Capitalsynthesis

Investing and trading is only and always about probabilities. The probability of a severe correction in global equity markets had a window to occur. The probability for markets to take this window is passing as resistances are overcome and capital sustains her march out of cash and into assets. Central banks are determined to flush all and every element of cash into risk.

Negative interest rates are in the process of going global and are moving ever further along the yield curve and risk curve, even at the 5yr on German Bunds now and approaching zero even on the Swiss 10 year! Could high quality corporate bonds be next in line for negative interest rates? Very possibly in my view. Note Apple’s treasury department are already taking advantage of close to zero interest rates for AAA corporate debt in CHFs by issuing her latest credit paper in CHFs and paying 0.25% for a fixed 10yr issuance. As the stock yields more I guess they will buy back with the excess capital raised? As i say zero across all asset classes beckons it seems and on that basis equities can go to the moon (and beyond) theoretically.

Central bankers and policy makers alike are forcing global capital over a metaphoric cliff. They are perpetually blind to bubbles created by their actions. I’m reminded here of Greenspan’s now infamous 2002 quote that capture their coordinated blindness:

Its “very difficult to definitively identify a bubble until after the fact”.

As I’ve commented before we are in a race globally to zero and beyond. Zero across all investment asset classes. And consider this question please: when we have zero or negative interest rates across cash, bonds, stocks how attractive does gold become? In my view, on a relative basis, incredibly attractive as you cannot impose negative interest rates nor counter party risks on gold holdings.  If there is an ultimate end game to this cycle of monetary debasement it appears to this, in my view.

I attach two reports here below which cover either side of the argument of where next or rather which cyclical model are we following here? I would also make the point very clearly that black gold, (oil), is not gold. (I would also make the side point here than shale gas is not light sweet crude! and neither is it even LPG until that infrastructure is in place).

As a holder of bullion I see the breakdown in oil as a very positive development for bullion in fact. Active correlation traders will know that although oil has a long term positive correlation to bullion on the short term the two often traded as in inverse hedge to monetary (US$) debasement. To see oil come off in this way shatters the algo trade US$ debasement equals long oil. The trade for US$ debasement (in fact all fx debasement on the long term) equals gold.

As some of you know, I’m traveling at present across Asia. As I travel across Dubai, Hong Kong, Vietnam, Cambodia the US$ strength or rather yen and euro weakness is killing the Asian economies and this is very clear. This cannot sustain for long. The dollar pegs must go soon or the US$ must weaken again soon. (Note if/when their dollar pegs are removed their local equities will surge upward in value. A good macro trade imo).

Germany is likely to see inflation ahead of most economies if this sustains. Wage growth in Germany is at a real term score of 4 to 5% for this fiscal year and much of these number forecasts are pre the debasement of the euro. Germany is on fire to the upside for obvious reasons. Her fiscal surpluses on trade and current account will boom to the upside.I must remind that currency debasement games are a negative sum game globally as industrial company’s are forced to either hedge or reverse investment flows to the new monetary landscape.Once again this games assist mega caps who produce and source globally. The trend of the mega caps and consolidation continues thanks to our “great” policy maker and central bankster games.

Without delay here Fitzpatrick at CB with much discussion on oil and the cyclical roadmap:

cb-wktech-2015

And here the swiss team’s interim update release:

wklytech–update

More comments to come as soon as i have time as price developments are making me ‘sit up’ so to speak. A parabolic price phase threatens here thanks to the central bank’s actions, especially if Yellen hesitates.

All the best

Rich

European equities have a strong monetary tailwind for now. Unlike the Yen and US$ quantitative move the euro has debased prior to the commencement of the euro OMT program which commences in March. This effectively creates an even warmer tailwind to euro equities especially exporters though from a macro perspective how long this can sustain remain to be seen via US and German trade balances.

Here below please find this week’s major releases:

First up the Swiss team with their usual excellent weekly technical update. “Gold buy the dips”.

Wklytech-2-2-15

And here Fitzpatrick with his usual weekly update:

cb-wlyteh-30-1-15

And here GS with their weekly technical perspective:

gs-wktech-29-2-15

And here CS with their own technical chart update:

cs-charts-1-2-15

And here CS wiith their macro trades update:

cs-macrotrades-30-1-15

And here ML with a solar view:

ML-solar-jan15

And here a couple of ML reports on energy:

ml-energy-jan15

ml-oil-jan15

And here a couple of macro updates:

jp-macro-1-2-15

RBC-marcro-1-2-15

And here on seasonality:

RBC-seasonality-jan29-15

And here JP on flows:

JP-Flow-1-2-15

Here MS with their regular FX weekly:

ms-fx-30-2-15

And here ML with their FX 2015 trades..  Note the AUDUSD has already reached her target in 4 weeks.

