Looking back
Credit
Tightened across the US and Europe, with Asia price action being a bit more mixed. Interesting to note that UK 10 years are now tighter than US 10 years, 2.541% compared with 2.575% – no doubt a result of the Scottish potential disruption vote last week. I’d still expect the Bank of England to move before the Federal Reserve, so would expect the spread to reverse. German Bunds closed at 1.04%.
Equities
Equity price action was predominantly up in Europe and the US, with Asia seeing mixed performances. The S&P closed back over the 2,000 mark at 2,010.40 (my 2,100 by the end of the year still stands, but with a whole quarter left, it's starting to look conservative). The Nikkei is back in the black for the year – a call I’ve been talking about since early August – we closed at 16,321, which was up 2.6% for the week (17,000 by year's end is far from aggressive… and I am starting to think 17,500 to 18,000 feels more accurate now).
Alibaba (BABA:xnys), which we have been excessively bullish on, as a once-in-a-decade type of company finally debuted on the NYSE, closing up 38%. The USD 167bn to USD 231bn market cap leap makes it larger than the likes of Facebook and Tencent. I believe in three to five years time, it will in the top five worldwide and eventually it will be the biggest – a title that Apple currently holds with a market cap of USD 605bn
Currency
I think the markets dodged a big missile with the Scottish decision to stay within the union. I tweeted a day before the results, where I said it went against all my rules for trading and risk-reward, but I thought going long on sterling particularly versus the euro or yen was the right thing to do. For the tactical amongst you, you’d have made a lot of money in under 24 hours. Apart from sterling and the Canadian dollar, it was very much a story of US dollar strength, which has just seen very big moves continue, in a very short length of time.
Geopolitical risks and conflicts
I did not see any real change in developments in Ukraine, Iraq and Syria. The US decision to not send troops into Iraq is the right thing to do. Sending troops is exactly what the terrorist state wants. However confining the airstrikes to Iraq and not Syria defeats the whole purpose of effectively combating the terrorists.
Very interesting to note that the US is sending troops as well as resources to West Africa to help combat and contain Ebola – again underlying the significant danger of a global outbreak. As I was saying to a few people over the roaring F1 cars at the Singapore grand prix, I still find it amazing that somehow we’ve not seen an outbreak in the US, Europe or Asia.
Central banks watch
The Federal Open Markets Committee statement was very little changed, yet seemed to have content for both the doves and the hawks. The doves noted the wording was the same, including considerable time. The hawks noted that there were now two dissenters compared to one in the last statement.
My own take is that FOMC board of governors chair Janet Yellen has been remarkably consistent – everything else being equal – they will hike in the summer or the second half of 2015, as it was surprising to see the August inflation figure miss expectations at 1.7%, compared with estimates of 1.9% (down from 2.0% in July).
We need more data points, but the result would definitely take pressure off the hiking camp. This trend is also turning out to be a global one. Global inflation has historically never been so cool. I was really surprised by the continued USD strength following the FOMC statement, as it seemed to me the rally up until then was because of this expected language change, which did not eventuate.
In Switzerland, the Swiss National Bank defended the 1.20 EURCHF peg, indicating that it was willing to take more measures if necessary. That is, speculators beware.
Looking ahead
Short and sweet piece this week, given our flagship conference and Singapore grand prix weekend, with KVP as well as the rest of the franchise on client patrol. It's been a monster weekend with what cannot be called just a dinner but a real experience at Restaurant Andre and my first time at the F1, not to mention entertaining clients – who drinks scotch straight?
Seriously that’s like selling puts into a crash that you are about to create… I just do not see the upside. What was interesting was there were quite a few people that were stunned at some of the moves we’ve had, that is, making money way too quickly can be pretty spooky. The guys who followed our long USDJPY call will know what I am talking about.
Anyhow, all scotch aside, I feel that September has been very intense so far… particularly on the FX and macro side of things. It feels right to step back a bit and just clear the mind, in the business of finding profitable opportunities, you need to be able to sit on the sidelines now and then. As the US trader Jesse Livermore once proclaimed: “It never was my thinking that made the big money for me. It was always my sitting.”
Still another trade off Alibaba?
Yes, the Asian Godzilla has finally listed and there is a trade linked to this. Look to short Yahoo (USD 40.93) versus Softbank (JPY 8,740). This is a simple play off of Yahoo (YHOO:NASDAQ) getting ahead of itself going into the IPO, as it was being used as a proxy, except that unlike Softbank (9984:xtks), Yahoo’s share price was being completely dictated by the developments in Alibaba.
With Softbank holding onto every share in Alibaba and Yahoo having sold off a good chunk, I’d expect the spread between the two companies to become inverse, as Softbank outperforms going forward. I would keep the pair FX neutral and pick up the legs on a VWAP basis. I’ll drop a focused piece on this early this week. Note the Yahoo and Softbank chart below.
