Macro Update: Trading Beta
By Nic Lenoir of ICAP
I apologize as I have not provided much added commentary on relative value trading ideas these past few days, I have been solely focused on trading bet (or risk) and digging into the data of last year's POMO days to isolate patterns and trends associated with Federal Reserve market operations. Regarding that last point I will have a comprehensive analysis out tomorrow, so far the results are interesting, maybe that will convince a few traders out there to actually come in on Friday to read it tomorrow!
As far as relative value is concerned, I had recommended bear conditional flatteners right at the highs. While the curve has lost a lot of delta to the curve, it is well in the money as we have flattened dramatically the past week. Why a bear flattener? Clearly a bull flattener would have been more profitable but the trade had no negative carry, in case of further bull steepening you would therefore have broken even, and since on a sell-off a flattening was virtually guarantied, the risk reward for that trade was excellent. On the flip side bull flatteners had negative carry. Still a good trade and the odds are that now market is going to keep flattening aggressively with steepeners getting carried out on stretchers, low participation overall, and the demand for yield pushing buyers ever further out the curve.
I also like selling the EDZ0/ERZ0 trade. I had suggested it at 60bps and after after testing 63 we had sold down to 46bps. The market is back around 58bps and around these levels I think it is time to start thinking of selling again. While the 3M Libor setting has been collapsing a lot faster than the euribor, the room to keep moving lower is starting to be thin, while the Euribor setting has only started to roll over. I would suggest selling in the low 60s if possible. If 3M Libor underperforms 3M Euribor for another few days it is possible we may get a chance to sell there.
In terms of Beta, we still advocate to be core short from 1,126. Partial profit was recommended at 1,070/1,075, and on the bounce we suggested to add tactically to shorts above 1,095 with a stop at 1,108 (same stop for the core position). Today with the Fed in for a POMO we could have expected a retest of 1,105 but the data this morning was resolutely bad enough that even a CNBC anchor can't spin it positively. There are several Elliott Wave possibilities here so that we can't really know for sure if the next serious leg down is upon us, which is why we will move trailing stops on the tactical shorts down to 1,085 to secure a profit (keeping 1,108 stop on a daily close for core position). If we are in a bearish configuration we shall not bypass 1,085. If Wave I or II is not complete yet (see alternate counts) we will reinitiate tactical shorts around 1,105 as we would end up taking profit on a stop at 1,085. A few elements make me think we can possibly be already looking at the abyss: The Vix has held the mid-Bollinger yesterday, and AUDUSD has rejected strongly the 61.8% retracement of the initial sell-off, underperforming S&P yesterday (which led to usual AUDJPY/S&P re-correlation arb) and leading the way down. The Nasdaq chart is absolutely beautifully bearish, and we have a clear intermediate support around 1,780 for the future, so we will monitor it closely as it will be a good indicator of whether we are still in Wave I or whether the market is about to go lower a lot faster. With Iran/Israel shenanigans "scheduled" for the weekend I won't want to go home long tomorrow night, though options expiry could well mute the price action as usual...
To conclude, I will just point out that when Druckenmiller decides to retire, Alpha and relative value is quite certainly dead and the market is also quite surely volatile enough that managing several billions is virtually impossible. Good thing that it is a problem that I don't have to worry about. Hopefully one day I do...
Good luck trading,