Intraday Market Thoughts

Yields Lead Slump in Virus-Driven Market Selloff

Jan 27, 2020 12:25 | by Adam Button

Risk trades deepen their slump as market react to weekend news of the growing coronavirus outbreak, claiming at least 80 fatalities and sending the number of confirmed cases to 2744. Markets were especially hit in early Monday Asia by the revelation that the virus has an incubation of as long as 2 weeks, raising the possibility that people carrying the virus but not yet aware of the symptoms could infect others. Markets were also concerned with news reports of rocket attacks on the US embassy in Baghdad (see below). The US crude oil short opened at 59.65 on Jan 8th will be closed today. Here is the rationale for entering the trade even after a sharp drop in oil.

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Yields Lead Slump in Virus-Driven Market Selloff - Premium Snapshot Oil Us Crude Jan 8 2020 (Chart 1)

A second city of 7.5 million people 70km away from Wuhan was put on lockdown with 10 cities placing curbs on travel. One startling fact is that Chinese foreign tourism has risen 8-fold since SARS in 2003 and the lunar new year holiday is an extremely busy time of year for travel.

Aside from oil, one other striking development is the breakdown in the 4-month trendline support of the US 10-year yield to 1.62%, which could clear the way for 1.51%, followed by the record low of 1.42% (Sep 3). JPY leads in FX, while the Aussie and kiwi lagging in a classic risk-off mood.

US new home sales are due up later but economic data will take a backseat to virus news.

The Baghdad Story

One story that could push its way into the limelight was a rocket attack on the US embassy in Baghdad. Reports from AFP says the dining facility was directly hit and that helicopters were removing casualties. It's not clear if they are Americans but if they are it could mark the start of another escalation in the region.

That would put oil traders in a particularly tough spot as they weigh a Middle East flareup against the demand destruction of shutting down large parts of China. In early trade crude breke through the November low and sank to $52.15 even with an OPEC warning that it was watching closely.

The week ahead is filled with US earnings and a few economic data points including new home sales on Monday but it's tough to see how anything could steal the spotlight from the virus. Don't forget the Fed meeting/press conference on Wednesday and BoE decision on Thursday.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -47K vs -48K prior GBP +25K vs +31K prior JPY -45K vs -31K prior CHF +1.5K vs flat prior CAD +38K vs +33K prior AUD -19K vs -20K prior NZD +1.8K vs flat prior

The risk off mood related to the virus caught the market just as it was shifting away from risk trades and the safety of the US dollar. That means that more specs will be at risk of going underwater sooner if risk aversion persists.

Act Exp Prev GMT
New Home Sales
730K 719K Jan 27 15:00
FOMC's Williams Speaks
Jan 27 14:30

Corona Virus Weighs on Risk, Oil Dumped

Jan 23, 2020 8:12 | by Adam Button

The coronavirus is increasingly drawing the attention of the financial markets and escalating headlines about infections are putting traders on edge. Chinese officials halted travel from Wuhan, locking down the city of 11 million people as they confront halting the spread of a new SARS-like virus that's already killed 17 and infected nearly 600 people. More below on how this compares to SARS in 2003. Aussie is the highest gainer on reduced expectations for an RBA rate cut next month after an unexpected decline in the jobless rate. Global indices are down across the board, oil extends its tumble, CAD fell sharply after the BoC issued a dovish hin, while JPY and bonds resume their ascent.   The Premium trades in short oil and long cable are deepening in the green, while the EUR trades await the ECB's 500th ECB policy decision, due later today.

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Corona Virus Now vs SARS in 2003

The outbreak of the Corona virus is especially scrutinized as it coincides with the upcoming Chinese Lunar New Year, which involves the largest human migration in the globe as train and air travel ascends in and out of China. Beijing is one of the most traffic-jammed cities in the world, but it's said that in 2003 during the height of the SARS outbreak, the only thing drivers had to worry about was getting a ticket. The city was on lockdown and virtually every face was covered by a mask.

The economic impacts were real, estimates vary but the curb to GDP growth was somewhere between 0.8 percentage points and 2.0 points. It also weighed on other countries, particularly in east Asia. SARS eventually infected more than 5000 people in China and the path of coronavirus appears to be similar. In that case, the WHO issued the first alert in mid-March and didn't declare that the world was nearly SARS-free until the end of June.

Ultimately, this virus will pass and growth will resume but we're at the point in the cycle where the numbers and the fears will continue to rise. One area that was hard hit in 2003 was commodities, which struggled during the height of the fears. However this will ultimately be a buying opportunity for risk assets, but not yet.

