Showing posts with label Yen Carry Trade. Show all posts
Showing posts with label Yen Carry Trade. Show all posts

Monday, April 16, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

And the Midcap 400 shall lead them. Was it not just 6 weeks ago that the market suffered from an intense bout of “forced” liquidation? Now, here we are looking at new all-time closing highs in the Midcap 400 Cash index and watching the remainder of the indices get within shouting distance of their 2007 highs. The NDX was helped by comments from the CFO of CSCO when he stated that earnings would be towards the high end of estimates during Friday afternoon. The stock immediately shot from 26 to 27 and provided the lift needed to boost the index market on a quiet Friday afternoon.

This morning the indices are called higher based on several factors. First we had strong rallies in the Asian markets and that has carried into European trading. In addition, Sallie Mae agreed to a private buyout that put a nearly 50% premium on the stock. Finally, earnings from two key banks C and WB were much better than anticipated.

Of course, we cannot forget our old friend the currency market which was given the all clear signal from the G7 over the weekend to continue the “carry” trade with abandon. Indeed, overnight the Euro/Yen continued through its respective all time high and the USD/Yen appears not too far behind. This liquidity driven currency trade has produced one of the key elements for tracing index moves both domestically and abroad. Simply put, comments out of the G7 meeting show just how sensitive the central banks of each nation are when it comes to the carry trade. Given the tremendous growth of funds using this trade over the past several years, it is easy to imagine how ugly a liquidation of this trade would end up being for the global markets. Indeed all one has to do is look at charts from last spring and a few weeks ago when hedgies were forced to liquidate positioning under “margin call, gentlemen” types of situations. Nobody wants that again, and the banks appear both coordinated and committed to ensure that the “carry” will not end the game.

This morning there is a potential early setup on the buy side. Even with are sharply higher open, players have been getting used to selling the open and getting long somewhere in the first hour for a walk the line rally. If players get caught trying this and the dealers come in on the buy side, look for significantly higher pricing in the first hour.

Finally, the final 2 hours of Friday’s session produced a significant volume increase in the SPminis and ER2 contract, when compared to their respective YTD and 5 day averages. Considering we settled on the highs of the session, this week looks potentially quite bullish.

Tuesday, March 13, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets are called to open at or near their respective low trading zones over the past 3 trading sessions. A combination of the sub-prime lending blowup, a weak retail sales report and – most importantly – whispers of INFLATION out of the BOJ last night has produced another big leg of unwinding in the YEN carry trade. On the flip side, GS produced blow out numbers on its quarterly earnings report released this morning…keep a close eye on this stock as it has been our proxy over the last several months.

One of the concerns behind yesterday’s small move higher was the complete lack of volume. It seemed as though it was a holiday trade yesterday as players were on the sidelines…this morning it appears players have awoken from their collective slumber and appear ready to monitor their collective portfolio risk. One key aspect of the trade that few have discussed is the expiration week that we are currently 1/5th of the way through.

Since our massive selling 2 weeks ago today, the indices have been able to hold at higher, but rather uninspired levels. There is little question that this move has been propped by large demand amongst the funds as they try and protect their favorite trade of selling options. If there were to be an unwinding this week of the YEN/DOLLAR it would have dramatic ramifications on the index market. Players are holding their breadth that this does not turn out to be the case, but, if they must let their positioning go due to the risk department LOOK OUT. Certainly the odds of such an event are outlier by definition. However, when looking at such events in a historical context there is always a trigger. The index markets are faced with a POTENTIAL trigger of a YEN carry unwinding that forces index positions out of portfolios creating a vacuum of selling. If this scenario plays out – I would suspect the SPX would fall roughly -4% by Friday’s close from current levels. Keep in mind that the probability of such a happening is small – perhaps as little as 5% to 10% so any plays on this theory should be done with ample speculative cash.

Finally, keep a close eye on GS…a reversal below 200 would put the overall market in jeopardy.

