Two rate hikes since last year have weakened the dollar. Why is that, and what’s ahead for dollar, currencies & gold? And while we are at it, we’ll chime in on what may be in store for the stock market…
The chart above shows the S&P 500, the price of gold and the U.S. dollar index since the beginning of 2016. The year 2016 started with a rout in the equity markets which was soon forgotten, allowing the multi-year bull market to continue. After last November’s election we have had the onset of what some refer to as the Trump rally. Volatility in the stock market has come down to what may be historic lows. Of late, many trading days appear to start on a down note, although late day rallies (possibly due to retail money flowing into index funds) are quite common.
Where do stocks go from here? Of late, we have heard outspoken money manager Jeff Gundlach suggests that bear markets only happen if the economy turns down; and that his indicators suggest that there’s no recession in sight. We agree that bear markets are more commonly associated with recessions, but with due respect to Mr. Gundlach, the October 1987 crash is a notable exception. The 1987 crash was an environment that suffered mostly from valuations that had gotten too high; an environment where nothing could possibly go wrong: the concept of “portfolio insurance” was en vogue at the time. Without going into detail of how portfolio insurance worked, let it be said that it relied on market liquidity. The market took a serious nosedive when the linkage between the S&P futures markets and their underlying stocks broke down.
Markets regulator Sebi has directed brokers to square off all existing open positions in the equity derivatives segment they hold for Vijay Mallya and the six former officials of United Spirits who were banned from the market last week.
The fresh directive by the capital market regulator has been made through an e-mail to stock exchanges yesterday.
“The trading members are advised to square off existing open positions in the futures and options segment, if any, for the persons/entities mentioned in the above order and also ensure that no fresh positions are created for the said persons/entities,” an NSE circular said quoting the Sebi directive.
However, the regulator has not given them a time-line to do so.
Sebi had last week through an interim order, barred Mallya and six former officials of USL from entering the market, after the CBI charge-sheeted them in a money laundering case involving a loan IDBI Bank.
The CBI also charge-sheeted and arrested eight IDBI Bank officials, including its former chairman Yogesh Aggrawal in the case for their role in bypassing lending norms to extend Mallya Rs 950 crore loan in 2010.
I believe that successful options trading requires a different mindset from the traditional “rules of success” for most directional traders in stocks and futures products.
First and foremost, I believe you need to take profits early and often. We’ve all been hit over the head ad nausem about the old maxim “cut your losers short and let your winners run.” This is a truth I believe holds true for most directional traders, but I don’t believe it holds any currency with consistently successful options traders.
Speaking of direction, I believe nobody knows the next direction the instrument you trade will move. Nobody. Plenty have ideas and hunches, and often they’ll be right. But the truth is, a coin flip has nearly identical odds. This is why I trade options positions that either don’t require me to guess a direction, or provide me with plenty of opportunity to make money even when I’m leaning in the wrong direction.
Immediately contradicting the item above, I believe in fading moves (especially, violent down moves). The best traders and investors are willing to put on positions the majority of market participants find hard to put on due to fear. Since the majority of market participants are net losers, I’ve got to find more opportunities to join the minority.
I believe in contradictions. I believe in breaking the rules. Rules are guidelines, nothing more. Nobody got ahead in this world by following the rulebook and not daring to make mistakes or look like an ass from time to time.
I believe in getting paid to wait. Time is money. Wherever possible, I want to have positive theta on my side. The odds are with me whenever this is the case.
Speaking of odds, I believe in frequent trading. Common wisdom wants you to believe that “over-trading” is the common cause of death for most retail trading accounts as commissions steadily drain your account. In many cases this is true (especially if your commission rate is obnoxious). But for me, I’m putting on trades with the probabilities in my favor. The more instances of opportunity I can get myself into, the more the law of large numbers and favorable probabilities will materialize to my bottom line.
In order to trade frequently, I believe in trading incredibly small so that I can spread my opportunity across as many instruments as possible, diversifying my risk. Call me “One-lot Seany.” I’ll proudly wear that name tag.
I believe that volatility retraces from spikes or reverts to the mean much quicker and predictably than most would have you believe. Thus, I believe in selling fear. Fear subsides.
I don’t believe in stop losses. I believe in adjustments. Options trading gives you, um…. options. When positions go against me, all is not lost. Often times, there will be plenty of opportunity to roll strikes to collect additional credit which improves my odds of success, or roll positions out in time to in effect “buy myself more time” for the trade to play out.
The reason adjustments work: I seek to enter credit spreads when volatility is elevated (see #9 above). Therefore, if my position is getting tested on the upside, volatility will likely be shrinking which further aids my short volatility position. If I’m getting tested on the downside, volatility is likely remaining high (or increasing!) which gives me more juicy premium to sell into, which then results in collecting more cash and effectively lowers my breakeven points on the downside, thus improving my odds of success.
I believe in net market neutral exposure for my portfolio.
To help achieve neutral exposure, I believe I should always have a short delta (but positive theta — paid to wait) position in the general indexes. Since the majority of my individual positions will be short volatility and benefit from a stable or slowly rising market, I need to have short index positions which will benefit when markets are receding and volatilities are rising.
