DAX, Euro and Bund reaction to QE Annoucement

Market shows vulnerability on the back of SNB

This morning we had one of the biggest moves that I’ve seen in my trading career, could be one of the biggest moves ever in terms of the time frame it took place in. The Swiss National Bank decided to remove the 1.20 floor on the Eur/Chf, which led to a 2200 pip move up in the Swiss franc future, and an even bigger move of 3700 pip move down in the Eur/Chf from 1.20 to 0.83 at its lows.

The trading which ensued was super volatile but what was more worrying was the absolute disappearance of liquidity in pretty much all markets. The ES was looking as thin as the Dax, the NASDAQ was trading 5 to 10 ticks wide with 1 and 2 lots on the bids and offers. After an initial sell off in Stocks, they bounced back, but with liquidity disappearing that quickly suggests that any major event that could occur could lead to a bigger flash crash type scenario, where big orders are getting out at market with literally nothing in the book, leading to massively exacerbated moves. This is what happened with the Swissy, where the CME halted trading a number of times, as the market was so thin, and large stops were getting triggered. Given that pre announcement we had 6S (Swiss franc) future trading at roughly 0.99 and I saw up the ladder large orders getting executed up until the 1.21 region.

This type of move was the type that could put firms out of business as proper stops couldn’t be executed and so risk controls at many brokers being left vulnerable which left many accounts with a losses far exceeding their deposit. One of the firms which has been reported to have this problem is IG index, which reported a loss in the origin of £30 million on that move, as the hedge wasn’t large enough to cover the excess losses in client accounts due to low liquidity.

I personally have had a 6k floating profit on an MT4 broker turn into a 13k loss instantly as the spread on the NZD/CHF which was already 400 pips at the time, (usually 15 pips) go out to 7000 pips!!! Triggering the account stop out leaving me in a huge loss. This surely will have to be sorted out with the broker and their liquidity providers as its simply market manipulation, and there is no way I could be paying a price that high above the underlying price at the time but the point being is the number of accounts this must have happened to must be enough to bring many brokerages down.

So the question is how prepared is the world for an unexpected event such as one today. Sure doesn’t look like they are. With no one willing to take the other side in times of extreme volatility, and with so much stimulus in place, the eventual unwind could be nasty. The SNB the biggest buyer of Euros, decided to pull the plug on the Eur/Chf floor today in anticipation of European QE, and the reaction was massive, when this happens on a bigger scale, well let’s hope you’re on the right side.

Choppy Start to 2015

Its been quite volatile in the Equity space as the past few days have all lead to big 3 digit swings in the Dow, as well as similar percentage moves in the other indices as bulls and bears fight it out. Markets are being kept up by the expectation of QE from the ECB this Thursday, and so far it is not a definite they will undertake the program, but if it doesn't happen this month, it is very likely to happen next month.
Data in general has been poor so far this year, with manufacturing and services data both in the UK and US coming in weaker, but this has been countered by FED comments that rates are unlikely to rise until the end of the year or beginning of 2016.
Not much movement in STIRs, as everything remains very flat, as Bunds hit over 157 for a yield of around 0.4%!
Its been slim picking so far this year to find anything to trade with much certainty, its a matter of being patient and waiting for those opportunities to come. Today is a quiet one, but data will be coming through from tomorrow with the main highlight being Thursday ECB press conference. The main benefactors will be the stock markets on any QE, and the Euro will be the victim, leaving the way for it to drop to 1.10 against the dollar.

End of Year Review 2014 - It's been a tough Year

This year has been a challenge to say the least. Many strategies were tested to extremes, volumes have petered out in many markets, and volatility has produced wild swings in other markets.

On the Bond front, we have seen Yield Curves Flatten across European and UK markets with the Euribor Yield curve almost totally flat. Negative interest rates coupled with low inflation has put to bed any rate increase in the near future, leaving QE as the next catalyst to try lift the economy
.

Trading has been very difficult in Euribors as volumes have dropped off a cliff. My strategy required Yield curve movement, but with the current policies and an 80% volume drop from a few years back, has pretty much ended any trading involvement for the time being in the Euribor Space. Many Market Makers have been hung out to dry as well and Euribor Options as you would expect has also seen dramatically reduced interest. I like many others are waiting to re-enter this market but as the Euro Economy falters, the likelihood for any kind of rate action seems very limited in the near future.

