen for two consecutive reporting period from record levels.  The gross short speculative position fell by 5.5k contracts to 123.2k contracts, roughly the same amount that was covered in the previous week.  The bottom pickers have slowly entered the market.  The gross long position bottomed in mid-July near 28k contracts.  It edged up 1.6k contracts in the latest reporting period to 40.1k contracts.  The net short sterling position of 82.8k contracts surpassed the euro (net short 81.5k contracts) to have the dubious honor of the largest such speculative position.

World’s Largest Oil Derivatives Trade : Mexico spends $1bn in annual oil hedge

Mexico has completed its annual oil hedging programme, considered to be the world’s largest sovereign oil derivatives trade, spending $1.028bn to hedge 250m barrels at a price of $38, the finance ministry said.

The government has run the hedging scheme for a dozen years to provide stability for its public finances, and it said in a statement it would enable it to budget a price of $42 per barrel for public finances in 2017

The government bought put options on its exports, known as the Mexican mix, at $38 per barrel for a total of 250m barrels at a total cost of $1.028bn, or 19.016bn pesos. The hedge was made via 46 operations in international derivatives markets with seven counterparties, the ministry said, but did not name the institutions involved.

The government will rely on a new sub-account within its budgetary income stabilisation fund, known as FEIP, to make up the difference between the $38 hedge and the $42 price to be used for the 2017 budget.

Last year, the government spent about the same amount but hedged oil exports at $49. This year’s lower level reflected the dive in international oil prices.

Future Position in Forex ,Treasury-Crude :An Update

The summer lull for speculators in the currency futures market continued in the CFTC reporting week ending August 23.  Of the 16 gross currency futures positions we track, speculator adjustments were less than 3k contracts in all but three.
The bears added to their gross short sterling position for the eighth consecutive week.  The seven hundred contract increase was the smallest of the streak and lifts the gross short speculative position to 130.8k contracts, a new record.
More substantive adjustments were seen in the euro and Mexican peso, where the speculative bears ran for cover.  The gross short euro position was trimmed to 182k contracts, as 13.6k contracts were covered.   It is the fourth week in a row that shorts were covered.  They peaked at 221.8k before the short-covering streak.   The speculators covered 14.9k gross short peso contracts, leaving them with 55.4k.  It is the third week of short-covering that began with a gross short position of 76k contracts.
Despite the small changes in the gross positions by speculators, two pattern were clear.  First, speculators did not reduce the gross long positions in any of the currency futures we track.  Second, speculators mostly reduced gross short positions.  The exceptions were sterling, as we have seen, and the Australian and New Zealand dollars.   We suspect some of the late positioning was caught wrong footed and may help explain the dramatic reaction of Yellen (and Fischer) before the weekend.

Why The Fed Expects 2018 Rates To Be Between 0% And 4.5%

While the debate rages whether Yellen was “hawkishly dovish“, hiking in September just to unleash trillions more in QE once the curve inverts even more as a recent Fed staffer paper suggested, or “dovishly hawkish“, waiting until December or even next year, before making another policy error, there was at least some clarity provided by the Chairwoman’s speech, at regard to the Fed’s forecast for where the Fed Funds rate will be over the next two years.

This is what she said:

as ever, the economic outlook is uncertain, and so monetary policy is not on a preset course. Our ability to predict how the federal funds rate will evolve over time is quite limited because monetary policy will need to respond to whatever disturbances may buffet the economy. In addition, the level of short-term interest rates consistent with the dual mandate varies over time in response to shifts in underlying economic conditions that are often evident only in hindsight. For these reasons, the range of reasonably likely outcomes for the federal funds rate is quite wide–a point illustrated by figure 1 in your handout. The line in the center is the median path for the federal funds rate based on the FOMC’s Summary of Economic Projections in June.

So where does the Fed expect US rates to be in two years?

“The shaded region, which is based on the historical accuracy of private and government forecasters, shows a 70 percent probability that the federal funds rate will be between 0 and 3-1/4 percent at the end of next year and between 0 and 4-1/2 percent at the end of 2018.”

Shorts Throw In The Towel: S&P Short Interest Tumbles To Three Year Lows

Earlier today, we showed Barclays’ calculation how, in a market in which there have been a gargantuan $128 billion in stock outflows YTD, the stock market has seen an unprecedented surge higher. The buyers, as Barc calculated, were buyers of index futures, such as central banks (“net buying of US equity futures since March ($60bn notional) has surpassed the amount of buying between October 2011 and May 2013“), corporations buying back stock (“The biggest buyers of equities are corporates themselves with S&P 500 net buybacks rising to $500bn over the last four quarters from $375bn in 2013“), and last but not least: short covering.

As Barclays reported, for S&P 500 stocks, the flow to US equities from short-covering since March has been $60bn, and $26bn since June.

This means that as of this moment, the S&P500 short interest as a percentage of market cap is at three year lows, as most of the weak hands have been flushed out.

The flipside of shorts officially throwing in the towel, is that going forward it will be much more difficult to push stocks higher simply from squeezing shorts or forcing covers. Then again, with short interest at approximately 2.0%, there is still a chance it may fall further. In early 2007, just before the financial crisis emerged, short interest was just above 1.6%. In other words, while going forward the pain for shorts will be substantially lower than over the past year, it may still continue for a while should central banks continue to push everyone into stocks.