Yahoo and Softbank
Mispricing after the Scottish referendum?
I think it odd that we still have 10 year UK yields tighter than 10 year US yields following the Scottish vote, as I am expecting the BoE to still move before the Fed. Also growth and momentum in the UK is more robust than in the US. I would hedge the FX legs of this credit spread, just as in the –Yahoo/+Softbank spread, this is a tactical trade that I think would happen fairly quickly. Depending on the composition of your portfolios, one may also just be outright short the UK 10 years.
Our USDJPY call
Our timing and call two weeks back has turned from phenomenal to PFL (phenomenal and F#$@ing Lucky), see our previous call on this. As I like to say and as my Trading Floor always points out to me when I get things right, better to be lucky than smart. There is no substitute for timing in this business.
Structurally: You want to stay short the JPY, 110 is the next key level to test – and I am expecting 115 to 120 in the second hald of next year.
Tactically: Given that our entry was 105.00 or better (target 110.00, stop 104.40), we are up about 4% with no leverage (that is, assuming a typical leverage of 20 times and you’d be up 80% in two weeks – a very big move, with little to no drawdowns).
At these levels above USDJPY 109, I’d be shaving off the balance of my core position. I may be cheeky and leave 5% to 10% of the original position, just to have some optionality if we do get a break through 110. However it feels to me that we need a key event to take us over 110. One of the sharper and savvier clients I was chatting with is playing on optionality banking profits made so far, picking up some 110 calls and putting on a delta short position. This resonates well with me, as it feels like we need a bit of a pull back on this cross.
Macro data highlights for coming week
Very light as we approach the end of the month, I’ll be particular keen on Japan's inflation, as well as the preliminary market PMIs for Europe and the US. Biggest data point in Asia, is most likely China’s September P HSBC manufacturing PMI figures. Manfuacturing PMI figures are out on Tuesday.
Macro events
Main macro data-points for the week
Monday, September 22 (Time reference: Singapore/Hong Kong time zone)
Europe
- Consumer Confidence, September A, -10.5e, -10.0p (22:00)
US:
- Existing Homes Sales MoM, Aug, 1.0%e, 2.4%p (22:00)
Tuesday , September 23
China
- HSBC Man. PMI, September P, 50.0e, 50.2p (09:45)
Europe
- Markit Eurozone Man. PMI, September P, 50.6e, 50.7p (16:00)
- Markit Eurozone Services PMI, September P, 53.0e, 53.1p (16:00)
- Markit Eurozone Composite PMI, September P, 52.5e, 52.5p (16:00)
US
- FHDA House Price Index MoM, July, 0.5%e, 0.4%p (21:00)
- Markit US Manufacturing PMI, September P, 58.0e, 57.9p (21:45)
- Richmond Fed Man. Index, September, 10e, 12p (20:30)
Wednesday, September 24
New Zealand
- Trade balance, August, NZD -1125m e, -692m p(06:45)
- Exports, August, NZD 3.20bn e, 3.70bn p(06:45)
- Imports, August, NZD 4.45bn e, 4.40bn p(06:45)
Australia:
- Conference Board Leading Index Mom, July, 0.4%p (08:00)
Japan:
- Markit JP Man PMI, September P, 52.2p (09:35)
US:
- New Home Sales, Aug, 4.4%e, -2.4%p (22:00)
Thursday, September 25
Japan
- PPI Services YoY, Aug, 3.7%e, 3.7%p (07:50)
Europe
- M3 Money Supply YoY, Aug, 1.9%e, 1.8%p (16:00)
- M3 3-month average, Aug, 1.8%e, 1.5%p (16:00)
US
- Initial Jobless Claims, September 20, 298k e, 280k p (20:30)
- Continuing Claims, September 13, 2,440k e, 2,429k p (20:30)
- Durable Goods Orders, Aug, -18%e, 22.6%p (20:30)
- Durable Goods Ex. Trans., Aug, 0.7%e, -0.8%p (20:30)
- Markit US Services PMI, September P, 59.2e, 59.5p (21:45)
- Markit US Composite PMI, September P, 59.7p (21:45)
Friday, September 26
Japan
- Natl. CPI YoY, Aug, 3.3%e, 3.4%p(07:30)
- Tokyo CPI YoY, September, 2.7%e, 2.8%p(07:30)
US
- US 2Q GDP 3rd reading, 4.6%e, 4.2$p (20:30)
- US personal consumption, 3rd reading, 4.6%e, USD 4.2p (20:30)
- University Michigan. Confidence, Sep F, 84.7%e, 84.6p (21:55)