Waiting with bated breath for Thursday ECB meeting


Asianmacro has many close friends in the ”real world” i.e. people who are engaged in real productive businesses or employment like doctors, engineers, businessmen, lawyers (OK maybe not lawyers) …. where FOMC. ECB, QE & other financial lingo don’t mean much to them! However, what you do not know nor care in your regular life in going for work in the morning at 9 a.m., punching out at 5 p.m. (if there is even regular hours anymore like days of old!) does not mean that you will not be affected by events & developments which only financial market practitioners care about to monitor with a hawk eye.

In fact since the 2008 global financial crisis, everything that has happened especially in the real world & economy affecting many lives can be traced back to financial markets development & actions taken by governments & central banks since.

The most important event coming up with reverberating effects globally with be this upcoming European Central Bank (ECB) meeting on Thursday 5 May.  All expectations are on Draghi, the ECB President to cut Eurozone refinance rate and unleash their version of QE as well. http://www.reuters.com/article/2014/06/02/us-markets-forex-idUSKBN0EA11M20140602 . From the chart above, we can see that EUR/USD has plunged from 1.40 to 1.36 currently in the past one over week end May as short positions (*best captured by the IMM CFTC net non-commercial positions) reached the highest level of shorts in 2014. Risk reversals volatility prices (where price of calls over puts) have fallen as well with options market pricing more demand for EUR puts over calls.

In the chart below, in fact, Citigroup Pain Index is at an extreme negative level. This is a FX Positioning Alert Indicator that infer positioning of active currency traders from relationships between exchange rates and currency managers’ returns. A positive reading suggests that currency traders have been net long the currency and a negative reading suggests that currency traders have been net short the currency, and in this case, the market is extremely short EUR.

We can also see that the yield spread between 2-year EUR rates & USD rates have gone to an extreme level since EUR rates fell a lot more & quicker in the recent weeks vis-a-vis USD rates.


When the entire sell-side screams for lower EUR & for further short EUR recommendations into ECB meeting, this is when Asianmacro gets worried over the imbalance of sentiments. Sometimes, the markets have no logic beyond street positioning & will go to the maximum pain to squeeze out the weak hands. As such, I have close out my short EUR/USD position & in fact turned long via 3-day EUR 1.3600 strike call options NY cut expiry (NYC 10 a.m. expiry which is right after ECB meeting decision & when the ECB press conference is underway). From illustration below, it cost my only 33 b.p. (or an equivalent of 40 pips in FX terms) with breakeven at 1.3640. If Draghi underwhelms in delivering an ECB cut & tone in his press conference, EUR/USD might just fly up to 1.3750-1.3800 level and I will be a happy man via my options & allow me to re-sell EUR/USD to take profit & establish new EUR shorts if it make sense again. If ECB overwhelms with aggressive cut & dovish undertones & EUR/USD plunge further, I don’t lose much beyond my small option premium for the call option that will expire worthless.


Path of least resistance is … UP!


There have been many naysayers & dooms -day-prophets in the markets lately. It’s always easy to call for a 10-20% correction in stocks & general markets & saying ‘Sell in May & go away!”.  The key is when precisely? And also after all the selling in protecting your downside if you cannot take the temporary marked-to-market pain; when & how are you going to get back onto the financial market bus before it speeds off again without you is key!

Sometimes when everybody call for a market correction or move in either direction up or down, usually, it just ain’t gonna happen that way.  Just like the past week when calls of 1815 or 1780 in S&P500, a 5% correction to the downside seems imminent … we end up at almost 1900 by the end of the week.

Asianmacro likes to look at relative performance of EEM vs SPY (the Emerging Market ETF vs S&P500 ETF) as an indicator of flow of funds between developed & emerging markets whenever the direction of the general market is uncertain. From the chart above, we see that SPY has outperformed EEM since 2010 till January 2014 when it reversed. The biggest components of EEM are the likes of Samsung Electronics (3.93%), Taiwan Semiconductor (2.50%), Tencent (1.88%), China Mobile (1.55%), China Construction Bank (1.31%); where the top 5 names account for about 11% weighting & all are from North Asia.

From the chart below, new units creation in EEM have been driving the rally outperformance of EEM evidently. The question now is will we see this continue or we might have plateaued & reverse instead?


It does seem that in the short run, perhaps we just might especially if China is relaxing the foreign investment rules http://online.wsj.com/news/articles/SB10001424052702303749904579579670989773760?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702303749904579579670989773760.html. In addition, EUR/AUD FX cross continues to head lower with VIX and all signs do point to S&P500 crossing & powering higher above 1900 despite the howls of protests by the bears that was touched upon in my previous post on a summer melt-up rally in risky assets https://asianmacro.com/2014/05/13/the-summer-carry-melt-up-in-risk-assets/.