I believe in making stocks and markets work to beat me. They will win from time to time, but they will have to earn it with outsized moves. If the stock or market is too lazy to come get me, I’ll gladly collect its coin and move on to the next trade.
I believe the only true edge in any marketplace is Buying Power.*
CNY mid rate for the day, little bit weaker for the yuan
Open market operations (OMOs):
inject 10bn yuan via 7-day reverse repos
inject 10bn yuan via 14-day reverse repos
Small injections (which mean today is a net drain); watch for more stress in HK yuan borrowing markets today. Yesterday saw surging rates for overnight (and longer) yuan borrowing. Likely we’ll see the same again today.
By limiting injections into money markets the People’s Bank of China makes borrowing yuan more expensive and therefore shorting yuan more expensive. The PBOC is trying to discourage yuan shorts.
On Monday China followed through a warning to “take further measures” against WTO members which continue to impose tariffs on its goods 15 years after Beijing’s accession to the organization.
On Monday the Commerce Ministry said that China has launched a dispute resolution case at the WTO, demanding that all WTO members, particularly the US and EU, stop using the “surrogate country approach” to impose higher tariffs against Chinese goods, which they claim to be exported at artificially low prices. “Regretfully, the US and EU have yet to fulfil this obligation,” the ministry wrote on its website. Sunday December 11 marked the 15th anniversary of China’s WTO accession, and China expects governments which have not already done so, to lift anti-dumping tariffs against its exports and treat Beijing like a fully-fledged member of the organization. The WTO and China agreed an accession protocol when Beijing joined the organization in 2001. Article 15 of this protocol dictates the terms which importing WTO members can use to compare their prices with those of Chinese producers, to determine if that producer is competing fairly with the domestic producers in the importing country. Some WTO members including the US and EU want to reserve the right to restrict Chinese imports with higher tariffs, in order to protect their manufacturers against “dumping,” the process by which a manufacturer exports a product to another country at a price below that charged in its home market, or at a price lower than the cost of production.
In order to investigate whether China is dumping goods, for the first 15 years of WTO membership Beijing was subject to the “surrogate country approach,” as laid out in Article 15.
Refusal by the U.S., European Union and others to recognize China as a market economy is the latest sign of intensifying trade friction between the Asian economic giant and other world powers, exacerbated by a supply glut in such industries as steel.
U.S. Secretary of Commerce Penny Pritzker said Wednesday that the time was “not ripe” to grant China market-economy status under World Trade Organization rules. A spokesperson for China’s foreign ministry shot back at a press conference the following day, claiming that “the world recognizes China’s success in developing a market economy.”
Dec. 11 will mark the 15th anniversary of China’s accession to the WTO — a milestone Beijing says automatically brings full market-economy status. The country has until now been labeled a non-market economy under the treaty. While Japan has not explicitly supported either side of the issue for fear of straining diplomatic ties, it is seen continuing to handle China as a non-market economy in practical terms.
This status allows Chinese products such as steel to be saddled with steep tariffs if it is determined, based on international prices, that the country is dumping those goods. Recognition as a market economy, meanwhile, would force trading partners to use domestic Chinese prices as a baseline for judgments about export prices, limiting their ability to impose trade restrictions.
Prices in China are far lower than international prices for many goods. Steel products, the leading point of contention, go for 10-20% cheaper here than in Japan due to production overcapacity. China made 800 million tons of crude steel in 2015. But the domestic industry was capable of pumping out more than 1.1 billion tons, putting excess capacity at nearly three times Japan’s actual output for the year.
China has sought to close this gap by boosting exports. The country sent 24 million tons of steel overseas in 2009. By 2015, that amount had more than quadrupled to 112 million tons. The influx of cheap steel eroded earnings at Japanese, European and American steelmakers, forcing widespread layoffs.
Chief Credit Strategist Charles Himmelberg says 2017 will be “High growth, higher risk, slightly higher returns”
Slightly higher returns relative to 2016. “Best improvement in the opportunity in global equities is in Asia ex-Japan.”
Fiscal stimulus in the U.S. will help reflate the economy
No imminent trade war on the horizon, any re-negotiation of agreements currently in place (like NAFTA) to focus on attempts to improve the prospects for the U.S. manufacturing
The Emerging Markets risk ‘Trump tantrum’ is temporary
Forecasts ($/CNY at 7.30 in 12 months) a depreciation for yuan well beyond forward market pricing
Monetary policy will increasingly focus on credit creation
2017 will confirm that the U.S. corporate sector has emerged from its recent ‘revenue recession’
Forecasting large boosts to public spending in Japan, China, the U.S., and Europe, which should fuel inflationary pressures in those economies
Commodity-sensitive segments of the credit market have suffered pain in 2016, there hasn’t been much in the way of contagion… expect more of the same in 2017, with the credit cycle not making a turn for the worse
Conditional on a large fiscal stimulus in 2017, the FOMC will be obliged to respond more aggressively to an easing of financial conditions, all else equal … cautions that it’s no sure bet that financial conditions will ease in the year ahead, noting the recent rise in bond yields and the U.S. dollar