Friday, March 2, 2007

Market Gyrations

Market GyrationsSocialTwist Tell-a-Friend
Sally Limantour

An unexpected rebound in the Feb. manufacturing survey helped support the market after a swift move down. Personal income was also up 1% which was better than expected, but the embedded core PCE was up 0.3% in Jan. after a 0.1% in Dec., or 2.3% y/y. Remember, a reading over the Fed’s 2% is taken to mean no rate cut anytime soon. Construction activity was down as was single and multi-family building. No surprise there.

In Japan, the Nikkei lost 1.35% on its 4th day of a losing streak. It has now given back all of this year’s gains. The Yen continues to rally and is fast approaching my 1st target of 86.00.The strong yen, of course, plays into the fears of “the great unwind” but the question is whether this is actual unwinding of the buildup of carry trades or… a feeding frenzy of speculators trying to jump in ahead of a potential unwinding. If anyone has a good understanding or a way of measuring this to get a handle on it I am all ears. The important thing to realize is the dollar is rising against the Euro but crashing against the yen. I think it is challenging to fully comprehend the correlation of stock markets with currencies and perhaps this uncertainty alone is enough to keep the market jittery for a while.

Bloomberg reports that it is real unwinding (versus unreal?) and will continue as “carry-trades are inherently risky and everyone wants to dump risk these days.” Meanwhile EconMin Ota is saying the Yen’s rise will not effect the economy. This makes no sense to me as the weak yen is a boon to exporters and they are the key strength for the Nikkei. The yen is making its biggest weekly gains in over a year against many currencies – Australian $, New Zealand $ and the South African rand which are all high yielders and favored carry-trade plays.

Note too, these are the commodity related currencies which is important and something to pay attention to as we have witnessed a stampede into the commodity arena both for diversification purposes and to chase returns.

In my virtual training class last night we were looking at a chart of the continuous commodity index (CCI) which is a basket of 17 commodities. Open interest recently set a record and we have seen outsized gains in different commodities over the last few years. My biggest question and fear (and we always have to carry a worse case scenario to be prepared) is what are the chances of these supposed non correlated asset classes declining in unison coupled with an unwinding of the carry trade? This is something on my radar as I hunker down the way I do on a sailboat right before a storm. Batten down the hatches! As mentioned yesterday I tightened stops in commodity position to lock in gains and they did take me out yesterday. I will observe and monitor metals, grains, etc and will write more on this sector over the weekend. Stops are your friend.

Coming in this morning, we have a pivot of 1399.00 in ESH with 1st resistance at 1410, then 1417. Support comes in at 1386.50, then 1368.25. We need to get above 1404 early to get things moving up, otherwise I suspect, given its Friday with rattled nerves we could have a fast move lower. Stay nimble and disciplined.

Rest up and enjoy the weekend.

Tuesday, February 27, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

This morning the indices are trading sharply lower on the heels of a mini-crash in China where the market lost -9% of its value in their Tuesday session. In addition, the unwinding of the Yen Carry Trade has begun in earnest as the YEN is higher by +1.2% vs. the Dollar overnight. I have said for quite sometime that this is the key, the liquidity primer that has become one of the primary reasons for the decrease in global volatility. Now…if this Carry trade turns into a fiasco of “last one turn out the lights” it will have major negative implications across the global index and commodity markets.

Given that I have laid out the bear case, it is worth noting a couple of key points. IF THE YEN CARRY UNWINDING IS MODERATE IN NATURE, the markets should have little trouble adjusting to this liquidity squeeze. On the flip side…all one needs to do is examine a chart from last years steep selling in the index market --- REMEMBER IT ALL BEGAN WHEN THE YEN RALLIED SHARPLY VERSUS THE DOLLAR ON COMMENTS OUT OF THE BOJ REGARDING THE END OF THE EASING CYCLE. Granted, the subsequent rally was tremendous and has carried the indices to new trading highs. However, being a short term trader we are concerning ourselves with the outlier event…and that is volatility. If I am correct, I suspect that today will usher in a several week period of increased volatility - time to put away the sunscreen or ski boots.

As volatility begins to come back into the marketplace, it will widen the true depth within the bid/ask. We have grown accustom to size up at every tick in the index futures markets – this will subside as market maker programs adjust for the uptick in volatility. Subsequently, this will increase the impact a large order has on the market – for example, an order to sell 1500 sp minis at the market during a liquid time of day may only move the index a couple of ticks. Today, that same order could move the market as much as 1.75. Be prepared for strong program playing and liquidation. In addition, be ready for some quick and aggressive short covering moves.

