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.

My take on Navinder Sarao "Rogue Trader"

This whole week has given the media a lot to write about. The idea that a single proprietary trader from Hounslow can bring down the most actively traded futures market by Spoofing has really captured the imagination of the media and people a like. I have actually seen a lot of support for Nav as it has become totally clear that the allegations are ludicrous.
Firstly anyone who actually observes the markets can see that Spoofing is still alive and kicking today. It is a widely used strategy and the front running on those Spoof orders by the HFT algos are as quick as ever. You see that a lot of the time if you put any half decent size into the book you will get the front runners out in force, and it is so fast that manually you have no chance of mimicking the action. Often once the front runners have done their thing the size disappears. So although Nav is technically guilty for deploying the strategy he used, it is not an isolated technique and if they go after him then they need to go after everyone who deploys the strategy.
Secondly to then accuse him to be responsible for the flash crash is an insult to the financial system as a whole. The market is like a battle field, we are all trying to predict human behavior to make money. So why do support and resistance levels work well, cause you know that historically around those levels you have other traders thinking the same thing and you can use that to your advantage to make a high probability trade. So in today's markets its not much human behavior, but it is computerized behavior which drives the market.
So to try and read the Algos is the goal. Nav had found a way to do this, beat the Algos at their own game. Now there are good Algos and bad ones, and some of these Algos in the market that day weren't programmed to deal with the lack of liquidity at the time and misread the order book(most likely), which lets face it is never really real. Reading level 2 these days especially in the futures side is very unreliable. So these bad Algos were intensifying the selling which then caused the flash crash. As we know Nav's Algos were switched off two minutes before the plunge so he may have contributed to them getting into a proper mess. Now is this his fault, NO. Its like saying its Floyd Mayweathers fault for knocking out someone in a boxing match. This market is a big arena with many players, Nav was a big player who played the game well but should not be blamed for the bad players who as a result caused in my opinion the panic selling.
Nav was quoted as saying on the night of the Flash Crash that "I Beat the Algos". This is what he done, he did not bring down the market, nor did he plan to do so. These strategies have been adopted many times, and it just happened that on this occasion there was an adverse reaction.
Nav consistently did 1 to 2% of the volume on the ES, which considering the size of that contract, is huge! So clearly there was a lot of trading going on, the CME loved him just like all the exchanges love the HFTs cause they bring in a lot of business to the exchanges. But it seems Nav as a sole entity is easily dispensable, an easy target. The big firms have wealthy clients, and much more influential people behind their funds. So messing with them is messing with the wealthy elite.
Now of course this is just conspiracy, but its totally plausible. The only way prosecutors can have credibility with this claim is to go after all the firms which engage regularly in similar practices, and this way there is genuine legitimacy to what they are trying to do.
However this is incredibly unlikely since HFTs provide alot of the trading volumes on all the exchanges.
The whole saga in parts is comical, I was reading a piece in the paper claiming Nav traded in Hounslow so he can have a faster connection to those in the city and have an edge on them. When I read that I didn't know whether to laugh or cry. As most traders know, when trading US products on US exchanges, independent traders are always at a disadvantage cause you are at least 60 to 70 ms behind in speed (which is light years in HFT world), purely because of location. Most of the sophisticated Algos running in the ES have co located servers at the exchange giving them almost zero latency. So at best if he had his orders running on a co-lo server he would be on a level playing field. Second the big players in the city dont have normal internet, they have high bandwidth unshared lines, so it seems like the papers are just coming up with anything for a story.

I sincerely hope he is exonerated of the charges, but one thing is for sure, his life will be totally different after this. He is likely to be a hero in the trading world, it will be interesting to see whether he will be able to trade again, but either way lets hope common sense prevails.