ML-FX2015

And here ML with a US equity view of the consumer discretionary sector:

ml-usequity15

The long euro equity funded with euro cash has been the trade over the last week or so. The problem with the trade is volatility but for now the gr-exist has an air optimism founded on little substance but this is enough for now.

I’m traveling across Asia for the next few weeks but i’ll be updating as usual.

All the best

Rich

Another week of volatility sustains.

It was a historic week for news flow as the ECB finally pressed the OMT button. Not a collective quantitative OMT action but performed via the NCBs (National Central Banks). If the devil is in the detail of these sort of policy announcements this was the certainly the detail.

In the short term the action its quantitative easing so does it matter on whose balance sheet the assets are held? In terms of asset prices near term, no. Main land Euro indexes made fresh historic highs. But in terms of risk management, yes as this is clearly a new chapter for the shared currency.

This policy statement reversed the central bank trend in the euro zone of the last 15yrs or so. The central bank functions are decentralizing than centralizing. This gives a greater voice to the NCBs and therefore undoubtedly adds risk. For example, controlling communication from 28 local NCBs is no easy task. The chances for conflicting communication and therefore ‘shocks’ to the market have greatly increased. Its yet another receipt for volatility, in my view. As the SNB showed no technical model can ever help you avoid news flow shocks to the market. Technical models by nature never capture the unexpected asymmetric shock. My point is the ECB announcement has likely hard wired shocks into the euro OMT model and risk models needs to consider that on the medium and longer term! The devilish detail of the announcement spoke of disunity not unity even though quantitatively its positive.

So, having not touched on the asset class for many years events are starting to direct us to gold again. I have been increasing allocation and I’m going  to say a couple of paras on the asset class having been underweight during her 3 year plus cyclical bear market.

For wealth allocators the bullion trade is firmly back on the radar. Why? Wealth allocators have been struggling with this narrow market bull for some time. All but the best are busy scoring negative betas to the indexes they benchmark. When you add then, e.g. Central Bank unexpected news flow like the SNB’s last week or geopolitical actions like sanctions on Russia managing client’s wealth becomes an almost impossible task. This task will become harder if/as central bank inspired volatility increases. (Disunity see above). In summary, whether you manage US$ wealth or Euro wealth the low beta method to index global wealth is via bullion. Each dramatic event points to this and with each event more wealth managers turn to the yellow metal. Its becoming clear again that the yellow metal is reasserting her age old properties of acting as a store of value. In the last year “gold bugs” have not been the buyers but professional wealth managers are turning to the metal to protect their client’s assets. This internationalization and indexation of gold to wealth is a potentially a “structural” development which bodes very well for the yellow metal.

The next big test for gold will be when the US economy disappoints, likely in the coming months due to the strong US$. What assets will be sold and which will be bought when the cyclical US ‘recovery’ eventually evaporates? In my view, the question will likely be between two variables: A) will gold be the -beta to market moves and nominally fall but by less, for example, than say equity indexes? Or B) will gold be the alpha asset class and nominally rise vs all asset classes including US$ and Bonds? In either case, the secular gold bull market will likely be back.

In terms of cyclical models, that event would likely be a key indicator inflation was back on the agenda with significant implications for the broader  commodity indexes! And a warning, rationalizing price moves of asset classes via traditional notions of supply and demand are not useful in our world awash with paper. It wasn’t a useful thing to do in the 1970s and it won’t be in the coming years. Price can and often does disengage entirely from micro economic theory due to monetary debasement. Money supply with money velocity can overcome any micro economic text book theory.

And finally before turning to the technical models, i take a moment to unpick these macro secular issues due to risk management in the main. Operating purely from technical models can blind you to asymmetric market risks. Without understanding how the macro is creating the technical price moves investors and traders alike expose themselves to immense risks. In our current paper world risks can be hedged cheaply in fact. Structurally the entire system is designed to encourage leverage/money supply increases. I suggest, we use these hedges for as long as they are available.

Reports here:

Lets start with the Swiss team’s latest:

wkly-tech-27-1-15

Ill be updating this report through this morning as i realize this is a little late..  Keep checking this page..

Here a weekly MM technical view from Commerz:

Commerz-wklytech-22-1-15

Here CS with their multi market chart update:

CS-wklytech-24-1-15

Here CS with their prop analysis of the ECB OMT announcement:

CS-Macroecb-24-1-15

And here CS wealth on the same issue of the ECB:

CS-E-OMT-finace-25-1-15

And here MS with their usual FX wkly:

MS-FXwkly-24-1-15

Here JP with an update to their equity strat pos the ECB OMT event.

