Weekend reading
Below are some highlights by some interesting facts about the past week’s trading. Courtesy FT’s Alphaville, combined with observations from thetrader.
Wall Street was unable to hold early gains fuelled by news of the death of Osama bin Laden, merger activity in the US and some encouraging economic figures. Trading was volatile elsewhere as the dollar, gold and oil prices swung back and forth between losses and gains. The dollar faded after an initial rally, touched a three-year low, and was slightly higher late in New York, its first gain in 10 days. Activity was subdued by market holidays in the UK and several Asian centres. Most analysts took the view that the death of the al-Qaeda leader would have only a short-term effect. “Apart from an initial euphoric reaction in risk assets, we wouldn’t suspect the killing of bin Laden to have any long-term financial market impact,” said Sacha Tihanyi, senior currency strategist at Scotia Capital
For cross asset correlations with the Dollar, October 2009 was a very important month. Admittedly, it was also the month when the previous Greek government lost the elections and it became gradually clear that the fiscal situation was in worse shape than previously thought. But to be fair, it took a few additional months for this information to become a dominating market driver. However, and more importantly, October 2009 was also the first month where it became clear that the risky asset recovery from the abyss of the credit crisis would not be a one-way street. Within the month the SPX rallied by more than 70 points to about 1100 only to drop back towards 1030 by the end. For the first time since equity markets had seen the trough, the steady decline in implied equity market volatility took a breather, too. The VIX index made a brief new local high above 30 after having already spent about 4 months clearly below this level. Something else happened in October 2009. The correction in equity markets went hand-in-hand with similar moves across a whole range of asset classes. In particular a number of FX crosses matched the equity moves like a carbon copy.
With the increasing correlation between Usd and equities, a quasi hedge, but still a very good one, would be going long the Usd, from a pure risk management perspective. With the rather steep skew in Eur/Usd, the set up for the Usd going parabolic was there. We only needed Trichet’s comments….
http://ftalphaville.ft.com/blog/2011/05/04/559076/goldman-ponders-puzzling-dollar-skew/
And then we had ECB’s famous words that started the collapse of the Euro. Bear in mind the short Usd and long Euro positions were at very high levels. On Friday evening those were added to, again, so Euro longs are at highest levels since 2007…..
And then the worst commodities sell off appeared, where previously unseen moves wiped out many Alpha chasers. CRB index had it’s worst one day drop in 2 years.
Since 1990, the standard deviation of daily price changes in front-month Brent crude (LCOc1) has been 1.64% (ignoring signs). Today’s current change is 6.1% (at time of writing) That is approximately 3.72 standard deviations IF price movements were normally distributed (which we know they are not), price movements should be within 1 standard deviation about 66% of the time, 2 standard deviations 95% of the time, 3 standard deviations about 99.7% of the time, and 4 standard deviations 99.99% of the time
On the oil move, which fell 10% on one day, we experienced volatility almost unseen. We’d love to see some of the HFT Algo models and their ability to cope with wild price swings and liquidity issues. Liquidity at some stages was almost non existent. Thetrader is very much concerned with another Flash Crash coming up. A small Flash Crash during this week, that never got any attention, was the fact that somebody managed to sell AAPL at -7.5% this week. We’d like to remind you that AAPL is one of the most traded stocks, in the world….
That’s a price change of more than four standard deviations — which is a statistical way of saying it’s something that should be seen on average only once in every 63 years, assuming a normal bell-curve distribution. Kemp also points out that at times on Thursday the move also approached five standard deviations — something which should only occur once every 7,000 years.
According to data from the CFTC, the short US dollar macro trade is heavily concentrated in the commodities space.Although it is difficult to get a reliable measure of cross-asset class positioning, Figure [2] measures the net open futures position across FX, commodities, equities and bonds. The five biggest positions as April 26 (latest data) were concentrated in the Mexican peso, crude oil, the Australian dollar, platinum and corn while the smallest were in US Treasuries, silver and S&P futures. From this analysis it might suggest that the correction in silver prices may be about to stabilise while crude oil and platinum being the next casualties in this correction. Naturally the relatively out-performance of corn may prove short-lived if investor liquidation spreads into the agricultural complex.
And some of the ETF’s got hammered;
Systematic daily outflows (daily rhythm equivalent to about -800 NatGas futures/day) continue in the UNG (US Natural Gas ETF) and the consequence is that the UNG has run out of Natural Gas futures. The Net Asset Value of the UNG might be of about 2 byn usd, it is left today with only 377 Natural Gas futures contracts . The rest of the assets are all invested in Natural Gas swaps. If the outflows continue at the pace of recent days then the UNG has no choice but to sell some of its swap exposure or start to be short futures, which would be ironic for an ETF that is supposed to replicate being long futures.
Which might make the UNG one of the first officially “long” ETFs on the market to use short future positions to achieve its tracking mandate — or at least the first that we’ve heard about.
So did all this commodity slaughter this week, coincide with everybody throwing out further QE’s by the Fed? For whatever reason, all “groupthink” Alpha Chasing Hedge Funds, all have the same position on, and every time that occurs, we get some black swan events, just like the commodities/Usd move this week. Let’s see if this spills over to SPX futures, that still seem to be well taken care of the “printers”.
Going into the weekend we got some news to think about. Is Greece exiting Euro, or is this false rumors by the Usd longs? Is it time to bring out the Drachmas again?