There are major macroeconomic events taking place at this point in time. The Chinese stock market collapse and Yuan currency re-balancing, the collapse in oil prices, Greek default, Japanese inflation, etc. The recent softness in the global equity markets, especially, China’s has led many to believe that Chinese growth may not be what we thought it was. This has dealt a serious blow to global GDP forecasts as the Chinese economy has been charged with the task of staving off global deflation. These recent events are undermining the market’s faith in the Federal Open Market Committee’s ability to raise interest rates, even nominally at the upcoming September 17th meeting. This confluence of uncertainty has driven the short end of the yield curve down as investors have sought liquidity and safety.
It is time to look at alternative ways to hedge against rising interest rates. Unfortunately, with the huge increase in volatility due to so many headline issues from Greece to trading halts on the NYSE, that it makes it tough to hold onto positions. Fortunately, the most liquid interest rate market is structured in such a way that hedging against inflation can be done with a reasonably fixed amount of risk.
It’s been an exceptionally confusing week to trade on a discretionary basis. Rarely can I recall a time when the markets have been more unsure of their next move. Fairly well every financial market has LOUD voices on both sides making good cases for their positions and their market forecasts. Between the FOMC meeting and the constant worry about whether or not or, when Greece will default has made picking a side based on theory and economics all but impossible. Despite this, we managed to remain fairly unscathed trading feeder cattle, Eurodollar and 30yr Treasury Bond futures; even a bit profitable.
Indecision, fear and uncertainty continue to strengthen their grip on the markets as we head towards the Federal Open Market Committee’s FOMC meeting beginning today as well as a possible Greek default by the end of the month. Faced with the possibility of correctly forecasting the actual events of the FOMC and the Greeks versus trading the reality of the markets’ collective reactions, investors are taking chips off the table. Here’s a brief look at why chips are stacked a bit differently than they have been since the ’08 economic collapse and the one pocket of the interest rate sector that could benefit substantially should indecision, turmoil and volatility be the effects of this month’s economic announcements.
I frequently talk about using the commercial traders as a proxy for fundamental information. Commercial traders’ pinpoint focus on the markets they trade takes into account the supply and demand structure within their individual markets, including stocks and bonds. Furthermore, their actions within the markets they trade literally, tell us what they expect to happen within their market going forward. Thus, our thesis that, “No one knows the markets they trade like those whose livelihood is based directly upon the correct forecasting of their market.” All things being equal, when my analysis of the fundamentals seems confounded, I defer to the respective experts within their markets. Finally, when the market sectors are analyzed in total, commercial traders’ actions can lead to a bigger picture. The recent shift in their positions within the financial markets leads me to believe Continue reading Expected Turbulence in the Financial Markets
Commercial traders have been selling Eurodollars at an amazing rate. The Commitment of Traders report shows that they’ve sold more than 1,000,000 contracts since mid-September. You can see on the chart below that this selling has shifted their momentum to the sell side for the first time in sixteen months. We took a closer look at this for our piece in Equities.com.