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2015-07-31 17:19:55

Posted by
Steven Levine
Fixed Income Reporter
MNI News
Contributor
Macro

MNI US DataWatch

The August 3 week will include all of the early month data, particularly the July employment report on Friday that is expected to show a 215,000 rise in the month. The unemployment rate is forecast to remain unchanged at 5.3% after dipping to that level in June. Prior to employment, there will be data released for ISM manufacturing and nonmanufacturing conditions, vehicle sales, construction spending, and international trade. Outside of data, the Treasury will hold its quarterly refunding press conference on Wednesday.
 
Here is a closer look at the key data in the coming week:
 
NONFARM PAYROLLS FOR JULY, FRIDAY, AUGUST 7, AT 8:30 A.M. ET
 
Nonfarm payrolls are forecast to post at 215,000 in July after coming in very near expectations in June. The unemployment rate is expected to remain at 5.3% in June on a sharp decline in participation. Hourly earnings are forecast to rise 0.3% after June's flat reading, while the average workweek is expected to remain at 34.5 hours.

Over the last 10 years of forecasts for July payrolls, there were five overestimates, including the last two years, and five underestimates. The absolute average miss of 35,400 over that 10-year period was smaller than the 47,000 average over the same 10-year period for June payrolls.
 
 
More recently, the median estimate was nearly on target in June after a large underestimate in May. Large downward revisions to April and May payrolls extended the recent streak of downward adjustments to five consecutive months, suggesting that June’s 223,000 level may be adjusted lower.
 
 
PERSONAL INCOME AND PCE FOR JUNE, MONDAY, AUGUST 3 AT 8:30 A.M. ET
 
Personal income is expected to rise 0.3% in June, as payrolls rose only 223,000, hourly earnings were flat, and the average workweek held steady at 34.5 hours. Nominal PCE is seen up 0.2%, as retail sales fell 0.3% and were down 0.1% excluding motor vehicle sales. The core PCE price index is forecast to rise by 0.1% after 0.1% gains in each of the previous two months.

ISM MANUFACTURING INDEX FOR JULY, MONDAY, AUGUST 3, AT 10:00 A.M. ET
 
The ISM manufacturing index is expected to rise to a reading of 54.0 in July after rising in June. Regional conditions generally indicated modest growth in the month, based on the already released data.
 
Over the last 20 years, analysts have overestimated manufacturing ISM in July eight times, with an average miss of 2.29 and underestimated it 11 times by a smaller 1.97 average. The overall absolute average miss was 2.00, larger than 1.44 in June. When sign is considered, the average miss was -0.17 due to the larger number of underestimates.
 
Looking at the most recent 10 years, there were three overestimates and seven underestimates. Over the 10 year period, the absolute average miss was 1.76, much larger than the 1.50 average in June. More recently, there have been underestimates in the last two months.
 
 
CONSTRUCTION SPENDING FOR JUNE, MONDAY, AUGUST 3 AT 10:00 A.M. ET
 
June construction spending is expected to rise 0.7% after rising 0.8% in May. Housing starts and building permits both jumped in the month, suggesting that residential building could post a solid gain.
 
DOMESTIC-MADE VEHICLE SALES FOR JULY, MONDAY, AUGUST 3
 
The pace of domestic-made vehicle sales is expected to rise to 13.7 million seasonally adjusted annual rate in July after sharp movements in the previous two months. Seasonal adjustment factors in July typically subtract less from the unadjusted levels than in June.
 
FACTORY ORDERS FOR JUNE, TUESDAY, AUGUST 4 AT 10:00 A.M. ET
 
Factory orders are expected to rise 1.8% in June, as durable goods orders were already reported up 3.4% on a surge in transportation orders, particularly aircraft orders.
 
INTERNATIONAL TRADE FOR JUNE, WEDNESDAY, AUGUST 5, AT 8:30 A.M. ET
 
The international trade gap is expected to widen to $42.6 billion in June after rising modestly in May. Boeing reported a solid rebound in aircraft deliveries to foreign buyers while manufacturing industrial production was flat and excluding motor vehicles was up 0.3%, suggesting exports posted a modest gain. At the same time, import prices were down 0.1% overall and down 0.2% excluding a small rise in the price of imported petroleum products.
 
NONMANUFACTURING ISM FOR JULY, WEDNESDAY, AUGUST 5, AT 10:00 A.M. ET
 
The ISM non-manufacturing index is expected to rise to 56.1 in July after rising slightly to 56.0 in June. Regional data from the Dallas and Richmond districts suggest solid improvement, as did the flash Markit Services index.
 