Remember, the path of least resistance is … UP … as this is when it’s most painful for everybody who’s gotten off the financial market bus & have not got back in again!

The summer carry melt-up in risk assets


The hardest trade to put on mentally & physically in execution more often than not ends up being the right profitable trade. This was learnt the hard way by Asianmacro over the years like when overnight & tomorrow/next Thai-baht (THB) rate was at 10% at mid-day at the onset on the Asian crisis in May 1997, when it was only 3% in the morning, it still made sense to pay up to secure any funding if you really need them. It ended up at 1,000% by late afternoon & everything keeled over.

There is a sense of deja-vu at the moment except that this time instead of the markets keeling over, there seems to be a slow motion melt-up in risk assets led by U.S. stock markets with S&P500 leading the way while Nasdaq100 & Russell2000 recovered from their respective corrections over the recent weeks.

From the chart above, where both the EUR/AUD FX cross & VIX bear high correlation & R-square with each other.  Everything seems to suggest with declining VIX and a continued search for FX carry best represented by EUR/AUD shorts (to earn the interest rate differential between EUR & AUD) … the pain trade is to see risky assets melt up even more into summer!

Long $/IDR … as Indonesia cuts its nose to spite the face besides elections uncertainty


Asianmacro has touched briefly on shorting IDR together with NZD & Gold very recently on 6 May 2014 & they are already working well https://asianmacro.com/2014/05/06/sell-in-may-go-away-the-question-is-what/ .

Besides the Presidential elections uncertainty, concerns are mounting again on the Indonesian iron-ore exports ban unless they are processed in-country.  Seems like the country has cut its nose to spite the face & shot itself in its foot to me! http://www.ft.com/intl/cms/s/0/a0e7256c-c455-11e3-b2c3-00144feabdc0.html#axzz312j7F7nE .

Asianmacro sees that all the mis-steps with elections uncertainty will make long $/IDR a good risk-reward trade to add on even at current levels 11570 spot & as for the Non-Deliverable-Forwards *NDF (11600 1-month NDF & 11700 3-month NDF).

From above chart, we should see 12,000 & maybe even 12,500 soon in spot $/IDR retracing back to its recent highs earlier in the year before the Jokowi feel good effect started.



Seasonality trades in Hang Seng Index (HSI) & Dollar Index (DXY)

Years ago when Asianmacro was about to graduate from university, he did well at interviews (or perhaps sufficiently lucky enough) to secure a position with a top Wall Street investment bank as a trader even before graduation.  But thoughts of pursuing a PhD & even becoming a professor did cross my mind.  However, the thought of forever needing to prove that your thesis & research is ‘right’ empirically or scientifically is way too much use of whatever brain-cells that was left in me … so Wall Street here I come more than 20 years ago!

Unlike Strategists, Economists, Analysts & other spin-masters from investment banks’, brokerages or asset management firms that can usually throw tonnes of information & justifications on why you need to buy, sell or hold … whatever that they want you to believe in; Asianmacro does not want to nor need to.  It’s my money that I am risking & I can believe in the brevity of thought, analysis, decision & execution.  Detailed & overly myopic empirical or scientific proof reminiscent of what a professor or PhD candidate needs to do might more often than not cloud the view of the forest from the trees.



Looking at the above heatmaps for Hang Seng Index (HSI) & the Dollar Index (DXY), you cannot help but notice that statistically speaking, HSI has fallen while DXY has risen in May over the last 10 years more often than not by a considerable margin.

Is it the ‘Sell in May & Go Away’ catalyst for risky assets at play … or is it something else? It’s really too much use of my brain-cells and perhaps just a sufficient bet in short HSI (which I did on the break of 22,000 for May14 futures) and DXY June14 futures now at 79.15 (from 79.20 to 78.90) that gives you participation if this seasonality happens again but without breaking the bank & your sleep if it does not.

India Elections: Modi muddles … NIFTY shudders … INR falters

Asianmacro loves trading & positioning in the Indian markets across FX, rates, equities & credits from time to time when special situations & catalysts comes about in this country.  As it has such a messy democratic process, coupled with unpredictable weather (*rainfalls & weather is such a big thing for such an agrarian society).  India also has a superstitious & chart crazy technical driven domestic market (*the Indians religiously follow candlesticks & all forms of chart studies including financial astrology) …  and it all comes to a boil every now & then!

The massive depreciation of INR from 52 against USD to about 70 in 2013 together with the appointment of the well respected Raghuram Govinda Rajan as the Reserve Bank of India (RBI) governor in September 2013 when $/INR was 70 marked the peak & turnaround of the FX pair.  Indian stock market, NIFTY rallied strongly since as well.