Short Sterling has seen more action as inflation in the UK was above the 2% CPI target in the early part of the year, and the economy was generally on a much stronger footing. Rate rise expectations were brought forward to Q4 2014 by some banks and this in turn lifted the front end spreads. However this expectation had waned coming to year end as inflation dropped, on the back of weaker commodity prices, and now is sitting just above 1% which is below the 2% target set. This has set back expectations to late 2015. Trading Short Sterling has been mixed this year, with some good opportunities selling the Spreads at the top of the range, which was around 17-20 in Sep15Dec15 and Dec15Mar16. However as the year went on, the volume continued to drop and there were times I was stuck in Spreads for over a month, which made it very difficult to consistently make money in the back end of the year.

Bonds in general have had a stellar year, with Bunds trading over 155, 10 Year T-Note traded over 127s and Long Gilts touching 120. This was against what most commentators were thinking early on, with the most surprising play being the up move US bonds. Despite the conclusion of QE and a very Strong Q3 GDP number Bonds still remain relentless to the upside along with Equities. The market has seemed to price in very low rates for a while to come and in my opinion it seems like this will hold true as the FED seem very reluctant  to start tightening policy. Firstly the recovery is fragile, second with the Stock Market as extended as it is, the potential for a sharp correction is very likely and we know central banks don’t like that. It seems to me the market has the central banks in their control, and I feel the first rate hike will be a coordinated hike with the UK possibly.

In my opinion raising rates from rock bottom to say 0.75% in the US or 1% in the UK shouldn’t be enough to derail any positive momentum that has built up. It gives savers a bit of yield also, plus stop the notion that we have to yield chase since you can’t get yield anywhere else. These rates would still be historically very low but not extra ordinarily low which in turn provides some sense of normality.

Equities have been in a world of their own in the past 2 years, with new record highs being hit on something like 20% of the days in 2014 in the US. Whilst the US is benefiting from improved fundamentals Europe is still very sluggish. Although judging by the gains in the DAX, CAC and EuroStoxx you wouldn't have thought this. The decoupling with the market and reality is alarming to say the least, but cheap money has been the number one catalyst for the market, and whilst stimulus is thrown around from Europe, Japan, China to name a few, the market will continue to rally because “There is nowhere else to get Yield” so they keep saying.

Many smart fund managers have been on the side lines looking for that elusive pullback, but we have seen time and time again that any pullback that does occur is followed by a very sharp reversal back to the upside. The action of the week on December 12^th was remarkable, we had a 4% correction in the SPX in 3 days followed by a gain of 38 points and 48 points for a two day rally of almost 90 points! The DOW in this same two day period moved up over 700 points, the DAX moved over 600. These type of gains is what you mite expect after a longer term correction, but not around all time highs. These sharp moves have made position trading very difficult, as you are almost certain to be stopped out.  With many fund managers under invested, any dip is swallowed by the large influx of cash on the side lines. Coupled with the reduced liquidity on the books, and increased volume at that time this created more exaggerated moves making it a casino like environment to trade.

Coming to 2015 I can imagine more of the same type of action, as multiples continue to increase with minimal earnings growth all on the back of low rates, QE and “Patience” from the FED.

What is clear though is that this epic bull market rally has been on the back drop of sluggish worldwide growth, super low rates, QE from many central banks, and falling commodity prices underpinning low inflation. However the longer this continues the more out of sync with reality this market will become, and history has taught us that this doesn't end nicely.

Personally this year I have had to change my strategies a lot and going forward I will be using a lot more options to create synthetic longs and shorts, as it will give me time to be right rather getting whipsawed out. The key to being profitable right now is to survive the sharp swings when they come, and being patient. While markets continue to be at highs, the risk to reward for going long in both Equities and bonds is a high risk trade in my opinion, so my bias will be to the downside. Although the bears have been killed the last two years, the key is too stay small, and play many occurrences.

I can see 2015 being similar to 2014 in the early part of the year, with buy the dippers pushing Equities up on any pullbacks, and Bonds pushing up on any sell offs, coupled with more declining volume. Although I think if this pattern continues and macro data continues in its current trajectory then we could get potential rate announcements from the fed which could put the brakes on the rally and provide some big volatility. What happens in the commodity space will also have an impact, as the continued decline in Oil will bring down the energy sector as well as many Oil producing countries which rely on Oil as their main source of income.