 
WEEKLY JOBLESS CLAIMS FOR AUGUST 1 WEEK, THURSDAY, AUGUST 6, AT 8:30 A.M. ET
 
The level of initial jobless claims is expected to rise by 7,000 to 274,000 in the August 1 week after a 12,000 rise in the previous week. The four-week moving average fell by by 3,750 to 274,750 in the July 25 week. The 296,000 level in the July 4 week will roll off the four-week average calculation as the current week is added, which would lower the moving average if the MNI forecast is realized in the current week, all else being equal.
 
 
Seasonal adjustment factors expect unadjusted claims to fall slightly in the August 1 week. Unadjusted claims fell by 32,519 in the previous week. In the comparable week a year ago, unadjusted claims fell by 9,748, a more than seasonal factors had expected, resulting in a 5,000 decrease in the seasonally adjusted figure.
 
 
CONSUMER CREDIT FOR JUNE, FRIDAY, AUGUST 7, AT 3:00 P.M. ET
 
Consumer credit usage is forecast to rise by $17.8 billion in June after $16.1 billion rise in May. Retail sales were down 0.3% while sales were down 0.1% excluding motor vehicles and down 0.2% also excluding gasoline station sales, suggesting that revolving credit use was weak. Nonrevolving credit use should be again the core of the overall increase.



MNI is a wholly owned subsidiary of Deutsche Börse Group.

This article is from Market News International (MNI) and is being posted with MNI’s permission. The views expressed in this article are solely those of the author and/or MNI 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.

2015-07-31 13:52:17

Posted by
Steven Levine
Fixed Income Reporter
MNI News
Contributor
Fixed Income

MNI's U.S. Risk-O-Meter

Sales of new investment-grade corporate bonds fell in-line with expectations this past week, as issuers continued to take advantage of still ultra-low interest rates and calm market conditions. Issuance was again dominated by supply from Financials, with Bank of America Corp.’s $2.5 billion, 10-year note announced at the top of the week, followed by a host of other names, including Citizens Financial Group, Inc., Regions Bank, American Express Credit Corp., Rabobank and Bank of Montreal. Overall, there was more credit quality diversity week-over-week, however sector variety diminished somewhat. Also, U.S.-based issuers continued to overshadow non-domestic borrowers by a considerable margin.

 

Keep pace with the latest corporate news with MNI's US Risk-O-Meter, a weekly recap of credit risk appetite! For more information and a full version of the US Risk-O-Meter, email Steven Levine at slevine@mni-news.com. Click here for more about MNI.


This article is from Market News International (MNI) and is being posted with MNI’s permission. The views expressed in this article are solely those of the author and/or MNI 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.

2015-07-31 12:32:31

Posted by
Fariba Ronnasi
CEO, Elite Wealth Management Inc
Contributor
Macro

Arbitrage Opportunities Abound

Summary

  •  Increased volatility in the global marketplace has created some interesting arbitrage opportunities.
  •  Two mergers present an opportunity for investors looking to speculate on mispriced equity valuations.
  •  Pair trades using ETFs that follow China and gold are highly correlated and could be a way to diversify against speculating on market direction.

Financial markets around the world have been roiling over the past few weeks. The Greek debt crisis, Chinese stock market crash, and plunging oil prices have triggered a wave of selling and have reintroduced volatility back into the markets.

The VIX, an index that measures overall fear levels in the stock market, has been on a roller coaster for the month of July. It hit a high of 20.05 on the 9th before seemingly settling down again, touching 11.77 by the 17th. Since then however, volatility has slowly been rising and now stands at 13.44 as of the close of the 28th.

The increase in uncertainty is inversely correlated with how stocks have been doing lately. The S&P 500 experienced its first five-day losing streak in six months this past week. As of the close of the 28th, the index has dropped 1.65% since last Monday.

Investors are now expecting the upcoming two-day Fed meeting to result in a more cautious outlook and could even prompt Janet Yellen to postpone any interest rate hikes until next year. As trepidation builds in the global marketplace, a growing sense of fear has begun to grip the minds of traders.

However, as any savvy investor knows, when the markets panic, there are bound to be opportunities available.

Wandering from the Mean

When any kind of momentum builds up in the financial markets, stocks and other asset classes can become victims simply by association. A company might not have any exposure to China at all, but widespread selling will still end up taking down the stock. Companies across all sectors can end up being sold off despite having strong fundamentals and solid growth expectations that aren't affected by exogenous factors.

Assets can naturally deviate from their fair value even in the steadiest of markets, but when volatility rises and there's panic in the markets, investors can find inefficiencies almost anywhere. Furthermore, when prices diverge and begin to trade out of sync with other assets, investors have the opportunity to trade using arbitrage.

Efficient Market Hypothesis states that an asset's current price is appropriate and fairly valued given that all available information is known at any given point in time. In reality though, this isn't always the case. Arbitrage capitalizes on assets that have become disconnected from their fair value.

While some arbitrage opportunities present themselves naturally, others tend to occur more frequently when financial markets trade erratically, such as now, when many investors are hitting the panic button and selling. Certain types involve taking on a lot of risk, while others almost have a conservative feel to them.