China marks time in march toward international yuan

In the year since China’s surprise devaluation of its currency, the yuan’s troubles going global have become all too apparent.

With the yuan continuing to lose strength as the Chinese economy slows, Chinese authorities have become reluctant to further expose the currency to market forces — a step necessary to achieve true reserve currency status.

 Last month, the People’s Bank of China gathered local bank executives here for a meeting to inform them of de facto regulations on transactions that could facilitate capital flight. Officials from the central bank reiterated administrative guidance on a prior reporting requirement for large foreign-currency purchases or outbound fund transfers by corporations.

This guidance would not be put in writing, but banks were expected to comply, the officials said, according to people familiar with what transpired at the meeting. Banks were also instructed not to sell foreign currency to companies not registered in Shanghai.

In its 2016 report on internationalizing the yuan, released Wednesday, the PBOC hails rising cross-border transactions and the currency’s progress toward global status. The Chinese leadership, under President Xi Jinping, has set a goal of having “a convertible, freely usable currency” by 2020.

But in a seeming contradiction to this aim, the central bank early this year introduced nationwide restrictions meant to block capital outflows, and has since tightened them. The yuan has been hit with bursts of activity that appear the work of short-sellers. Clearly afraid of letting the currency weaken or allowing capital outflows, the PBOC has put a halt to the liberalization on which the drive for a global yuan depends.

6 Trading Behaviours For Traders

1) Fresh Ideas – I’ve yet to see a very successful trader utilize the common chart patterns and indicator functions on software (oscillators, trendline tools, etc.) as primary sources for trade ideas. Rather, they look at markets in fresh ways, interpreting shifts in supply and demand from the order book or from transacted volume; finding unique relationships among sectors and markets; uncovering historical trading patterns; etc. Looking at markets in creative ways helps provide them with a competitive edge.

2) Solid Execution – If they’re buying, they’re generally waiting for a pullback and taking advantage of weakness; if they’re selling, they patiently wait for a bounce to get a good price. On average, they don’t chase markets up or down, and they pick their price levels for entries and exits. They won’t lift a market offer if they feel there’s a reasonable opportunity to get filled on a bid.

3) Thoughtful Position Sizing – The successful traders aren’t trying to hit home runs, and they don’t double up after a losing period to try to make their money back. They trade smaller when they’re not seeing things well, and they become more aggressive when they see odds in their favor. They take reasonable levels of risk in each position to guard against scenarios in which one large loss can wipe out days worth of profits.

4) Maximizing Profits – The good traders don’t just come up with promising trade ideas; they have the conviction and fortitude to stick with those ideas. Many times, it’s leaving good trades early–not accumulating bad trades–that leads to mediocre trading results. Because successful traders understand their market edge and have demonstrated it through real trading, they have the confidence to let trades ride to their objectives.

Copper sitting in warehouses jumped by 18 per cent this week to the highest level since February -LME

coppCopper has been flowing into warehouses in Asia, fuelling speculation about demand in China, the world’s biggest consumer of industrial metals, and the outlook for prices.

Copper sitting in warehouses licensed by the London Metal Exchange has jumped by 18 per cent this week to the highest level since February, totalling 234,750 tonnes, up from 140,000 tonnes in April.

Many fear the inflow of metal could weigh on copper prices, which recently touched a two-month peak of almost $5,000 a tonne partly on expectations of further stimulus from central banks.

Others say the increase in stocks reflects storage economics and will reverse once premiums for physical copper starting improving.

Here are the main arguments.

Weakness in China

Last month around 50,000 tonnes of copper left Chinese ports, according to data provider Shanghai Metals Market. A lot of the copper comes from the bonded warehouses in Shanghai, where the metal is stored before it enters the country, according to analysts.

It is a sign of weak downstream consumer demand and that copper-consuming industries have not benefited from the government-engineered credit surge that boosted construction activity and prices of steel and iron ore.

Some of the copper that has left China was sent out by Chinese smelters, which produce finished copper from raw copper concentrate, according to Matthew Wonnacott, analyst at consultancy CRU in Hong Kong.

Upcoming Week :Sources of Movement

Investors are under siege.  A growing proportion of bonds in Europe and Japan offer negative yields.  The German and Japanese curves are negative out 15-years, while one cannot find a positive yield among any tenor of Swiss government bonds.   Despite a string of robust data, US Treasury coupon yields are at record lows.

The UK referendum hit an already vulnerable banking system in the eurozone.  Italian banks are on the front burner, but the temperature is rising in Portugal, and this is not to mention the slow boil at some of the largest European banks, specifically singled out by the IMF as posing the greatest systemic risks.

Politics add an additional wrinkle.  Both of the two main parties in the UK are divided. The leader of the UK’s Independent Party resigned.   If Labour was not doing a fine job of destroying itself, Cameron, in among his last acts as Prime Minister, will give it a helping hand.  He will have parliament vote on the renewal of the UK nuclear deterrent (Trident), and it will further split Labour. Corbyn has been long opposed, while the Labour MPs typically favor.  There is an attempt by the Labour MPs to block Corbyn’s name from even appearing on the leadership ballot.  

The US political parties hold their conventions over the next few weeks, though it is possible that Trump announces his vice-presidential running mate in the week ahead.  Indiana Governor Pence appears to be edging out former Speaker of the House Gingrich.  Perhaps to prevent the Republican Party to dominate the news cycles, it would not be surprising if Sanders were to endorse Clinton either in the week ahead of the following week.