t Shadow Capitalism

zones around 1.3700 & 1.3840 and the 61.8% Fibo level at
1.3860. If it reverses course, I’ll stalk short below 1.33.

MARKET COMMENTARY BY NAUFAL SANAULLAH

Tuesday, September 28, 2010

Metals break out as bonds yields plummet

S&P out today with an estimated €35b price tag on the Anglo-
Irish bailout, sending EURUSD plunging earlier this morning.
However, a combination of ECB’s Jürgen Stark asserting non-
standard policy ending Q4 will not be renewed, weak US data
renewing QE talk, and BoE’s Adam Posen suggesting QE in UK
sent the euro higher to early April levels. German CPI came in
The QE trade was definitely on today, as a function of both
in-line at 1.3%, while US dataflow showed weakening, with
weakening US data and comments from BoE’s Posen,
July Case-Schiller missing estimates at -13bps, Consumer
resulting in big moves in metals, bonds, and FX.
Confidence at 48.5 vs 52.1 estimates, and Richmond Fed at -2
vs 6 expected. USD is being sold heavily against the backdrop of forthcoming
QE, and /DX is now at levels last seen in February. Unless and
Equities remain rangebound under S&P 1150, which should
until the 80 level is recovered, the dollar looks very weak and
determine trend from here. Weakening US data is sending
unattractive. There’s technical support around 78.70, but
USD lower due to decoupling theses and QE expectations,
nothing significant, and as decoupling remains the pervading
driving equities higher, particularly commodity-linked names.
theme in the market, weaker US data will continue sending
A bearish session in AAPL today, selling off almost 6% from
USD down. Unless dataflow starts weakening abroad as well,
open in the first three minutes of trading, weighed on broad
particularly in Europe, the goldilocks trade remains on.
indices, but the market ended up finishing up about 35bps. I
Foreign exporter CBs have been intervening on the back of
re-entered short spoos with stops above 1150. If we rollover
appreciating currencies, with Japan, Brazil, Colombia,
and sell below 1130, I think we continue lower; above 1150
Indonesia, and Peru all buying USDs. “Currency war” is the
should be strong for the bulls.
trendy phraseology for the doom-and-gloomers these days,
but the geopolitical ramifications of these conditions perhaps
do warrant such diction. Political pressure for further CNY
appreciation, combined with tense Chinese-Japanese
relations and an increasingly competitive NJA export market,
could lead to alliances forming, which is never good. USD
remains bearish and without fundamental or technical reason
to be bid in the near-term.

EURUSD remains on a tear, up another 145 pips today,

breaking out through the 50% Fibo level. The chart looks very
constructive, especially since 200d breakout. ECB’s Stark’s
comments pushed down Euribors while the usual suspects
(QE expectations and technical buying) remained in place for
the euro to march on. Periphery spreads continued to widen
today, however, with Irish & Portuguese spreads to bunds at
new all-time wides. Since the Fibo break at 1.3510, not a lot Copper is testing April resistance just under $3.65/lb and is
of significant technical levels exist around here, until S/R now up over 33% since summer lows. The recovering
Shanghai Composite, up 20% from its June lows, has been AUD broke out vs CAD today as well, moving to six-year highs
driving the metal higher, with help from a surging Aussie and as it cleared significant resistance. I expect this move to lead
an overall risk-on sentiment courtesy of an easing Federal to broad CAD weakness, helping my FX longs funded by CAD,
Reserve and normalizing Eurozone situation. I expect some in CHF and EUR. CADCHF is bouncing around the 0.94 level so
profit-taking around these levels, unless S&P 1150 breaks on I may be forced to cover soon but further weakness in that
a sustained basis, and may look to get short some copper if it cross could send it plummeting if 0.94 is taken out.
breaks back down below 3.50. Chinese PMI on Friday should
provide some context to industrial demand in the world’s
largest copper importer, especially against the backdrop of
possible tightening from PBoC, whether via developer pre-
sale proceeds restrictions, extension of third mortgage
suspensions to a nationwide level, outright credit tightening,
or even a property tax. The trend remains up for now.

EURCAD continues to propel higher, breaking out today. If the

euro continues higher, this one could see some huge moves,
especially if Canadian GDP underwhelms on Thursday.