Risk Arbitrage Finds Profits from Mispriced Assets

In theory, the best type of arbitrage to practice would be pure. This is when two identical assets trade at different prices. Imagine finding two companies in the same sector with the exact same cash flow, growth expectations and so on, but trade at different prices. There would be an opportunity to sell the higher priced stock and buy the lower priced one, making a profit on the difference. Unfortunately, it's impossible to find companies that are so identical that they can be traded in such a manner. However, by introducing a little risk into the equation, arbitrage opportunities can be found.

Merger Arbitrage

Perhaps the most common type of arbitrage practiced on Wall Street is merger arbitrage. Profits are made on the spread between the price of a stock before an acquisition is announced and the buyout price of the same stock. In some cases, the differences can be quite vast and the opportunity for instantaneous profits is the number one source of insider trading scandals.

Right now there are two deals worth taking a closer look at:

Anthem Inc. (NYSE:ANTM) and Cigna Corp. (NYSE:CI)

Health insurance giant Anthem negotiated a deal that was announced just last week to buy out Cigna for more than $48 billion, or roughly $188 per share. Rumors of the purchase had caused Cigna's stock to spike during the latter half of June, but both stocks fell following the official announcement.

Interestingly, the terms of the deal itself presents investors with an opportune arbitrage trade. Anthem is set to pay $103.40 per share in cash and 0.5152 of a share in Anthem stock. All in all, it equated to about $188 per share as of the date of the valuation on May 28th.

What investors should consider is that the actual price of Anthem's stock will affect the new value of Cigna's stock. Anthem closed at $154.20 on the 28th, which makes Cigna's stock worth $181.45. At Cigna's closing price of $145.84 on the 28th, it represents a potential gain of more than 24%.

Of course, the biggest risk is whether or not the government will approve the deal. It could be struck down as a monopoly since the deal would limit the number of major health insurers on the market from five to just four.

The other major consideration to the deal is the value of the company right now. If the markets continue heading down, the deal might be renegotiated or even canceled altogether. Investors should note though, that under the current conditions, Anthem's stock price would need to fall considerably to make Cigna's stock price fairly valued at today's price - down to around $82 per share.

SunEdison, Inc. (NYSE:SUNE) and Vivint Solar, Inc. (NYSE:VSLR)

Another upcoming merger that could present an arbitrage opportunity for traders is the recent buyout of Vivint Solar by SunEdison for $2.2 billion. Under the terms of the deal, Vivint shareholders will receive $16.50 per share with an expected closing date pending approval in the fourth quarter of this year.

Vivint's stock shot up more than 40% on the news, but isn't quite trading at par with its buyout price. If the deal went through as is, stockholders would gain about 4%. While it's not a large percentage, the likelihood of a deal is very high and even the collapse of negotiations shouldn't hurt the stock.

Interestingly, the terms of the deal are in question, citing a higher actual value for the company's stock for shareholders. The possibility remains that the offer could be raised to appease shareholders and the stock still trades at a slight discount even under the terms of the current deal.

A Less Risky Approach to Arbitrage

Merger arbitrage might be the most popular form of arbitrage, but thanks to the proliferation of ETFs, pairs trading is becoming much more common. In order to profit from pair arbitrage trading, two assets need to be very highly correlated with each other. If they begin to deviate from that correlation, there could be an opportunity for investors to profit.

Pairs trading differs from merger arbitrage in the fact that price direction doesn't matter. Speculation comes from the relative difference between the two assets and when they will become more strongly correlated again. It takes the guesswork out of the equation by not having to worry about whether the market is headed up or down and can be a very conservative way to play arbitrage. Keep in mind that high frequency/algorithmic trading has done an exceptional job of capturing these opportunities more quickly than the average trader can partake, but there are still plenty of opportunities that crop up if you know what to look for.

Here are two highly correlated pairs that tend to diverge and reconnect on a fairly consistent basis:

iShares FTSE China 25 Index Fund (NYSEARCA:FXI) and SPDR S&P China ETF (NYSEARCA:GXC)

It's easy to see how these two ETFs trade together by looking at the chart. Like most ETF pair trades like this, the two ETFs don't stay out of sync for very long. The longest stretch is about a month on average. To initiate a pair trade on these ETFs, you would wait until there was a clear divergence in price and place a buy on the lower priced ETF. Then you would sell short the higher priced ETF. The profit comes from the difference between the two ETFs regardless of the overall performance of the market or China itself. Based on the chart, investors stand to make a profit of nearly $1 per share on the difference when the ETFs become disconnected.

SPDR Gold Shares ETF (NYSEARCA:GLD) and PowerShares DB Gold ETF (NYSEARCA:DGL)

Exactly like the previous example, these two ETFs tend to trade in a very tight pattern making it a perfect candidate for pairs trading. This ETF pair is more tightly correlated, but has slightly less separation. Investors should look to make around $0.75 per share when the ETFs diverge.