Housing Higher, Dollar Bets Shrink

Jan 21, 2020 11:38 | by Adam Button

Here we go again; central bank meetings and more earnings from the US. US housing starts jumped 16% on Friday in a positive sign for the US consumer and a sign that low interest rates might be working too well. Trading was light on Monday largely because of the MLK holiday in the US. Gold leads all currencies, holding partly to gains after US inde futures bounce from Asia lows. The CFTC positioning data showed US dollar longs cutting back again. As speculation mounts ahead of this week's BoE and ECB monetary policy decisions, Ashraf posted the chart below, which he says is foretelling a major move in 2020.

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Housing Higher, Dollar Bets Shrink - Mystery Chart Jan 21 2020 (Chart 1)

The jump in US housing starts to 1608K from 1380K was the biggest one-month gain since October 2016. One caveat to the rise was unseasonably warm weather, which may have artificially increased activity but in the bigger picture, starts have been strong since August.

From a global perspective, US housing is still relatively cheap in part due to the overhang from the crisis, but the scars are beginning to fade and low rates remain steroids for home buying. In addition, home builders have been scaling down to lower-priced homes to capture high demand in that segment. That trend could help to boost activity in 2020 while higher housing prices could spark a wealth effect.

The jump is a reminder that US risks are more two-sided than they were in 2020. If manufacturing and trade-related sectors get a bump from the phase-one trade deal or if business investment picks up, the Fed could be facing questions about inflation.

CFTC Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

EUR -48K vs -61K prior GBP +31K vs +17K prior JPY -31K vs -12K prior CHF flat vs -4K prior CAD +33K vs +26K prior AUD -20K vs -27K prior NZD flat vs -1K prior

The overall the US remains firmly in a net-long position but it's at the weakest since June 2018.

5 Near-Term Themes

Jan 17, 2020 18:02 | by Adam Button

You probably had your fill of "2020 themes", so why not another? The one spot to watch for a jolt to global growth in ... China. The US-China trade deal removes a major worry for Beijing, which may take action as soon as early next week to enact some stimulus ahead of a week of holidays starting on Jan 24.  Officials strongly hinted that another RRR rate cut isn't coming, but they are expected to cut the loan prime rate soon and may take additional stimulus measures on the fiscal side. That would be powerful -- and if they do, I see bright days ahead for the Australian, Canadian and New Zealand dollars.

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5 Near-Term Themes - Balance Sheet Vix Jan 17 2020 (Chart 1)

Inflation watch

A pair of US inflation reports this week were on the low side of expectations but there is a clear trend higher in core measures and wage growth (to a lesser extent). The Fed has confined itself to the sidelines but there is life in inflation. Heading into next month, we roll over some tough comps and that sets a lower bar. I think there's a chance that at some point this year, inflation is a major theme in markets and that sparks talks about central bank hiking.


Central banks haven't been able to spark broad based inflation, but they've been remarkably successful at creating asset inflation. With all the rate cuts last year, an underrated risk is a surprise rise in house prices globally. We're already starting to see signs of tighter market in New Zealand which just posted a 12% rise in house prices. Thursday's home builder sentiment numbers in the US were a bit stronger as well.


US shale oil is not what it appears to be. Every budget that comes out points to less spending this year and the market is laser-focused on return of capital rather than production expansion. Natural gas is worthless in many parts of the US and is being burned off at unprecedented rates. On top of that, the risks for the US election are higher in energy than anywhere else. The market is overly comfortable around $60 but a fall below $50 would create a real reckoning in shale and that has a multitude of knock-on effects, particularly in junk bond.


A week ago we were on the brink of war and now the world has forgotten about Iran. Geopolitics are impossible to price in. You can't price in half-a-war. The thinking now is everyone got to flex their muscles, but a report on Friday said that 11 US soldiers were concussed in one of the blasts. That puts to bed the theory that Iran was knowingly dropping bombs that wouldn't hurt anyone (assuming the report was true). The chance of Iran or Iran-sponsored militias launching attacks remains high and the situation could quickly spin out of control from them.

US election

The election is the one risk that everyone can point to and it's undeniable. The world will change on Nov 3 but it's a binary risk and that's tough to price in. At some point there will be a pre-election de-risking but it's tough to say whether that comes in the autumn or sooner. The following remains far: Trump is staying in the White House as long as a recession or a stock market crash are ruled out.

Ashraf in Dubai Jan 22-24

Jan 17, 2020 14:20 | by Ashraf Laidi

Details of my Dubai seminars         تفاصيل عن ندواة دبي    


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Ashraf in Dubai Jan 22-24 - Dubai Ashraf Agenda 2020 (Chart 1)

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