Short Sterling Spreads Rebound

Its been a while since I did my last post, with markets much tougher to trade as a STIR spread trader. Often the lack of movement has meant you have no option but to hold positions for multiple days or weeks till you take a profit.
I currently amassed a long Short Sterling position, which isn't surprising given the big bout of flattening that first started end of January. The Spread has come off a relatively large amount, falling to a low at the beginning of Feb. It was an unprecedented move, with the curve which has been dead for the past few months dropping like an out right, with Mar17Mar18 spread dropping from the 30s to 9 on Feb 9th. Since then it has rallied a little to a high of 25 but on Friday dropped to a low print of 10.
Ive been long the spread in some form for the past 2 months, jobbing in and out, to where I'm finally break even, and hopefully a move back higher by a few ticks in the 12 month will get me a good out.
Todays inflation data is a push the right way to help dispel some of the rate cut calls from the BoE, but whilst the economy is still sluggish looks like accommodative policy will be here for the foreseeable future.
The problem arises that technological advances are making things more efficient and hence lowers costs, which in term keeps prices lower. This inevitably puts a cap on inflation, so will we really get that inflation these central banks are looking for. I doubt it, either way for the time being its sell any rally in STIR spreads.

Markets gone wild in this not so lull Summer

Its been a long time since my last update, a lot has happened since then. It was always coming a major dump in this market, and the inevitable bounce back but this move had a lot more to it then many of the other ones since 2009 I have seen. There was a serious capitulation seen in the markets Monday, liquidation throughout. Mini flash crashes occurring all over the place, with the most notable being Apple, which dropped 12 dollars to a low of $92 of the open before retracing it all. Now in hind site, there was a bucket load of opportunity then and the following days, but its hard to be subjective when a move of that intensity happens, and generally the first thought for most people is account preservation. I can't imagine there were many that were totally flat as that move happened, either they were already loaded up, or like me when you saw the market drop 3% or 5%, you started getting long, and hey why not considering in the past 4 years no meaningful pullback over 5%, and in the past every pullback was followed by a sharp snap back. Either way as I got long deltas via selling puts and some long stock positions, the expansion in Option Vol pretty much destroyed any leveraged account. Given that selling puts has been the strategy of choice over the past few years, I can imagine many were badly burned as a result. The thing is the move happens so fast that it makes it hard to get out, and as expected the market has come back but volatility is still remaining high with the VIX still in backwardation. Monday was a bad day for premium sellers, and as the saying goes, its not whether you are write or wrong in trading that counts, its whether you can stay solvent to see your view play out.

In the Bond space, as you would expect you saw a rally across the curve with Short Sterling giving some great opportunities to get long the curve on the drop down. Jun16Jun17 Short Sterling dropped to 46 on Monday for it then rebound 7 ticks to around 53 in the coming days. Its now dropped back to 50s. Using this as a guide I'll be looking to go long again with a further dip if it comes.

Next week should see the usual raft of data coming, with the looming Sep Fed meeting the focal point in the month, with a potential rate rise on the cards. Although personally I think they will bottle it.

Summer market lull, Volatility down the drain

So much for the volatility, we were trading lower with markets on tender hooks, and then in a flash the ES is trading at all time highs, Dax rallies over 10% the VIX gets smashed over 30% and its back to the new norm, which is grind up, low volumes, low interest.
Its slim pickings out there but short sterling has been livelier of late.
Short sterling has shown a steepening bias, with Jun16/17 trading around 62, with almost a 20bp move over the past few months, as comments from BoE Carney as well as other BoE officials suggesting a possible rate hike this year. I have continued to fade the red/blue month spreads on new highs, looking to nick a tick. Trying to stay away from the whites, as the back end remains more active.
Looking forward we have the BoE rate decision tomorrow which is again likely to be a non event, but other then that pretty light on the economic data front. Trading is likely to remain subdued, unless any shock events arise out of the Greek bailout negotiations.

The Greeks have brought back the volatility at least!

Whilst the Eurozone and Greece have been at loggerheads, the increase in volatility and especially the rise in the VIX has been what the market has so badly needed. Rise in volatility has given so much needed premium to some of these options helping option selling strategies.
Algos have been working overtime lately with thin markets getting manipulated by every single Greek comment, Fading any extreme move has been the play rather then to go with it. Dax has traded in 500 tick range this week although moves have been sharp, it hasn't broke out one way or the other.