Arbitrage for Profit or Diversification

While arbitrage strategies are often used as speculative investments, they can also be a good way to mitigate risk as well. Trading pricing inefficiencies requires a different outlook than simply betting on the direction of the financial markets, making it useful as a non-correlated trading strategy compared with most investment styles.

Merger arbitrage opportunities can be found in any type of market, but the current environment could create some additional value as investors sell without properly evaluating risk. A more conservative arbitrage trade involves using highly correlated ETF pairs in order to profit from pricing differences without needing to worry about price direction. As the markets undergo a more negative shift, speculating on pair correlations rather than stock values could be a less risky and potentially more profitable strategy.

 

Full Disclosures here.

This article is not intended as investment advice. Elite Wealth Management or its subsidiaries may hold long or short positions in the companies mentioned through stocks, options or other securities.

This article is from Elite Wealth Management and is being posted with Elite Wealth Management’s permission. The views expressed in this article are solely those of the author and/or Elite Wealth Management and IB is not endorsing or recommending any investment or trading discussed in the article. This material 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 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.

2015-07-31 11:18:02

Posted by
Russ Koesterich, CFA
BlackRock
Contributor
Macro

Why the Dollar's Strength Can Continue

Though currency market volatility is likely to continue, Russ sees the greenback continuing to move higher for these reasons.

 

Overall, the U.S. dollar has rallied this year, with the Dollar Index (DXY) now up by roughly 8 percent year-to-date, according to Bloomberg data. But the gain hasn’t been steady. Instead, the dollar has been on a rocky ride, as investors have repeatedly re-calibrated their expectations for U.S. growth and the timing of a Federal Reserve (Fed) rate hike.

Indeed, world currency markets have roared back to life lately after years of hibernation, with a handful of monetary policy surprises—including the European Central Bank (ECB)’s bigger-than-expected bond buying program and the Federal Reserve (Fed)’s delay in raising rates—leading to rising volatility, as the chart below shows. This begs the question: Where will the dollar go from here?

My answer: Though currency market volatility is likely to continue, I still see a stronger dollar over the longer term. Here’s why:

Diverging central bank policies

As the U.S. economy continues to modestly strengthen, the Fed will likely begin raising rates later this year, and possibly as early as September. In fact, in her recent testimony before Congress, Fed Chair Janet Yellen laid out a fairly upbeat assessment of the U.S. economy and left the door open for a September rate hike. While the U.S. tightens, most other central banks will likely remain in easing mode. (For more on this monetary policy divergence, check out the BlackRock Investment Institute “Diverging World” interactive graphic).

The U.S. energy renaissance

As the U.S. has become more energy independent, we’ve had to import less from overseas. Over the last 10 years, the U.S. current account deficit has been cut roughly in half, and a large part of that improvement has been a function of surging U.S. domestic oil production. Looking forward, rising U.S. production should continue to support a strong dollar.

U.S. dollar rallies have tended to last years, not months

Since the 1970s when the Bretton Woods fixed-currency regime ended and currencies began floating, a typical dollar rally has lasted roughly six to seven years. The increase in the dollar we’ve seen so far this year is muted compared with the strong dollar episodes of the early 1980s and late 1990s. The dollar’s recent rally may just be getting started. In addition, according to the BlackRock Investment Institute, dollar rallies tend to be self-reinforcing—a stronger dollar begets greater inflows into U.S. assets in expectation of further dollar appreciation. For instance, U.S. companies start hedging overseas earnings, increasing demand for dollars.

A rocky ride is par for the course

In past dollar rallies, the dollar’s rise is usually not uniform, with lots of dispersion across different currency pairs, and it’s characterized by sharp reversals. According to BlackRock Investment Institute research, history suggests the dollar usually rises moderately before the first Fed rate hike, then stumbles for a year (as fixed income markets often take a hit), before resuming its rally. The same pattern could repeat itself this time around.

To be sure, for this cycle in particular predicting currency movements requires divining the behavior of the world’s major central banks. The process is further complicated by the fact central bank policy now includes unconventional monetary policies in addition to changes in interest rates.

That said, assuming the dollar continues to appreciate over the longer term, there are several implications for investors. A dollar that remains strong, albeit with some reversals, would put downward pressure on inflation and the earnings of U.S. exporters. Commodities are also likely to struggle in an environment characterized by a stronger dollar and rising real rates.

But further strength in the U.S. dollar would likely be good for equity markets that traditionally outperform on their currency’s weakness, such as Japan and the eurozone, as a stronger dollar will make their exports more competitive. Finally, the long-term strength in the dollar boosts the case for considering strategies that can help insulate an international equity portfolio from the impact of weak foreign currencies, such as currency hedged exchanged traded funds (ETFs).

