Sun, 07th February 2016

Anirudh Sethi Report


Archives of “futures contract” Tag

Positioning in the Forex & Crude Futures: First Net Long Yen in 3 Years

Due to the holidays, the CFTC has been releasing its Commitment of Traders report late.  With this week’s  report, the normal Friday release schedule resumes.  
The latest report covers the shortened week through January 5.  It is not surprising to find that speculative position adjustments were minor.  There was only one gross position adjustment of more than 8k contracts, and that was the long yen. Speculators increased their holdings by half to 67.5k contracts from 45k.  
What is perhaps a bit more unexpected was that speculators added to exposure rather than reduce it.  Specifically, of the 16 gross currency positions we track, only five were cut.  And they were concentrated in two currencies.  The Swiss franc and Canadian dollar accounted for four of the gross position reduction.  
Of the eight foreign currencies, we track, the speculative community is now net long three.  The New Zealand dollar is small beer.  The net long position is less than 2k contracts.  Speculators have maintained a long Swiss franc position for the third week.  It is long 3.6k contracts.   More significantly, the speculative market went net long yen futures for the first time in three years.  They are long 4.1k contracts and were short 17.2k in the previous reporting period. 
The month of December saw a large adjustment of the speculative positioning in the yen.  It was probably both a cause and effect of the 2.4% appreciation of the yen over the course of December. The net position increased by 81k contracts.  This was a function of shorts being cut by 44k contracts and the longs adding on 37k contracts.  The 22.5k increase in the gross long yen position pushes it ahead of the euro (66.9k gross long contracts) to be the largest speculative position among the currency futures.  

FXCM Doubles Yuan Margins, Warns Of Market “Disruption And Highly Illiquid Conditions”

Dear Client,
We believe there is a chance of disruption and highly illiquid conditions in the forex market during the coming weeks (and/or months). Please be aware that market gaps tend to occur over the weekend – that is, currencies trade at prices considerably distant from previous levels.


Margin requirements will double on the USD/CNH pair after market close on January 15, 2016. See a Complete List of New Margin Requirements

Please review your account to ensure that you have enough available margin to support any new positions. You may deposit additional funds at www.myfxcm.com or close positions as needed.

Follows the traditional disclaime which FXCM itself probably should have taken to heart one year ago when after the SNB’s de-pegging the firm suffered tremendous losses:

 Remember that forex trading can result in losses that could exceed your deposited funds and therefore may not be suitable for everyone, so please ensure that you fully understand the high level of risk involved.

The paradox here is that pre-emptive, if correct, warnings such as this one, tend to quickly become self-fulfilling prophecies as other brokers immediately follow suit and likewise increase margin requirements, which helps mitigate total loss potential but just as quickly soaks up liquidity from the market, leading to an even more fragmented market, prone to sudden, and quite dramatic moves.

The full list of FXCM margin increases is shown below; expect every other FX brokerage to promptly jump on the bandwagon.

FXCM Margin Update

Moscow Set to Put an End to ‘Western Dominance’ in Oil Trading

Oil rigRussia heavily depends on high prices of oil and cannot influence pricing in the market controlled by the West. This is why Moscow is set to create its own futures market for domestic-produced oil to put an end to hegemony of Western bourses, Finanzmarktwelt reported.

The end goal is that Russia wants to provide competition for the oil futures markets in New York and London. With its own futures market for Urals and Espo, Moscow would take a “decisive step.”

Moscow, following China’s footsteps, will introduce its own futures trading on the St. Petersburg exchange, according to the article.

The author noted that despite its minor share in the global market, Brent “virtually controls 70 percent of global oil trading.” Market shares of Russian-produced Urals and Espo are more significant.

“It is clear that Russian wants to get rid of the system which allows for oil prices to be set by London or Dubai,” the article concluded.

Treasury Bond Yields Are Collapsing As Dec Rate Hike-Odds Slide

With December rate-hike odds sliding the most since the last FOMC meeting (down from 75% to 70%), following abysmal data this morning, it appears investors are reaching for the safety of Treasuries as either a fed policy error is about to be unleashed and/or growth is signficantly weaker than all the talking heads proclaim. With traders the most net short in years, this rapid plunge in yields could quickly accelerate.

The entire curve is plunging…

With 30Y almost roundtripping to The FOMC (and back below 3.00%)…

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).