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.
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.
Ray Dalio was in the news overnight, and picked up by the Aussie press here
Says Trump’s policies would have a “broadly positive” effect on the US economy
Bond prices have likely made a “30-year top”
“There is a good chance that we are at one of those major reversals that last decade”
“We want to be clear that we think that the man’s policies will have a big impact on the world. Over the last few days, we have seen very early indications of what a Trump presidency might be like via his progress with appointments and initiatives, as well as other feedback that we are getting from various sources, but clearly it is too early to be confident about any assessments”
While Russell Clark’s Horseman Global may no longer be the most bearish it has ever been (it was over 100% net short in June), and has since trimmed its bearish bets to “only” 84% net…
… it certainly remains the most bearish $1 billion+ hedge fund in the world. Which means that in August, when the S&P soared back to record high highs, and global stock markets soared, Horseman’s LPs were less than excited with the fund’s performance. Sure enough, as Clark writes in the latest hedge fund letter, “your fund dropped 4.94% net this month. Losses came from the short book, the FX book and the bond book.“
The mea culpa continues:
It was a poor month for the fund, but probably overdue. The MSCI world index is up 3% this year, while MSCI emerging markets are up nearly 12%. Many of the dollar weakness trades that I have had on this year reversed in the final days of the month as the Federal Reserve talked up interest rate rises.
So is Clark finally ready to throw in the towel and take the blue pill? Not even close, although he does admit that active managers are suffering:
“The whole world is wrongly positioned,” warns Norwegian hedge fund firm Sector Asset Management’s founder Peter Andersland, “the common denominator for everything is the long duration — real estate, stocks, bonds. Everything is much more rate sensitive now.”
As Bloomberg reports, Andersland’s $1.6 billion holds as much as 50 percent in cash in one of its funds, because holding cash is the best protection against bond and stock markets inflated by record monetary stimulus.
“What can kill us now?,” Peter Andersland, the 55-year-old founder of Sector, said in an interview on Tuesday at his office overlooking the Oslo fjord. “It’s the correlation between stocks and bonds that will be induced by higher rates. That’s the biggest risk in the capital markets today, not geopolitics or Trump.”
Massive central bank stimulus with below zero rates and quantitative easing has led to increasingly dysfunctional markets, with even the negative correlation between stocks and bonds breaking down. As we have noted previously, they are now largely moving in the same direction as markets have become more driven by central banks, leaving investors with no place to hide.
Hedge funds are shying away from big bets on Brexit, with many unwilling to risk further losses having already suffered a painful first half of the year.
With the outcome of a UK vote on the country’s membership of the European Union still looking uncertain, many large hedge funds have opted to reduce their overall market exposure rather than attempt to predict a result.
Stan Miranda, chief executive of London-based Partners Capital, said his fund had put on smaller trades in anticipation: they expect sterling to fall as much as 15 per cent if the UK exits, or bounce a few percentage points if it does not. It has used futures and options on gold and currencies, he said.
“The most obvious [play] is the currency. We’re shorting the euro against the dollar because of the contagion issue,” he said. “We’re not ignoring it [Brexit], we’re just expecting to lose money on these bets.”
More hedge funds closed their doors in 2015 than at any time since the financial crisis, according to new research, as turbulent markets dragged down the industry’s performance.
Last year was the worst year for liquidations since 2009, with 979 funds closing, up from 864 in 2014, according to data from Hedge Fund Research. The fourth quarter of 2015 also saw the fewest new hedge funds starting up since 2009, with just 183 openings compared with 269 in the third quarter.
The figures capture a period in which many of the industry’s marquee names suffered significant losses. The HFRI Fund Weighted Composite index fell 0.9 per cent last year, HFR data show. December saw a flurry of funds converting into family offices, including Michael Platt’s BlueCrest and Doug Hisch’s Seneca Capital, or shutting entirely as Lucidus Capital Partners did following redemptions.
Unnerved by jerky markets, hedge fund clients became fearful of risk and less patient with poor returns in the second half of the year, according to Kenneth Heinz, HFR’s president, who said many started asking for their money back from lagging funds.
“Investors have become increasingly discriminating in their capital allocations, and the environment for launching a new fund continues to be extremely competitive,” he said.
The top 20 per cent of funds by assets received about 80 per cent of all new money last year, the prime brokerage group at Barclays found in an analysis of HFR data.
So far, this year does not appear to be any kinder for the industry.
While not nearly as exciting as JPM cornering and manipulating the gold or silver markets, over the past few years Jamie Dimon’s bank appears to have cornered a very prominent commodity traded on the London Metals Exchange, aluminum, resulting in price “anomalies” which as Reuters politely puts it “mean prices do not always reflect fundamentals” and which as we put it, reflect outright manipulation, however because regulators are captured have so far completely slipped through the cracks.
According to Reuters, large amounts of aluminum traded on the London Metal Exchange over the past couple of years “have at times been in the hands of a dominant position holder.” Citing sources at commodity trading houses, warehouses, producers, brokers and banks “one such position holder is U.S. bank JPMorgan.”
Reuters adds that “other companies have done so in past” which perhaps is meant to mitigate JPM’s culpability, but merely confirms that if it isn’t one bank manipulating commodity markets, it’s another – the famous example of Sumitomo’s Yasuo “Mr. Copper” Hamanaka comes to mind.
As Reuters points out, “while no rules have been broken, holding a large, sometimes dominant position can to an extent have an influence on prices in the short term for contracts that will soon reach maturity.” For its part, the LME said it “would seek additional information from market participants regarding activity that raises concern.”
“If a breach of the LME’s rules is deemed to have occurred, we would take appropriate action.”
First it was JPM’s Croatian quant “Gandalf”, Marko Kolanovic, who promptly became the nemesis of every 17-year-old upward momentum-chasing hedge fund manager after accurately calling every market move, especially selloff, ahead of time with uncanny precision.
Now, another Croatian JPMorganite, equity strategist Mislav Matejka, will be the recipient of permabull ire with his latest call which, while a rehash of his most recent call that “equities are not attractively priced any more”, will likely sour today’s market sentiment and attempts by algos to ignite upward momentum and forget, if only for a moment, the perfect storm brewing in China.