Sources: BlackRock, Bloomberg

Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock. He is a regular contributor to The Blog.

 

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.


International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets and in concentrations of single countries.

The iShares Currency Hedged ETF’s use of derivatives may reduce the funds’ returns and/or increase volatility and subject the funds to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. A fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited.  There can be no assurance that any fund’s hedging transactions will be effective.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

©2015 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries. All other marks are the property of their respective owners.

iS-16184

This article is from BlackRock and is being posted with BlackRock’s permission. The views expressed in this article are solely those of the author and/or BlackRock and IB is not endorsing or recommending any investment or trading discussed in the article. This material 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 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.

2015-07-31 10:29:53

Posted by
Erik Norland
Executive Director and Senior Economist
CME Group
Contributor
Macro

El Niño & Natural Gas: Weather-Fueled Volatility

As we head into the fall of 2015, it appears that a strong El Niño is forming in the Pacific Ocean that may rival the one that occurred through 1997 and 1998 and had significant consequences for the natural gas market in North America.

El Niño is a macro-scale weather phenomenon associated with warmer-than-average sea surface temperatures across the Central and East-Central Equatorial Pacific. This weather anomaly typically increases temperatures over Western and Central Canada and over the Western and Northern United States and creates cool and wet conditions in Florida and the Gulf Coast. After a period of warmer equatorial waters in the Pacific, we often see cooler than usual waters, known as La Niña. Not surprisingly, La Niña has largely the opposite effects of El Niño, bringing cooler temperatures to much of North America. Both El Niño and La Niña usually begin between March and June and reach their peak intensity between November and February. (Figure 1)

The natural gas market is highly inelastic on both the supply and demand sides, making prices very responsive to short-term changes in fundamental drivers including production, storage levels, and weather. The natural gas term structure is defined by cyclicality, which is due to seasonal consumption related to the residential and industrial sectors as well as to electrical generation. Unexpected changes in the fundamental factors can create supply-demand imbalance, high volatility, and price shocks.

In this article we present evidence that El Niño and La Niña have consequences for Henry Hub Natural Gas futures prices –but not always the impacts that one might expect. El Niño events vary in duration and magnitude. In the 1997-1998 heating season, the US experienced the largest El Niño event on record and the second warmest winter since detailed records began in 1895, which led to warmer-than-average temperatures in the Northern US and colder-than-average temperatures in the South. More moderate-than-normal temperatures created high inventory levels and a supply glut in natural gas. As indicated in Figure 2, after climbing during the summer and early fall of 1997, Henry Hub futures prices declined to a low of $1.65 by the summer of 1998. During the winter season, gas prices averaged $1.92. This level was 20 to 25% below the seasonal norms.

By mid-1998, Equatorial Pacific Ocean temperatures had cooled down, creating a La Niña weather pattern that continued through the winters of 1998-1999 and 1999-2000. During these two heating seasons, the Northeast region, which is a major demand market, experienced below average temperatures and consumed more gas than previous winter seasons. Natural gas prices recovered in late 1998 and 1999 before soaring in 2000.

During the 1997 to 2001 period, El Niño and La Niña produced the sort of impact upon natural gas prices that one might logically expect:

  • El Niño, which led to warmer than normal temperatures in 1997-1998, reduced winter time natural gas demand, leading to a supply glut and lower prices.
  • La Niña in 1998, 1999 and 2000 caused colder than normal winters in much of the US and Canada, putting strains on supplies and eventually contributed to soaring prices. (Figure 3)

Looking out over a longer period of time, however, the El Niño/La Niña cycle’s impact upon natural gas prices has been far from evident and often counterintuitive.

As such, to analyze the relationship between El Niño, La Niña and the evolution of natural gas front month prices, we constructed three time series of synthetic spot prices using 1st nearby futures prices:

  • The El Niño series, which assumes that one is long only during El Niño.
  • The La Niña series, which assumes that one is long only during La Niña.
  • An overall series that assumes that one is long under both El Niño and La Niña.

The nearby future (the contract closest to expiry) is the contract most closely tied to the Henry Hub spot price. As such, using a time series of the nearby futures contracts without properly rolling them (reinvesting one contract into the next as it comes to expiry) can be a proxy for the evolution of the spot price. Moreover, stringing together the nearby contracts to create a synthetic spot price has the advantage of daily pricing. In actuality, spot price transactions don’t occur every day, leaving gaps in that time series --a problem that is easily avoided in the deeply liquid futures market.

Figure 4 shows that since the Henry Hub Natural Gas futures began trading in April 1990, the spot return of natural gas tended to be positive under El Niño and negative under La Niña with most of the difference coming after the year 2000. This result is counterintuitive given that El Niño typically produces warmer than normal temperatures in the Northern US, where wintertime demand for natural gas is the highest. During the 1990s, natural gas spot prices behaved in a fairly similar fashion overall under El Niño and La Niña –in spite of the aforementioned 1997-1998 El Niño and 1998-2001 La Niña. It wasn’t until after the year 2000 that the two time series began to diverge.