They Bought the Dip...No Surprise

After what has seemed like a never ending sequence of up days the market has come down with a bang on Friday only for it to make it all back over the past two days. Volatility products continue to struggle to contain any move higher as the market rally continues. Taking UVXY for example, it has lost over 50% of its value in the last month and a bit, as the roll cost are quite high as the futures are in contango, meaning that near term there is little fear , with expectation for more volatility later on in the year.
In Europe the DAX has taken a big hit the past few days, after hitting highs at 12400. Since then it has come off over 5% trading to a low of 11700 before bouncing back above 12000 two days later. Such a move isn't surprising given that QE still underpins the market. I have maintained my short for the past 3 months rolling up and extending duration, waiting for the inevitable correction. I initially had a 10500/10350 put spread in Feb which I rolled to 10550/10400, and now today I rolled my May Options over to June with a 11000/10850 put spread whilst selling a put at 9000 to cover the roll cost. With IV relatively low, playing the debit spread worked out to be the better play in my opinion.
I continue to be long Volatility as well, and this is the biggest drag on my portfolio as drag has pushed this contract down further, as the effect of the roll is embedded in the ETF. UVXY is trading around 11.50 right now however it was trading at 37 earlier in the year. I'm hoping for at least a 50% retracement in this ETF.
I'm currently looking into shorting Oil if strength continues as it looks like there is not much more room to go and as for Equities, I don't see no reason why the buy the dip mentality will change so expecting more upside after every pullback.

Swiss issues negative Yielding as 10 Year Bond

As volatility continues to drag, and volumes subside, the market clearly is well supported as any downside action is just met with buy the dippers as worse economic data and easy money continue to support the markets.
Last Fridays NFP number was a bit of a shocker coming in at 126000 against an expectation of 200K plus, the initial reaction was a sell of in Equities and Bond Yields dropping, however we have seen time and time again that bad news is good news and this resulted in a massive reversal on Monday as all was ok again.  The move up has also pushed up European stocks to highs.
Bunds are above 159 again as Yields near negative territory and the Swiss Bank just issued the first negative Yielding 10 Year Bond which was over subscribed.
What is this world coming to, investing in an asset which they are charged to borrow to the government. In my opinion any fund manager buying this debt isn't doing his job correctly. However this is becoming normal as negative yielding bonds have become the worlds fastest growing asset class accounting for a quarter of the Euro Government Debt Market.
We now live in a world where people are happy to pay the government to lend them money, and one where Equities cannot go down cause we have low inflation and a sub standard economy. Yield curve plays are non existent, which leaves most of the opportunity in Energy related products.
With Oil and Nat Gas moving and providing opportunities. I'm looking to short any rally in Oil as we remain oversupplied, and we remain in a 45  to 53 trading range for the past few weeks, and until this breaks one way or the other, I will continue to play this range.
In Agriculture, the dip below 400 has got me interested in Corn again. looking to the July Future, I would be looking to go long on another pullback, but buying a put against it as a hedge.

VIX suggests little Fear as Markets Fall

Wednesday saw quite a substantial sell off in the US markets with the Dow down almost 300 points and the ES and Nasdaq down similar percentages. Thursday saw some further selling pressure pre cash open, with the Nasdaq printing down over 50 dollars and the ES down 20 points. At that moment you begin to think will the buy the dip pattern hold, or is this the time when it is just going to go.
One clue was the VIX, with the move up in the UVXY only 8% which isn't much considering it has lost 60% plus of its value in the past month or so. It was interesting watching the VXX and UVXY trade as it would reluctantly go up as the market was going down, but on any up tick it would be smashed back down.
All the VIX futures are trading in Contango meaning there is less near term fear in the markets, and hence the bounce was to be expected as the 20 point pre market down move was made back up by the end of the session.
It seems buy the dip is here to stay for a while, as long as easy money is available.

My long VIX plays are not playing out as I hoped so I have just continued to roll them in order to give me duration, however I have lightened my deltas slightly so not to leave me too exposed. Next week is a short week for many of us, although NFP will still be traded on the Friday with most of Europe shut. This is likely to mean the markets will likely be far more illiquid around the time of the release. However the number will likely have a greater impact on the markets as the FED is indicating raising rates at some point this year.