As far as trading Is concerned it is likely we going to see the market continue to be increasingly dominated by Algos with human activity in the day trading space becoming less and less. Either way the next few days is a time to reflect and adjust those strategies to deal with the new normal that is among us.

Stocks drop as VIX ramps up

After a  roughly 15% rally in many of the major indices since the October lows, crashing Oil, as well as general geopolitical tensions have put the brakes on the rally, and we are now 3% off highs in the SPX, over 6% in the FTSE100, 4% in the Dax, to name a few. With WTI OIl trading below $60/barrell, basic material Stocks and Commodity stocks as you would expect have been hit hard,  and whilst cheap Oil is good for our pockets, its effect on the Stock Market is being felt with the Energy Sector dragging down the overall market.
On Wednesday the SPX fell 33 points, and the Nasdaq dropped over 60 points, which was the biggest sell off since October, but what was different was the price action yesterday. The SPX  and Nasdaq jumped 28 points and 60 points respectively off the open, and it seemed like it was your usual rally after a sell off, the price action was very similar to previous days too, where every down tick was met with a barrage of buyers. Now the theme for the past two years has been that when ever there is a big up move, it usually sustains it but yesterday we witnessed a 20 dollar drop in the SPX and 50 point drop in the Nasdaq in the last couple of hours, to still settle up on the day but way below the highs, and this was enough to install quite a bit of fear into the market.
The VIX, the volatility index on the SPX ended up the day over 8%! Heres what's interesting, not once in the last 5 years has the VIX been up on a day when the SPX has been up, let alone up 9 points on the day, is this a freak event, a so called black swan event?
What can you infer from this, well given this is the first time in 5 years such an event has happened, suggests there is alot more fear out there, everyone is expecting the Santa clause rally into the end of the year, but maybe...just maybe, the market may not play nice, and we are in for some downside. One thing is for sure, is when you move up and down in a straight line without healthy pullbacks on the way, price action is likely to be more erratic. With lower volumes going into the holidays, price action is likely to be wild!

Oil Drags down Equities

A 60 handle in Oil finally took the shackles of the Equity markets as ES dropped 1.5% and other Indices fell over 1% too. T- notes pushed above 127 in the March Contract and Bunds traded above 154!!
Bonds keep catching a bid as risk aversion takes place. Whats crazy is that Equities are just marginally off all time highs, so if we get any type of real correction, its safe to assumes Yields will continue to get crushed, and the curve will continue to flatten.
Personally I think that buying the dip in in Eurodollar Spreads is the play as it is likely that rates will tighten slightly next year as the Economy picks up steam, and cheaper Oil will only help that.
I've found it tough recently, cause you had a massive buy the dip yesterday and today we maintained the downside momentum, tough to tell which market you will get. I think there should be more downside to come but I don't think the dip buyers are done yet and its likely there will be choppy action till year end.
STIR Spreads remain flat, with a slight pick up in volume in Short Sterling, Although not enough to get me involved as much, I will be trading it light until next year where I hope for a pick up in activity.

ECB Sources hint at January QE Program

So after massive run up in the Equities, which is just the norm these days, with a down day a collectors item now, Draghi said in the ECB press conference that they had the reins in place for QE but mentioned it would happen early next year not necessarily January, but maintained that he would like to see the effectiveness of existing policy before embarking in such a move. 

The markets didn't like that and we saw a 200 point turnaround in the Dax, which is warranted given the 900 point move up we had based on the idea QE was happening. However it just seems like Central Bankers just cant let this market go down, its as if there is an agenda to ensure it continues in this trajectory. 3 hours after the ECB press conference finished "Sources" reported that the ECB are preparing a broad based QE package for Jan, with the the package envisaged to include all kinds of bonds but no Equities(apparently). This as you can imagine pushed everything back up again, and we are back to where we were. 

Although this hasn't been confirmed, the market is taking its weight in gold and pushing towards new highs.

Moral of the story is don't fight this market. I've been burned quite hard balking at the rationality of this 15% up move without any pullback, but it seems this is the new way. When you probably have central banks buying stocks, sellers have no chance!