Much of the divergence appears to be coincidental. Natural gas prices went higher (+558% spot) during the mild El Niño that occurred between February 2002 and September 2005 for reasons that had little, if anything, to do with the weather. The February 2002 to September 2005 period witnessed an enormous run up in commodity prices in general (West Texas Intermediate crude oil + 228%, gold + 65%, high grade copper +149%). This phenomenon was driven in part by constrained supply growth in many commodities (including natural gas), a weak US Dollar, lower than normal US interest rates following the 2001 recession, a rebound in US economic activity beginning in 2003, and strong growth in emerging markets.

Hurricane Katrina, which struck in August 2005, at the tail end of this period of mild El Niño, also significantly boosted natural gas prices as Gulf of Mexico supplies were significantly disrupted. It should be noted that hurricane landfalls are statistically less likely under El Niño than they are La Niña (see NOAA’s study on the Effect of El Nino on U.S. Landfalling Hurricanes, Revisited (Bove, O’Brien, Elsner, Landsea and Nin: http://www.aoml.noaa.gov/hrd/Landsea/elnino/). So, here too, the Katrina-related rise in prices that occurred at the tail end of the 2002-2005 El Niño is probably coincidental.

Likewise the decline in spot prices that occurred under La Niña conditions in 2006 also appears to have little to do with the weather. A mild La Niña began in October 2005 which coincided with a return to normal in Gulf production and a decline in natural gas prices. This unwinding of long positions famously led to the collapse and liquidation of Amaranth Advisors, which held a large long position in natural gas, which was definitively liquidated in September 2006.

Finally, La Niña conditions prevailed during the period from March 2007 to April 2009, encompassing the acute phase of the financial crisis. While natural gas spot prices rose 58% during the period from March 2007 to early July 2008, they subsequently fell by 76% between early July 2008 and April 2009, mirroring the behavior of crude oil. Overall, they fell by 58% during the “financial crisis La Niña” for reasons that had far more to do with a recession-related softening of domestic demand than they did with changes in weather patterns.

As such, while it is interesting that natural gas spot prices have risen by a cumulative 659% under El Niño and fallen by a cumulative 75% under La Niña, we don’t put much stock in these numbers for the reasons outlined above.

Outlook and Conclusion

The NOAA Index has risen to a level of +0.9°C above normal in May and probably rose further in June, indicating that we have begun an El Niño that could continue to intensify significantly into the fall and winter. While El Niño has been fairly reliable in the past at bringing cooler, wetter weather to the Southern United States and moving the storm track southward, it has produced less reliable impacts on fall and winter weather in the North. It is entirely possible that we could still see a cold snap in the fall that sends natural gas prices higher. Likewise, it is also possible that a warmer-than-normal winter in the Northern part of the country will lead to lower demand and prices for natural gas.

The data make clear that El Niño and La Niña are not the primary drivers of natural gas prices over long periods of time– except that powerful El Niños, like the one in 1997-1998, have the potential to disturb US weather patterns sufficiently enough to create strong trends in the natural gas markets. The same can be said of extended periods of La Niña like the one that followed the 1997-1998 El Niño and lasted for three years.
 

Erik Norland is Executive Director and Senior Economist of CME Group. He is responsible for generating economic analysis on global financial markets by identifying emerging trends, evaluating economic factors and forecasting their impact on CME Group and the company’s business strategy, and upon those who trade in its various markets. He is also one of CME Group’s spokespeople on global economic, financial and geopolitical conditions.
 

All examples in this report are hypothetical interpretations of situations and are used for explanation purposes only.  The views in this report reflect solely those of the authors and not necessarily those of CME Group or its affiliated institutions.  This report and the information herein should not be considered investment advice or the results of actual market experience.

This article is from CME Group and is being posted with CME Group’s permission. The views expressed in this article are solely those of the author and/or CME Group 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.

2015-07-31 09:49:46

Posted by
Singapore Exchange

Contributor
Futures

SiMSCI Index Shines as Global Indices Retreat

  • The Greek crisis, turmoil in China equities, falling commodity prices and fears of an impending US interest rate hike have scattered the bulls, leaving investors with few haven options.
  • Yet the MSCI Singapore IndexSM (SiMSCI Index), anchored by premier blue chips, has remained stable during the recent storm.
  • According to analysts, Singapore is likely to embark on its journey of value creation, driven potentially through measures such as the restructuring and internationalisation of Government Linked Companies (GLCs).
 
Equities Face Perfect Storm
 
Global equity markets entered a turbulent phase as bulls and bears struggled during the first seven months of the year.
 