Bunds have been in a 250 tick range consolidating after the big drop in May. A firm break of 150 is needed to resume the downside, but a break above 153 could see a move back to 154.50. Volume has been good, and action choppy making it decent conditions to scalp.

Short Sterling is getting its mojo back with some decent volumes coming in. The yield curve has been steepening on the back of a potential rate rise this year, although events in Europe will largely determine the rate path in my opinion.

This weekend is the Greek referendum, and although I don't think anything will be solved it will provide some good tradeable opportunities. Volatility has increased in options due to this so Monday will see big option vega contraction on a yes vote.

Fixed Income technicals

Bund futures trade up 24 ticks at 150.93 this morning after trading as high as 151.06 earlier after slightly weaker German IFO data helped underpin the slight bid tone this morning. A break above the highs should see a test of 151.36, and a break above which could see strength up to 151.79. To the downside 150.60 remains good support, with a move below this to target yesterdays lows at 150.02 and then 149.93/85.

UK Gilt futures saw earlier weakness opening at 114.66 down over 20 ticks on the back of BOE member comments stating that the BoE should be ready to raise Interest rates as early as August. It is currently trading 114.65 trading at the lows of the day. Momentum remains to the downside with support at 11.48 and 114.27. A move to the upside would target 115.36.

BTP futures trade flat this morning having been down earlier in the session trading at 131.94 up 5 ticks. The future is trading mid range currently with upside resistance seen at 132.66 which is yesterdays high with a move lower targeting 131.56 then 130.57.

Bunds trade sub 150 on a 600 tick drop in 3 days

The past week has been a explosive week for the Bund with a 600 point drop since midday Monday. June Bund traded as low as 149.70 having been at 155.70 earlier in the week. This represents an increase of more then 200% in the yield in this time. Its funny as many analysts were calling for the Bund to be negative and now its pushing 1%. Tells you how much the analysts know. The unwind has been massive, with such a one way trade over the past year its inevitable that you would get an aggressive unwind. The drop in the Bund has sharply steepened the yield curve, with the Bund Bobl spread a mere hedged outright.
European indices have felt the pressure as the fall in the Bund has given strength to the Euro. The Euro trading at 3 week highs has put the Dax under pressure as export names get smacked.
Trading wise as I've said before, its all about deep pockets. The swings in the Bond markets and equities mean getting entry precision is vital. Keeping size small and allowing a bit more room for volatility is key in trading well at this time. I have shifted my focus more to options of late, with my long term UVXY position a real dog at the moment, but I continue to roll it over against my better judgement. Volatility has been high on bond plays with some opportunities in playing TLT as well as the Bond Futures optionss, with the recent move down providing opportunities to sell some puts. Trying to catch the falling knife in the future is a bit to rich for my blood right now, so options are my best play. Despite the fall in Bonds I think this economy isn't strong, its been sluggish for years, and so will always put off the central banks from doing anything on rates, and while inflation stays subdued, despite these moves rates are not going anywhere.  

Volatility continues to contract as volumes dissapate

Equities continue their grind higher as volume wains. As I write the ES has not even traded 500k contracts which is well below the years average, but low volume generally means sideways grind to slightly higher. The lack of volume is shown in volatility products as they continue to decline despite the worst macro month for the US in April since 2011. As always the name of the game is super low rates, and due to the poor data any near term rate hike is off the table.
Given that it has been 7 years since the credit crunch and still economies not firing on all cylinders, it is totally possible that we could have Japan style monetary policy, who haven't raised rates since 1989! This is certainly true in Europe as growth remains sluggish and due to the make up of the union it is unlikely Germany's strength will be a reason for a rate hike.
Whilst equities continue to grind to the upside action in the Bond markets have been alot more volatile with the Bund dropping 800 points in the space of two weeks before recovering at around the 154 level. The fall from 160 to 151 was one of the biggest drops in such a time period that I have seen, although with 10 Year Bund yields at around 0.1% at the high left little room for further downside. So the pullback was inevitable but the speed of the pullback was one which surprised many. This is often what happens when you have such a one directional market and the unwind happens.

On the equity front, net outflows has been at some of the highest levels since 2008 and yet we continue to go up. Thus if this money returns back to the market we could continue to see more upside. Although there is many reasons why this market should go down, the low rate environment and QE continue to hold it up, and so it seems this is the way it will continue .This in turn will continue to crush volatility, with UVXY and VXX at losing more then 50% off their value in the past month. Premium in options are very low, with Facebook for example having an IV rank of 0%. With such low IVs everywhere its hard to find much opportunity, and hence being very selective is the only play right now.