IB Traders’ Insight

View The Latest Videos View Videos

1 2 3 4 5 2 22


Macro

Rareview Macro - Next SOMA Matters Most This Year


Friday, June 29th is quarter-end. The next SOMA redemption day is Saturday, June 30th. A net $18bn of US Treasuries will be allowed to mature, weighing on US liquidity Monday, July 2nd.

To put this in context, since October 31st, the average net daily impact on US liquidity has only been $8.1bn. The only other time a net $18bn matured was April 30, 2018. On that day, the broad US dollar index (BBDXY) closed +0.31% and the S&P 500 closed -0.82%.

Note, the US dollar has risen, and the S&P 500 has fallen 5 of the last 5 and SOMA days where they fell on the last day of the month.

Regarding the S&P 500, the smallest fall was -0.69%. The largest fall was -2.23%. The average fall is -1.11%. Note, the -2.23% fall was on a Monday, April 2nd, following Friday, March 29th quarter-end, and Saturday’s maturity. This is the same quarter-end profile this week.

Regarding the US dollar, it is quarter-end for US corporations. Total repatriation in the first quarter related to new tax policy was $305bn, and the US dollar was to buy every month-end this year so far. With estimated total tax repatriation of $800bn to $1.2tn this year, why should the sky be a different color late this week?

The US dollar and S&P 500 response to the last 5 SOMA days should not be a surprise because it coincides with a more deliberate interest rate hiking cycle, an increase in the rate of liquidity withdrawal, and the economic convergence with Europe turning into a significant divergence.

While -1.11% in the S&P 500 is only a 1.41 standard deviation move in the S&P 500, something professionals are more than equipped to work through, they must deal with it on quarter-end when performance metrics matter more.

And, there is one other key variable regarding less liquidity that must be factored in – the stock market will close early at 1:00 p.m. on Tuesday, July 3, 2018, in observance of Independence Day on Wednesday, July 4th.

Finally, we would note that in July and August, a net $24bn of US Treasuries is expected to mature each month as the Fed increases the total pace of their balance sheet runoff next month to $40 from $30 billion.

Overall, the key point here is that this is a distinct theme in the market, including negatively impacting sentiment.

Remember, regarding draining the balance sheet, the Fed set out to boldly go where no central bank has gone before. No central bank has successfully drained a balance sheet of this size, especially during a deliberate tightening cycle that includes raising interest rates alongside it and the removal of forward guidance.

As a yardstick for monetary tightening, every $100 billion of balance sheet normalization equates to a 0.10% rise in interest rates. Therefore, the balance sheet reduction this year will feel like the Fed raised interest rates an additional 0.40%.

Using arithmetic, the balance sheet plus interest rate hikes, equals six hikes in 2018, not the pedestrian view of four. That is why SOMA matters.

                              

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


18752




Macro

Rareview Macro - Observation - Buy What the BoJ Is Buying


An asset – J-REITs – that benefited early from Japan Abenomics and has been supported by the Bank of Japan ever since is exhibiting signs of resurrection.

As a reminder, as part of their Comprehensive Easing program, the Bank of Japan continues to buy ETF’s and J-REITs.

The Tokyo Stock Exchange REIT Index (TSEREIT) closed +2.04% last night and is showing the largest positive risk-adjusted return across regions and assets.

Below are two charts.

The short-term chart shows the 21/40-day moving average sloping up. The degree of that slope should steepen more next.

The long-term charts show the 200-week moving average being recaptured, a cycle change.

Whether this observation is actionable is up to you. For now, we just observe that the trend signal has strengthened in recent weeks and there is a potential cycle change underway.

 

 

 

Observation – Canada

The Canadian 10yr bond is showing the largest positive risk-adjusted return in fixed income. Very rarely does anything related to Canada show up on our risk-adjusted return monitor. So, when it does, we pay attention to it.