JP-equitystrat-25-1-15

Here JP FX calling for parity eurusd

eurusd-25-1-15

For what its worth, I agree that we are likely to see parity at some point in 2015 but i see the move as volatile spike down not a sustained move to parity as the dislocation to the global economy of such a devaluation would be immense if it is sustained. Germany’s trade surplus will be beyond embarrassingly immense. I hate to quote Cellente but he’s correct when he states: “currency wars lead to trade wars lead to world wars”.

Here JP on commodity fx:

jp-commodityfx-tech-25-1-15

Here GS with their wkly tech pack

GS-techwkly-24-1-15

For me the standouts here are eurostoxx600 and on the FX side the gbpusd. Both conviction 3 trades. Of the 2 the gbpusd trade is the more risky, in my view. CFTC shows that long US$ positions are extremely full at present. Its also correct that the short gbp trade is not full at all. The pair look nothing like the eurusd cftc positions so on this basis risk of a wider dollar disappointment but likely to be less volatile vs sterling than the euro.

Here an excellent report from JP post the ecb picking up exactly on the issues i mentioned live on hearing the news. Including negative consequences to the euro insurance industry as well as the trade war issues.The Greek withdrawals should be expected and sustain.

jp-liquidityflows-24-1-15

Here JP Macro data watch:

JP-Macrodata-24-1-15

And here JP with their quarterly metals forecast update.

JP-metalsQ115

Note the 2016 forecast for gold, 1200$. (Clearly if the Dow is at 1000 and the SP500 100 this would be a good result. I suggest any nominal numbers nowadays need to be covered correlated to other assets so confused we have become by central bank interventions. Throughout millennia when currencies are debased this is usually an excellent period for alternative stores of value to be demanded. This is all I can re-say).

Here an excellent CS chart pack on the euro sectors. I like euro industrials especially following Siemens huge disappointment.

CS-euroequity-charts-22-1-15

And here GS on euro equities post the ECB

GS-EuroECB-23-1-14

Here RBC with a market overview piece, post ECB news.. Draghi’s war on Deflation.

RBC-ECB-24-1-15

All the best

Rich

p.s. here hot off the wires a CS FX update. Target 1.08 vs the eurusd. 

CS-FXtech-27-1-15

This euro bounce have been weak so far. Fed in an hour or so could be important in reasserting the US$ bull, as could any news from Greece or Italy.

Its been an extremely busy start to the year with volatility staying high across most asset classes. FX and the PMs have stepped up a gear. The US$ bull market has been truly impressive. As impressive as the euro’s bear market. The SNB’s decision has thrown risk management into total confusion as historic volatility in the chf went from near 0 off the scale. Another black swan day for some care of yet another central bank’s actions.

We are a day or so away from the ECB’s historic decision on OMT, sovereign bond buying care of expansion of the ECB’s balance sheet. These are macro events that are potentially technical trend wild cards. The only way to hedge these events are via options. Insiders do not necessarily know what will occur and therefore price cannot be relied on here and now to provide insider directional guidance as to where trends are heading. Hedging your books in preparation for the ECB news event as well the Greek elections is a very wise thing to do in my opinion. This is why Ive chosen to lead this technical update with this reminder for all Capital synthesis readers. Reports like the CS report below “strategizing” to clients to stay long short the euro and long euro stocks is all well and good but if the ECB disappoints the reversal could be a tidal wave. If you are short the euro and long euro stocks I would cover the reversal risks with out of the money options covering the worst case reversal event.

Here the CS report strat for the ECB decision:

cs-ecbstrat-19-1-15

And here CS on the Euro

CS-FXeuro

For a company that lost potentially hundreds of millions on the SNB surprise move it seems no lessons have been digested to pass on to their client’s. #

As we can see from the latest CFTC report the long US$ position is at extremes or extremes. It is the most crowded trade in the market. This doesn’t mean it will end it simply means that risk management needs to be considered if you are involved in this position one way or another. Especially around such an important news event.

Here Scotia on the CFTC

ctfc

Here a macro view by RBC

RBC-marco-19-1-15

I realize many are waiting for the following technical reports so once again i’m going to update this release tomorrow with a V2 version and possibly v3 as the day progresses. I have a stack of reports to update with and some technical comments of my own.

Here with his usual technical weekly update Fitzpatrick from CB.

cb-wklytech-19-1-15

And here the swiss team’s first technical weekly update for 2015.

wklytech-20-1-15

Here the CS team with their wkly tech chart update

cs-techcharts-20-1-15

And a quick update on the commodities sector here by Barcap

barcap-comod-19-1-15

And with that please look out for updates through the day tomorrow. Its been an incredibility busy period trading and in book setup preparation for Friday but i will update tomorrow this release.