The Greek crisis, selling in China stocks, the commodities rout and an impending interest rate hike in the US have created a perfect storm of events. Amid the spike in volatility, the SiMSCI Index has emerged as one of the most resilient indices, closing just 0.17% down month-on-month.
 
 
Volatility spiked for major developed market indices, while the fear gauge for the SiMSCI Index stayed around 10%.
 
On the macro front, the latest advance estimates showed the Singapore economy expanding by 1.7% year-on-year in the second quarter of 2015, lower than the 2.8% growth recorded in the previous quarter. On a quarter-on-quarter seasonally-adjusted annualised basis, the economy contracted by 4.6%, a reversal from the 4.2 % expansion in the preceding quarter.
 
The growth momentum is not expected to deteriorate further in the second half, Monetary Authority of Singapore (MAS) Managing Director Ravi Menon said at a press conference on MAS's annual report for financial year 2014/15.
 
Election Looms
 
Meanwhile, election fever has hit Singapore.
 
The Electoral Boundaries Review Committee (EBRC) on 24 July released its report on new electoral boundaries, an indication that the General Election will be held soon.
 
According to the report, the city-state will be carved up into 29 electoral divisions, comprising 13 Single Member Constituencies (SMCs) - up from 12 in the last election - and 16 Group Representation Constituencies (GRCs), a rise from 15 previously.
 
Historically, Singapore stocks have chalked up mixed performances in an election year. While local equities soared after 2006 election, the performance was not repeated in 2011.

Going forward, Singapore’s equity market is less likely to be marginalised, and with its recent initiatives, the probability of increasing its global relevance has increased, Morgan Stanley wrote in a note.
 
“Two themes that are likely to drive Singaporean equities are restructuring and internationalisation of Government Linked Companies (GLC) and Emergence of Singapore's Globally Competitive Companies (eGCC),” it added.
 
SGX SiMSCI Futures
 
SGX MSCI Singapore Index Futures (SiMSCI Futures), listed in 1998, is the world’s first and main incumbent equity index futures contract tracking the Singapore stock market.  Denominated in Singapore dollars with a notional value of S$75,172 per lot, the SiMSCI Index futures grants investors one-stop access to Singapore blue-chip stocks.  Actively traded by local and regional investors alike, the local equity derivatives contract recorded notional average daily traded volume of S$1.1 billion in the first half of 2015. The SiMSCI Futures provides an alternative to leverage trading with the ability to long and short the Singapore market. The initial margin that an investor needs to place for trading one lot of SIMSCI futures is S$1,870. The average bid/ask spread for SIMSCI futures contract is at one tick (or 2.7bps of notional value) which is relatively more cost efficient than buying one SiMSCI basket in the cash market.  In other words, if the investor were to buy and sell one lot of SiMSCI futures contract simultaneously, it will cost him S$20, excluding brokers commission and exchange fees.  If he were buy and sell one SIMSCI basket in the cash market, it will cost him 20bps (approximately $150.34) excluding commission and exchange fees.

 

This article is from Singapore Exchange and is being posted with Singapore Exchange’s permission. The views expressed in this article are solely those of the author and/or Singapore Exchangeand 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.

2015-07-31 08:38:39

Posted by
Elaine Chen
Sales Trader
International Business Division
Guosen Securities
Contributor
Macro

GUOSEN Closing Bell (July.31)

MARKET

Chinese stocks closed lower today, with the benchmark Shanghai Composite Index ended at 3663.73 points. The A share market continued to retreat with shrunk trading volume, the market fluctuated below 3700 points and spiked around 2PM which became a pattern despite regulator’s effort to reduce market volatility by strengthen supervision on program trading. Beverage and home appliance sectors led the gains; while military and agricultural sectors led the falls. Combined turnover for both markets was 878.0 bn yuan, down 24.1% dod.

 

CLOSE

%CHG

VOL (bn yuan)

%YTD

SH Composite

3663.73

-1.13

460.4

+13.26

SZ Component

12374.25

-0.17

417.6

+12.34

CSI300

3816.70

+0.03

299.3

+8.01

ChiNext

2539.84

-0.83

108.5

+72.57

 

Sector

Top 1

Led by

Top 2

Led by

Upward-leading

Beverage

000752

Home appliance

300475

Downward-leading

Military

600893

Agricultural

000048

 

NEWS

*China Quanjude (Group) (002186.SZ) recently announced that as of now, the Beijing SASAC has not conducted a review for the stock ownership incentive plan of Beijing state-owned holding companies. The company still has no timetable for the stock ownership incentive plan. (AAstocks)

*CITIC Securities, in a report, stated that Tesla Motors's Model S sales in China are expected to exceed 1,900 units in the first half of 2015, recording a significant increase on a yearly basis. The sales from January to May amounted to 1,729 units. Tesla Motors's Leopold Visser, in an interview with DZH News Agency, said that the management is satisfied with the sales of Model S in China. (AAstocks)

*China COSCO Holdings (601919.SH) announced on 30 July that benefited from the subsidy for ship scrapping, the company expects its interim results to swing into a profit from a loss. The net profit is expected to be about RMB1.9 billion. DZH News learned that China COSCO Holdings received a ship scrapping subsidy of RMB3.963 billion at the end of June. (AAstocks)

FUND FLOW

This article is from Guosen Securities Co., Ltd. and is being posted with Guosen Securities Co., Ltd.’s permission. The views expressed in this article are solely those of the author and/or Guosen Securities Co., Ltd. and IB is not endorsing or recommending any investment or trading discussed in the article. This material 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 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.