Presently, Asianmacro is worried about the impending return of El Nino http://www.livemint.com/Politics/JpJfZbdhAmV1qT3qWkVeoO/El-Nino-alert-issued-by-Australia-as-event-seen-developing.html  & also the Indian elections is really a muddling headache for India whichever way it goes, where Modi while serving well within India is not viewed favourably in the West, http://blogs.ft.com/beyond-brics/2014/05/05/india-elections-four-pitfalls-for-modi-and-the-bjp/


From the chart above, it just make sense to me that unless there is really some good news coming out in weather or politics; having a short INR and short NIFTY position will be my favoured play to wear diamonds soon!

Demise of trading revenues in banks & in hedge funds


Barclays announced earlier today a poor set of results mainly due to a 41% drop in revenues over at its FICC (Fixed Income Currencies & Commodities) business division. As reported here http://www.ft.com/intl/cms/s/0/f9dd1338-d4e6-11e3-adec-00144feabdc0.html#axzz30wtGgbfE & here http://www.ft.com/intl/cms/s/0/fe1c811c-d50a-11e3-9187-00144feabdc0.html#axzz30wtGgbfE in the Financial Times.

Hedge funds were not spared as April 2014 was reportedly the worst month for many (http://www.zerohedge.com/news/2014-05-05/cruelest-month-april-was-bloodbath-most-hedge-funds) in a long while especially for CTAs & Macro strategy funds that rely on heightened volatility & gyrations in market with trends to serve them well.  Even the legendary Paul Tudor Jones was lamenting last night at the Ira Sohn conference on the need for a ‘Central Bank Viagra’ to bring excitement back to the markets http://www.bloomberg.com/news/2014-05-05/-tudor-s-jones-said-macro-funds-need-central-bank-viagra-.html .

It is the recognition of such ‘dampened’ volatility and lack of trend breakouts or mis-pricings in the markets that saw Asianmacro laying low for a number of months.  From the chart above, where the upper panel white line is the JPM G7 FX vols minus VIX; has gone back close to zero since H2 2013 till present.  Typically VIX as a simple measure of S&P500 implied vols is usually much higher than FX vols especially during periods of financial market stress where equities tend to plunge faster & a lot more than FX directionality.  The bottom panel in the above chart is the normalised vol price of VIX & JPM G7 vols from 2006 before the pre-2008 crisis period till present. FX vols is in fact going back to almost the lows in 2007 just before the onset of the financial crisis.

Are we facing once again the calm before the storm? We could well be when the last crowded positions capitulate & it seems like the consensus strong USD & short US Treasuries trades of 2013 going into 2014 are being forced to unwound at great loss by banks & hedge funds …. we are getting close to the last inning.


The Singapore Population Ponzi … Short SGD as funding FX


Singapore has experienced the fastest rate of population growth anywhere in the world over the last 10 years.  However, if you go back in history to examine its rate of population growth and also literature on Total Factor Productivity, you will realise that there have been arguments from early 1990s levelled on the unsustainable and also myopic and unproductive utilisation of pure increase in labour as an input in Singapore to drive economic growth. http://www.nber.org/chapters/c10990.pdf

Asianmacro as a trader believes in the brevity of my musing & you can click on the above link to read in detail if you are interested in the paper by Prof. Alwyn Young from MIT published in 1992.  From the illustration above, we can see the close correlation between SGD appreciation and stock market (Straits Times Index – FSSTI) with Population growth % yoy.  It makes you wonder with the announced deliberate slowing down of the influx of foreigners by the Singapore government that drove this unprecedented pop in population, what will happen to SGD and FSSTI?

Anyway, the Monetary Authority of Singapore (MAS) recently concluded its semi-annual policy meeting in April 2014 without much fanfare http://www.mas.gov.sg/News-and-Publications/Speeches-and-Monetary-Policy-Statements/2014/Monetary-Policy-Statement-14-Apr-14.aspx .  For the longest time since 2008, SGD has unfailingly appreciated into and after each and every MAS policy meeting as a strong SGD policy (which is also the only policy tool MAS has that it uses) is trumped out time and again.  However, such an antiquated policy is long past its use-by date and it has been a case of weak USD against all major currencies in recent months rather than a strong SGD that resulted in $/SGD at 1.25 today.

Asianmacro will be very keen to established short SGD against GBP, AUD and EUR (*actually Asianmacro already have these positions for awhile and will add to them) on any potential SGD appreciation in May/summer if some mistaken belief by portfolio flows in SGD as a safe haven results in inflows over May/summer driving $/SGD to 1.2350-1.2450 levels.


Sell in May & Go Away … the question is what?