To put in perspective the move in their bond market, about a month ago, the money market curve was priced for 3 rate hikes in 2018. Now, it is priced for 1 hike. The chart of their economic data relative to forecasts shows why.

 

 

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


18741




Macro

Rareview Macro - Observation: China Real Estate


Various equity benchmarks in China entered a bear market on a closing basis last night. However, the standout weakness was in the property sector.

The Shanghai Stock Exchange Property Index (SHPROP) is showing the largest negative risk-adjusted return across regions and asset class.

We view the 200-day moving average (DMAVG) as a short-term trend change, the 55-week moving average (WMAVG) as a medium-term trend change, and the 200-week moving average (WMAVG) as a cycle change.

Last night, there was a cycle change in Chinese real estate as SHPROP crossed below its 200-WMAVG.

 

Developers plunged in both the mainland and Hong Kong. It was reported the China Development Bank (CDB) will stop approving Pledged Supplementary Lending (PSL) for shantytown development, an important source of base money expansion and credit for the real estate sector.

To understand the terminology, we looked up the various terms to see if they are significant, which they appear to be:

  • China Development Bank is a financial institution in the People's Republic of China (PRC) led by a cabinet minister level Governor, under the direct jurisdiction of the State Council. As one of three policy banks of the PRC, it is primarily responsible for raising funding for large infrastructure projects. Established by the Policy Banks Law of 1994, the bank is described as the engine that powers the national government’s economic development policies.
  • PSL is a targeted lending scheme that allows Chinese banks to use their loan book as collateral for cheap credit from the central bank.
  • Shantytowns are a deprived area on the outskirts of a town consisting of large numbers of crude dwellings.

 

Then, to understand how much PSL contributed to money expansion, we reviewed this chart from Citic Securities, which shows PSL surged so far this year, up by 437.1bn yuan or 48.3% y/y as of May 24th.

Finally, these two tidbits added to the negative sentiment:

  1. Hong Kong government is expected to announce a tax this week on properties that are empty for more than one year as a way of helping ease the city's acute housing shortage and tackle the soaring home prices. (Source: Sing Tao Daily, local newspaper).
  1. Chinese real estate developers will face more than $80 billion worth of bonds maturing this year and the following two years, meaning that they could hurt the broader financial system if they aren’t able to reissue debt. (Source: Nomura Research Institute Ltd., executive economist and former BOJ board member, Takahide Kiuchi)

Observation – China Currency

The US dollar relative to the onshore and offshore Chinese yuan (USD/CNY, USD/CNH) is showing the largest positive risk-adjusted return in foreign exchange.

Many have highlighted that the PBoC set the reference point stronger than most estimates. Here is what headline writers left out.

The key observation is that the USD/CNY spot rate is now beginning to trade nearly 1% above the daily USD/CNY reference rate set by the PBoC. For reference, the PBoC will tolerate a 2% deviation in the spot rate relative to the mid-point.

When the USD/CNY appreciated (yuan depreciation) following the August 2015 shock-even and throughout Q1 2016, USD/CNY would trade very close to the mid-point of the band. However, in 2015, when the PBoC devalued the yuan by 3%, in the span of 48 hours, USD/CNY was more than 1.5% above the midpoint.

The inference is that the PBoC is deliberately trying to prevent the yuan from weakening.

 

 

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


18742




Macro

Rareview Macro - Gold/Silver Ratio Says Something Important is Happening


Like the 200-day moving average (200-DMAVG), we find long-term Linear Regression Channels can be a reliable technical indicator.

For those not familiar with Linear Regression Lines, it is a line that best fits all the data points of interest and consists of three parts:

  1. Upper Channel Line: A line that runs parallel to the Linear Regression Line and is usually one to two standard deviations above the Linear Regression Line.
  1. Lower Channel Line: This line runs parallel to the Linear Regression Line and is usually one to two standard deviations below the Linear Regression Line.
  1. The Upper and Lower Channel Lines contain between themselves either 68% of all prices (if 1 standard deviation is used) or 95% of all prices (if 2 standard deviations are used).