 

2015-07-31 00:08:32

Posted by
Darren Chu, CFA
Founder
Tradable Patterns
Contributor
Technical Analysis

Natural Gas (NG) Rejected Again at Weekly Chart Triangle Resistance

Natural Gas (NG) sold off yesterday ahead of and following the weekly storage figures.  Yesterday's pullback occurred from just below descending triangle resistance (on the weekly chart), and flattens weekly and daily RSI and Stochastics.  With weekly MACD still sloping up, my longer term bias remains bullish, and I will look to establish an intraday long today once the 4hr Stochastics and MACD flatten out and begin turning up.

 

NG (CME NG Aug15) Weekly/Daily/4hr/Hourly

Tradable Patterns was launched to demonstrate that the patterns recurring in liquid futures, spot FX and equity CFD markets can be traded consistently profitably. Tradable Patterns’ daily newsletter (blog) provides technical analysis on a subset of ten to twelve CME/ICE/Eurex futures (commodities, equity indices, interest rates), spot FX and US equity markets, which it considers worth monitoring for the day/week for trend reversal or continuation. For less experienced traders, tutorials and workshops are offered online and throughout Southeast Asia.

This article is from Tradable Patterns and is being posted with Tradable Patterns’ permission. The views expressed in this article are solely those of the author and/or Tradable Patterns and IB is not endorsing or recommending any investment or trading discussed in the article. This material 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 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.

2015-07-31 00:08:30

Posted by
Darren Chu, CFA
Founder
Tradable Patterns
Contributor
Technical Analysis

WTI Crude (CL) Daily Chart MACD Positively Crossing

WTI Crude (CL) saw more consolidation yesterday, sliding slightly lower.  The break above descending wedge resistance (on the daily chart) hasn't provided much fuel for upside, weighed partially by a still slightly downward sloping MACD green line.  Nevertheless, weekly and daily RSI and Stochastics are bottomish, and daily MACD is making a positive crossover.  I am flat CL and will look to go long intraday in the 47.5-48.3 range today.

WTI Crude (CME CL Sep15) Weekly/Daily/4hr/Hourly

Tradable Patterns was launched to demonstrate that the patterns recurring in liquid futures, spot FX and equity CFD markets can be traded consistently profitably. Tradable Patterns’ daily newsletter (blog) provides technical analysis on a subset of ten to twelve CME/ICE/Eurex futures (commodities, equity indices, interest rates), spot FX and US equity markets, which it considers worth monitoring for the day/week for trend reversal or continuation. For less experienced traders, tutorials and workshops are offered online and throughout Southeast Asia.

This article is from Tradable Patterns and is being posted with Tradable Patterns’ permission. The views expressed in this article are solely those of the author and/or Tradable Patterns and IB is not endorsing or recommending any investment or trading discussed in the article. This material 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 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.

2015-07-31 00:08:11

Posted by
Darren Chu, CFA
Founder
Tradable Patterns
Contributor
Technical Analysis

Arabica Coffee (KC) Reclaims Weekly Chart Downchannel Support

Arabica Coffee (KC) surged yesterday as it broke above downchannel resistance (on the 4hr chart) and closed at 1.25 (just above the July low).  KC is now targeting daily chart downchannel resistance, and has successfully reclaimed descending wedge support (on the weekly chart).  I am flat KC and will look to reestablish intraday longs today in the 1.225-1.24 range.

 

Arabica Coffee (ICE KC Sep15) Weekly/Daily/4hr/Hourly

Tradable Patterns was launched to demonstrate that the patterns recurring in liquid futures, spot FX and equity CFD markets can be traded consistently profitably. Tradable Patterns’ daily newsletter (blog) provides technical analysis on a subset of ten to twelve CME/ICE/Eurex futures (commodities, equity indices, interest rates), spot FX and US equity markets, which it considers worth monitoring for the day/week for trend reversal or continuation. For less experienced traders, tutorials and workshops are offered online and throughout Southeast Asia.

This article is from Tradable Patterns and is being posted with Tradable Patterns’ permission. The views expressed in this article are solely those of the author and/or Tradable Patterns and IB is not endorsing or recommending any investment or trading discussed in the article. This material 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 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.

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