It is May now and the famous ”Sell in May & Go Away!” mantra always resonate in financial markets.  The question this time is a challenging, what to really sell?

The top 10 & bottom 10 performers in global equity indices are shown here.  You will notice that the top performers are really those marginal frontier markets mostly that nobody really invest in a big way. While the bottom performers are some of the bigger markets that have sold down substantially already like Nikkei 225 (Japan) and Hang Seng (Hong Kong).


Similarly in currencies below, besides NZD (New Zealand dollar) & Gold that have gained more than 5% against USD, the best spot returns are from relatively illiquid currencies that nobody owns much of; while major currencies like EUR, GBP, CHF are only 1% up for the year which is almost a rounding error.


If there is something that I want really want to sell or short in May, I guess I am now looking at cheap downside bets in NZD, Gold and IDR.  Asianmacro never like the frothy levels of milk anyway and prefers soy latte rather than regular milk latte coupled with an exuberant Kiwi banking sector holding up the economy http://blogs.wsj.com/economics/2014/05/06/new-zealand-banks-arent-playing-ball-with-rbnz/ .  For Gold, I can find more things that glitters like LED lights & the safe haven bid due to the Russian / Ukraine fears are overplayed.  Lastly in the case of IDR, well the Jokowi feel good effect in Indonesia is all but played out.  The follow on Presidential elections will take on a more complex Javanese shadow puppet play that will mean more uncertainty http://www.thejakartapost.com/news/2014/05/05/prabowo-desperately-seeking-partners-jokowi-flexes-muscles.html that the markets will not like soon.




Making a home run

Asianmacro has not posted since the 1st week of May to smell the roses into early summer and also in travels across Europe.  Looking back in the past where I have been in the futures open outcry pit, a bank market maker and then proprietary trader, followed by stints as a hedge fund portfolio manager … I came to realise that the most amount of money is only made slowly over time when you can sit comfortably on a position and for your investment thesis to bear out (*assuming that you have correctly done your homework and not stopped out way beforehand).

This meant that position sizing must be such that for longer term trades to bear out and perform well to make that home run, it must not be over-leveraged such that you cannot sleep at night with all the gyrations and noise that the market will invariably move like a butterfly flapping its wings at the slightest breeze!

Notice how Warren Buffet always appear to be such an investment stud with most of his positions reaping home runs more often then not and covering his losses or ”mistakes” elsewhere.  Mr. Buffet has the ultimate advantage in having a ”cheap & almost free float” of investment capital via the perennial annuity premiums collected from his insurance business (where the cost is even lower than deposits obtained by banks who similarly will lever up to make loans & other investments).  This allowed him to almost ”never cut loss or stop out of his positions” and we all know that even a broken clock will tell the correct time twice in a day … Mr. Buffet can in fact be proven right most often than not as ”in the long run, we are all dead” does not apply to his investment style.

Asianmacro certainly do not have the good fortune of owning an insurance company and also with the capital size of Mr. Buffet.  Nevertheless, as highlighted above, from the 20 years of cutting my teeth and learning from the losses made while accepting with humility that I was probably more lucky than smart with my winners … In any given year, there are probably about 1-3 real serious tradable themes that you can express via a trade that is ”medium” term of 3-12 months of more in investment horizon that will be the 10-baggers.   Most of the other time when you are fiddling & twiddling your fingers, you should not be doing anything much unless you have the systems, tools, inclination and skills to do some short term noise & gyration trading … you could be expending more energy than ever for very small incremental returns.

If you look at my postings this year, my 3 medium term thematic trades consistently were:

  1. Long USD preferably via DXY futures on medium term U.S. economic recovery.
  2. Short AUD/USD where the lucky chaps down under end their spell of good fortune.
  3. Short China and/or underperformance of Asian equities.

They have all performed well YTD 2013 and there is no reason to close out the trades or a change in the theme.

Asianmacro will probably be eating, drinking, lazing and snoozing a lot more over summer.  But will try to wake up from my stupor now & then and post again (*on shorter term gyration noise opportunity) and potential medium term thematic trades as I start my re-assessment for H2 2013 into 2014 outlook in deploying my capital again.

Good luck!




*Asianmacro is a beach bum managing his own wealth. Besides deciding what to have for lunch (or hitting the gym sometimes), he is mostly found listening to loud music while trading and investing for himself. While every care has been taken in preparing the information in and/or materials, such information and materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials. The opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. In no event will Asianmacro be liable to you for any direct or indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials attached herewith. Asianmacro may already have or intend to have a trading or investment position in the financial instruments or products referred to in this communication. This is not intended as an offer or solicitation for the purchase or sale of any financial instrument and Asianmacro may also have interests different from or adverse to your interests.