1st Update here (8.48 am GMT)

Here CS with a volatility report. Given the recent evidence (ie post the snb last week) I suggest they are a little conservative in this report.

cs-volatility2015

Their comments on Greece interesting. Ie than in 2012 Greece was the major source of volatility whereas this time around the market appears to not be pricing in any threat to stability from Greece. (Whenever a market places near zero volatility risk on an event like this its generally worth taking notice). More than 20% of the Greek economy is tourism, inside the currency union. In the event of the return to the Drachma expect this share of economy to surge. This would shatter Spain’s recovery in one move. Spain (who in turn also has an anti austerity party ahead in the polls for the nov elections) would also be forced to reconsider her membership of the currency union. To explain, a -6% (a conservative number!) from tourism income would shave a clear 1% from her GDP and have a disproportionate impact on jobs. Tourism is the main source of income for Spain’s vast numbers of low skilled part workers. I suggest Greece’s potential exist from the EU is more about Spain’s exist than Greece’s.

A long way of saying the market is showing a misprice of risk on Greece. In my view!

And here ML with a strat update:

ML-strat15

And here ML on US equities

ml-usequities-14-1-15

And again here with their 1st recommendations for 2015:

ML-EquityRecs-17-1-15

Here (12.30 GMT update) CS with an FX trade strategy doc. A continuation of the theme of US$ strength but with a risk management perspective.

CS-FXtrades-jan15

And here CS again making some excellent points re 1 month eurusd volatility is relatively low vs 2012 2013. Ie the options around the pair for trade or hedging are not expensive on a historical basis.

CS-macrotrades-19-1-15

A few more FX reports, given tomorrow’s main event.

Here MS with their regular FX technical weekly. (From the end of last week but little has changed and their euro thoughts re the ecb timely).

MS-FXwklytech-16-1-15

Here nomura on the eurusd

Nomura-eurusd

And here a couple of daily fx reports with some useful levels.

sg-fx-daily-21-1-15

Scotia-fx-daily

Its also worth making the point that fx trading in the last few days has been choppy and price hard to read. Many investors and traders are working to a different rhythm for now. Squaring their books, hedging things off and calculating exposures to various scenarios. We will get back to trading price as soon as the news breaks. Worth also mentioning that Syriaz is well ahead now in the latest poll in Greece. Any short term relief tomorrow may prove short lived due to Greece although those negotiations will likely be prolonged and therefore harder to market time.

All the best guys.

Rich

Its Boxing day so i’m not providing a full release here for a few days yet. I will release a 2014 retrospect and look ahead to 2015 pre the calender end of year but let me enjoy this holiday for a few more days guys. Having said the above, I appreciate that it is a time when part time traders have a little more time on their hands and its good moment for some reflection and planning for the year ahead. On that basis here some comments and a trio of reports below that may assist during this holiday period. On the near term markets are very thin and can consequently be pushed around to catch stops. Doubt all price moves on this basis I suggest, on the near term.

Firstly, technically there is no immediate correction here and now in the offing. As I suggest early in the rebound market breadth and contrarian indicators did not suggest a continuation the bear sell off. This was unexpected and hugely frustrating for many bears that had been waiting for this q4 correction since the end of q1. The correction was swift and deep but when she turned she turned very impressively, convincingly and she burnt alive all those who didn’t take profits on their shorts. The tech did suggest a continuation of trend so those that got stubborn need a moment of honesty is my comment here.

A few breadth tech charts:

First sp500. My comment would be that in a bull market as significant as the one we are in this is good enough. And at Christmas this is great!

Nas100 wise. Given Apple has suffered a significant correction this is relative strength. Nothing has broken here either on apple or the index. The probability move is for apple to at least attempt another new higher high which in itself would be enough to propel the index to make a new higher high. This is the prob trade and right now is not a bad apple entry.

Sp600

Not totally convincing but as i said seasonality wise this is enough.

Of course the wider nyse is struggling. Its that good old spread between main street and wall street. Until we see the wider housing market revive, (No signs yet), and mortgage credit be widely available again the nyse is likely to struggle.

And with that here a trio of reports to keep you busy. All asset markets inc fx appear on continuation of trend, for now. Its been the year of the US$!

First up here GS. I can’t recall seeing so many high conviction trades from GS! All continuations note. Is q1 setting up to be a bumper for fx and the Shanghai? Possibly and worth noting the positive correlation Shanghai AUD and Copper has broken down.

gs-20-12-14

And here ML with a 2015 view.

ML-2015

And here a quick tech set of chart comparisons..

Avi-19-12-14

So with that all the best for now guys. Hope you are all having a great break. Now on to 2015. As promising as Q1 looks h2 is likely to see some real volatility return to these asset markets. In my view.

Photo below, yours truly enjoying some mountain air. Happy holidays to all where ever you are this Boxing day

All the best

Rich