The Australian Dollar broke out to new year highs today, as

recent RBA hawkishness and rates differentials has made it
the go-to currency for risk inflows. However, it is now around
its channel trendline resistance and appears quite extended,
just as the S&P is trading around its 1150 resistance level.
Additionally, much of the recent move is based on tightening
expectations and with the RBA convening in just a week, any
action may be discounted by now. Spec longs are at levels last
seen during April highs, January highs, and the July 2008 top,
USDJPY is going straight down and is now at post-intervention
and it seems everyone is on the long side of this trade.
lows. While the rest of the world is enjoying currency inflows
Potential for tightening in China would be very bearish for
as UST yields go down, increasing rate differentials, Japan has
copper and Australian miners/AUD obviously, and also
to deal with being the one country with lower rates than USA
revaluation would be a synthetic tightening as money supply
and thus hating its rate differential tightening. USTs keep
is decreased. I went short today, but only for a trade; trend is
surging as QE demand is front-run, and considering the
up for now. Be watching Chinese PMI this Friday.
prepayment spike imminent on a further dip in yields, the Fed
will have to purchase marginally more USTs just to match
duration demand. I remain long bonds and still am targeting
200-220bps on the 10yr, but below that I doubt there can be
much of a sustained move. Even if QE news or expectations
drive USTs all the way to 150bps, I don’t see it as any
sustainable level of yield investors will be happy with getting
over a 10yr horizon. Additionally, when the Fed demand for
USTs is over and/or priced in, there is no demand on the
margin at those yield levels to replace the Fed’s, and I think
shorting bonds will be just as big of a trade in 2011 as being
long bonds has been this year. If this turns out to be accurate,
then watch euro fears resurface sharply next year, as US-
German rate differentials turn bearish EURUSD and the
current rate- and liquidity-driven environment are
eliminated. Also, if and when yields start rising, expect gold to
surge. Bonds are a “sure thing” right now, as Fed QE demand
makes them an attractive front-run and any lack of efficacy
and/or deflation risk just increases the implicit QE demand, as
well as brings into play the risk aversion/safe haven thesis.
When you “can’t go wrong” is when you want to be the most
prudent and though I’m long bonds and enthusiastically
holding, I think shorting them around November or
December may be a huge trade that I will probably
participate in.
And the winner today is… gold.
When the ISM beat last month, market participants began
discounting beats in the regional Fed manufacturing indices,
yet the opposite has occurred, with both the Richmond &
Dallas Fed totally missing expectations on back-to-back days. I
think this will translate into a bad ISM number this Friday,
and considering the market isn’t reacting to the negative
regional figures, a bad ISM could really shake up equity
prices. Meanwhile, banks are most likely headed for this
worst quarter since Q4 2008 as plunging trading revenues
and normalized credit spreads are hitting their bottom lines,
as well as affecting their employment. Morgan Stanley has
frozen all hiring, while BofA and even hedge funds like D.E.
Shaw are cutting jobs. This is what happens when US trading
volumes turnover plunges from $7.0t to $4.2t in less than six
months. But the worse the news gets, the better stocks do, at
least when the Fed is buying “as much as it takes”. Still, the
risk of recoupling is an issue, and if economic deterioration
spreads to anywhere else in the world, particularly in Europe,
then watch out below. In the meantime, running a long
gold/short oil or long copper/short oil pair trade may bring
home some alpha (though I’m not in it), as CAD sells off and
crude goes with it, while AUD surges, USD plunges, and
copper flies. Or perhaps the resistance levels I noted in their
charts give way for some selling. All that is certain is that QE
is driving everything in this market. Even recent M&A activity
has been a function of minimal yields available in cash and
bonds (due to the Tsy rally which is due to QEII expectations)
leading businesses to deploy cash for acquisitions. Below is a
chart of (new orders)/(inventories). As you can see, there will
be no replacement of stimulus orders with organic ones.
OPEN TRADES
Long BVN | 41.20 | stop 39.85 | +6.31%
Long USD/CAD | 1.0285 | stop 1.0200 | +5 pips
Long /ZN | 125’15 | stop 124’20 | +0’25
Short AUD/CHF | 0.9490 | stop 0.9555 | +40 pips
Short X | 44.80 | stop 45.80 | +2.66%
Short NZD/CHF | 0.7225 | stop 0.7250 | +10 pips
Short CAD/CHF | 0.9555 | stop 0.9595 | +55 pips
Long EUR/CAD | 1.3860 | stop 1.3785 | +115 pips
Short MON | 53.62 | stop 55.10 | +7.70%
Short /ES | 1144.85 | stop 1151.00 | +0.44%
Short AUD/USD | 0.9680 | stop 0.9720 | +5 pips
If you would like to subscribe to Shadow Capitalism Daily Market
Commentary, please email me at naufalsanaullah@gmail.com to be added to
the mailing list.
DISCLAIMER: Nothing contained anywhere in this commentary, including
analysis and trade ideas, constitutes or should be construed as investing or
financial advice, suggestion, or recommendation. Please consult a financial
professional and do due diligence before engaging in any purchase or sale of
securities.