When prices break outside of the channels, it tells you either that there are buy or sell opportunities or else that the prior trend could be ending.

When long-term ratios, as defined by a "monthly" period, are beyond the 2 standard deviations (2-SD) threshold we believe an opportunity presents itself, and the past trend is ending.

Over the years, we track the Gold/Silver ratio for the predictive signal to sell gold and buy silver.

The key observation is that the long-term trend tends to reverse around historic economic or geopolitical events.

For example, in the last case, crude oil bottomed out in 2016 when the XAU/XAG ratio was trading at the 2-standard deviation line.

Here is an updated “monthly” chart going back 30 years.

It is too early to label today’s extreme, but we guess that it will fall into one of these categories: bond bear market, unwind of QE, protectionism, populism, North Korea peace deal, Presidential impeachment, etc.

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


18400




Macro

Rareview Macro - Fed Closer To Being Done


We continue to track anecdotes that historically illustrate that the interest rate market is beginning to formally price in the “end of cycle” dynamics. For example, the forward interest rate curves are already at zero or inverted. Today, we add another one for those keeping score.

What occurs towards the very end of a tightening cycle is to discount only the closest meetings as high probabilities of raising interest rates, but discount anything beyond what is perceived to be “neutral.”

Over the last week, the unconditional probability for the June 2019 meeting has dropped by 27% (i.e., 49 – 36 / 49). As you can see, the bars on the May and June 2019 FOMC meetings have reversed, whereas the bars between now and March 2019 have increased in probabilities.

This observation argues that the interest rate market thinks that the Fed is less able to get to 2.75% Fed Funds rate (i.e., four more hikes) or beyond it.

To see the remainder of today's edition, please sign up for a subscription to Sight Beyond Sight through Interactive Brokers.

Sight Beyond Sight® is a global macro trading newsletter written daily by Neil Azous. With close to two decades of institutional experience across asset classes, Neil interprets the day-to-day economic, policy and strategy developments and provides actionable trading ideas for investors. We invite clients of Interactive Brokers to sign up for a free trial in Account Management. If you are not a client of IB, you can sign up for a free trial by visiting our website.

This article is from Rareview Macro and is being posted with Rareview Macro’s permission. The views expressed in this article are solely those of the author and/or Rareview Macro and IB is not endorsing or recommending any investment or trading discussed in the article. This material is for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IB to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.


17883




1 2 3 4 5 2 22

Disclosures

We appreciate your feedback. If you have any questions or comments about IB Traders' Insight please contact ibti@ibkr.com.

The material (including articles and commentary) provided on IB Traders' Insight is offered for informational purposes only. The posted material is NOT a recommendation by Interactive Brokers (IB) that you or your clients should contract for the services of or invest with any of the independent advisors or hedge funds or others who may post on IB Traders' Insight or invest with any advisors or hedge funds. The advisors, hedge funds and other analysts who may post on IB Traders' Insight are independent of IB and IB does not make any representations or warranties concerning the past or future performance of these advisors, hedge funds and others or the accuracy of the information they provide. Interactive Brokers does not conduct a "suitability review" to make sure the trading of any advisor or hedge fund or other party is suitable for you.

Securities or other financial instruments mentioned in the material posted are not suitable for all investors. The material posted does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation to you of any particular securities, financial instruments or strategies. Before making any investment or trade, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice. Past performance is no guarantee of future results.

Any information provided by third parties has been obtained from sources believed to be reliable and accurate; however, IB does not warrant its accuracy and assumes no responsibility for any errors or omissions.

Any information posted by employees of IB or an affiliated company is based upon information that is believed to be reliable. However, neither IB nor its affiliates warrant its completeness, accuracy or adequacy. IB does not make any representations or warranties concerning the past or future performance of any financial instrument. By posting material on IB Traders' Insight, IB is not representing that any particular financial instrument or trading strategy is appropriate for you.