macro paper trading

chipping ~0.7% of portfolio on slightly OTM june long options on ESM7, 2 call 2400 @ 24.75, 3 put 2250 @ 28.50. VIX is 2 percentage points above this year's low, but still low on historical levels, though not against the realized vol. Implied vol is shown 10% for the calls, 14.5% for puts. Don't have the infrastructure to track option vols historically but I am fine with 14.5%.

The idea is that S&P will shake off this week's losses tomorrow if the Trump team manages to get the missing congressmen aboard for the healthcare reform. If they don't manage to pass it, this could start unravelling the post-election gains in the s&P. S&P has had an over 20% run up without substantial retrenchments, so I join the camp that wants to see some harsher downmoves in the S&P. S&P is only 2% down off the highs. That's not sufficient if it's revealed that Trump can't pass the reforms effectively.
 
RUB further strengthened from 57.2 to 56.90 despite oil falling three quarters of a buck week-on-week from 51.75 to 51. That said, RUB weakened 2% intraday on Wednesday when may brent touched 50, but didn’t care about oil losing some 60 cents down to 50.30 on Thursday, so seems like the market thinks RUB is okay as long as oil is above 50. Equity market and gov yields are at roughly the same place, so making foreign money inflows the boogeyman won’t work. Interestingly, the fx market took it positively that the central bank cut rates to 9.75% with reasons that inflation is doing better than expected and the expectations that have been very sticky finally moved down too.

The Trump/healthcare idea didn’t work, but so far without material losses. I suppose lack of volatility up to now will convince investors that healthcare doesn’t really matter anyway, so they shouldn’t sell if there are further problems with the bill. Decided to wait until Monday US market open to make sure no one changes minds over the weekend.

GBP retail sales and CPI data were fine, yet the long gilt rallied more than the bund did, and PNL on long short sterling Sep-17 was negative too. Blue euribors and short sterlings didn’t move much week-on-week. Seems that gilt outperformance came from 22/03/2017 afternoon when EURGBP spiked to 0.87 and returned back to 0.865. Not sure why.


macro_paper said:
bot 10 BAZ7 @ 98.53
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This was a typo. It’s BAZ8 @ 98.53, not BAZ7.

Weekly PNL:

  • Long EDU1-EDU2: +750 USD
  • Long strangle on ESM7: -400 USD
  • Long L U7: -240 GBP
  • ER Z7-Z8-Z9 fly: -2250 EUR
  • Long bund against gilt: +1340 EUR, -1560 GBP
  • Long BTP against bund: +1670 EUR
  • Long BAZ8: +2500 CAD
  • Long IRU8: +2520 AUD
  • Steeper CAD / flatter AUD: -6313 CAD, +2661 AUD
  • Short RUB: -81 360 RUB
 
I am thinking about short EURNOK from 9.15-9.20 level.

- It’s underperformed the developments in oil and interest rates since the US elections according to my model, and had also underperformed in Q2, so 4-11% too high now.
- Positive carry of 1.5% per year
- NOK will get support from improved trade balance. Trailing twelve month trade balance has increased from 127b low in Oct to 154b NOK in February.
- As described in one of the above posts, I don’t buy that ECB is considering hiking, so I’d expect futures implied EURIBOR rates to decrease and make rate differential more favourable for NOK
- 2y NOK swap rate is above 6m NIBOR, so seems like the market is NOT pricing cuts
- This contrasts with the last Norges Bank statement where they stated they weren’t expecting any moves, but odds of a cut were larger than of a hike.
- The Feb CPI data with the core falling from 2.1% to 1.6% yoy was prior the Norges bank data, so they have considered it. They had a clause that lower inflation in isolation implied rate cuts, but also cited dangers of persistently low rates and stable inflation expectations
- Feb PPI data is healthy, Jan industrial production and credit growth accelerated, PMI is fine. Econ data doesn’t point at an urgent need to cut.
- Short EURNOK would be a bet on a higher oil price without incurring contango costs in the oil futures.
- Not view on oil price. Last summer front Brent touched 42.50 or so before the OPEC deal talks started being discussed in the media. From August 2016 up to now: OPEC production -1.5m bpd, Russia +0.4, US +0.65, Indonesia falling out of OPEC data +0.75 bpd. Overall +0.3 bpd. If the deal falls apart we are getting more Saudi supply (+0.9), probably something from small producers (+0.6), Iraqi energy minister talked of 5m production by end 2017, so +0.6m if he isn’t lying about their capacity, +0.2 from Iran. Overall increase of +0.9+0.6+0.6+0.2 = 2.3m bpd. Demand was expected to go up 1.4m bpd yoy in 2017, probably biased to upward due to strong econ data recently. 2.3 + 0.3 – 1.4 = 1.2m bpd change in supply-demand balance versus summer 2016.