Friday, February 16, 2007

S&P, Yen and Gold

S&P, Yen and GoldSocialTwist Tell-a-Friend
Sally Limantour
February 16, 2007

The risk appetite is increasing in the financial markets and the shortest term indicators are now back at high levels. Consequently, my short term model is back to a sell signal. There was a notable short covering of put options yesterday and the 3 day put to call ratio is also moving back towards a sell. Closing long positions today ahead of the 3 day weekend and will execute short positions with a stop loss of about 1% above current levels between today and Tuesday.

The monthly capital flow report from the Treasury yesterday showed a net portfolio inflow of only $15.6 billion in December versus the “norm of $50-80 billion (Nov. was 84 billion). This is due to record net outflow of foreign investment from US equities and record US investment in foreign securities, according to Bank of NY economist, Woolfolk.

The Yen moved higher against every currency and the probability a rate hike at next week’s BoJ policy meeting is growing. The question is if the BoJ yields to foreign pressure, thereby raising rates, will the whole carry trade unwind and if so, will it be orderly? The Carry Trade was covered here on my February 4th post. The last time we saw an unwind was the summer of ’98 when the carry trade ended violently and some are concerned given the size of the short position today we could witness a protracted and painful event. This must be monitored closely. The BoJ members are in a “blackout” mode ahead of the policy meeting next Tues/Wed., so we will not hear policy statements until after this time.

Gold has formidable resistance between $668-674. Gold is trading lower this morning and next support for April gold is 663. Many cycle folks are writing about a cycle high due at the end of February. Perhaps if the market continues to reject closes over the 672 area we will go back and test the low 650’s. The real action of late is in the base metals, particularly nickel which rose 5.4% yesterday due to tight supplies. Nickel is up 22.3% for the year, versus copper which is down 7.2% year-to-date. There are a number of attractive companies to look at in the base metals sector.

Thursday, February 8, 2007


VolatilitySocialTwist Tell-a-Friend
Sally Limantour
February 8, 2007

Volatility or the lack of is on everyone’s mind. On CNBC early this morning they played the theme song from Jaws with the title, IS VOLATILITY COMING BACK – then phased out to a commercial. The NYT on Feb 3rd had an article IT’S CALM. LOOK OUT FOR A STORM. “If complacency breeds danger, then we might be sitting on a powder keg heading into 2007,” James Stack, editor of, Invest Tech Market Analyst.

The low reading in volatility which is trading close to record lows set in 1994 is comforting to many. A belief that the evolution of financial products makes the stock market inherently less volatile than it use to be is becoming its own mantra.

“People are very worried about risk,” says Tobias Levkovich, equity strategist at Citigroup Investment Research, and the fact that so many investors are focusing attention on volatility is another reason not to be concerned.

I see the logic in all of this – being concerned, not being concerned, being indifferent about being concerned all over this concept of volatility. My gut feel is this is going to be a volatile year. I have my reasons why and began putting on volatility strategies last week. We shall see…


Dr. Plosser tried to crash the party yesterday with talk of higher rates. At the heart of his antinflationary remarks is a fear that labor costs are about to advance. The market remains well bid and shorts established two weeks ago were covered yesterday. Perhaps a light upward bias will take bonds back to 112 00, though I would be a seller there. You have a sector of the trade questioning overall growth prospects ahead and then you have the non-farm productivity up 3.0% annual rate in 4th quarter which was far better than the consensus of 2.0% (non-farm payrolls for all of 2006 rose 2.1%).

Stock Indexes

HSBC has warned that debts will be higher than the consensus due to further deterioration in third-party originated sub-prime mortgages in the US. Disney had impressive earnings and while I think we are building toward a correction you cannot argue with the pretty charts. The mid-cap and small caps are leading the market and that is usually a positive development. The NASDAQ is the only major index that has not set a new high this month. February typically is one of the worst performers, but seasonal tendencies cannot always be trusted nor followed. Trade with caution and perhaps tighten the stops.

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