- IEA estimates were that 2015Q4 oil glut was 1.7m bpd, 2016Q1 1.3m bpd, almost balanced out in Q2-Q3, glut resumed in Q4. With no deal it’s plausible we will be at the same glut levels as 2016Q1 (~1.2m bpd), and back then we saw oil prices hit 30. Of course this would take out some US production again and eventual balancing of the market.

- Short oil seems to be an option-like strategy. Probably lose as the deal probably is extended, but potentially make it big if it’s not extended.
- On portfolio level short EURNOK would reduce oil factor risks of being long USDRUB
- Norges Bank has reduced NOK buying from 1b NOK to 850m/day. I am curious who is on the other side to buy so much FX. This offsets the trade balance improvements.


edit: looked at wrong trade balance figures.
 
Last edited:
macro_paper said:
RUB further strengthened from 57.2 to 56.90 despite oil falling three quarters of a buck week-on-week from 51.75 to 51.
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Out of curiosity, how are you calculating the total return on NDF pairs like USDRUB?
 
I was referring to spot prices in that statement. I think in terms of spot prices and then decide if expected move is large enough to offset the carry. For position accounting I am using exchange traded quarterly futures. Front contract is liquid (2.5b usd daily volume, 3.5b open interest), back contract less so (11m USD trading volume, 50m OI). They are financially settled, but PNL is in RUB. You can back out the yields from spot / front contract or front/back contract differences. It's around 8.1% annualized, below central bank key rate of 9.75%/repo rates and slightly below 2y gov bond yields (8.3-8.45%). Don't have access to NDF yields but I imagine there is no markable difference between deliverable and NDF curves right now.
http://moex.com/en/contract.aspx?code=Si-6.17
http://moex.com/en/contract.aspx?code=Si-9.17
 
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Watching with a magnifying glass? None. Remotely interested in? BRL, TRY, KRW, ZAR, MXN, PLN, HUF, CZK. Obviously the latter three are very boring to watch as volatility is almost non-existent, but I suppose things may change for CZK and HUF. iirc CZK story has been discussed in the media. They plan to depeg the currency from EURCZK = 27 in 2017H2 (strengthening expected), so there have been huge inflows in their bonds that pushed yields below zero. HUF monetary policy seems fairly crazy to me. They have wage inflation of 10% and labour force shortages, yet the central bank is limiting the size of the depo facility to push the excess liquidity into government paper to lower the rates and engineer more growth. I think this is a good recipe for runaway inflation down the way. PLN/HUF is fairly low vol pair (4% annualized). Longing this seems like a good carry trade to me. You get paid 1.5% p.a. and you are long the run-away inflation risk in HUF. It's been kinda mean-reverting for the past few years though and on 1y horizon in the top of the range.
 
I should probably clarify again I am doing paper trading.. ZAR and MXN can be CME traded. Interpolating 3m-1m forward points isn't that difficult to value forwards on broken dates. Investing.com has forward points data publicly available. I could do that for TRY, PLN, CZK, HUF. Realistically bid-ask on crap sized forward would be quite bad though, so would have to account for that too. I haven't had necessity to think about KRW and BRL yet but I'd need NDFs for those. Idk what min size NDFs in those two you can do realistically either.

China is very non-transparent. Their econ data is so smooth I cannot help thinking they cook the data. Case in points were the smooth official unemployment rate and the volatile employment subcomponent of PMI index. The HSBC (now Caixin) PMIs were released prior to official PMIs. Now they are published the same day/after. Seems like political interference to me. The infamous recommendation to use data like rail traffic, electricity usage is becoming less relevant with transition to service-based economy. In addition to questionable quality data, chinese stats website clearly doesn't care about accessibility of its data. It takes more than a week for figures like CPI to appear in the English version of website, not breaking down Jan-Feb data into separate months because of Chinese NY for some series. Central bank transparency is really poor. A lot of benchmark rates with random market interventions and FX squeezes, unofficial capital controls, etc. Tracking the Chinese initiatives like cutting coal capacity or limiting trading stocks on margin from primary sources seems impossible. In addition to all of that, we have cases of people being questioned for bearish reports on China.

My paragraph above was probably slightly too political and good chance I don't need all that data to punt CNY or A50 futures, but I'd feel like a completely sucker with a huge informational disadvantage versus the Chinese speakers or anyone having direct access to speak with traders/analysts in the region.

Why not India? No strong reasons but huge economy size, unclear political system, lack of volatility in INR and perception that its financial markets are underveloped didn't make it an obvious choice. Range of things I am TRYING to track is fairly wide. Definitely not going to expand it.
 
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