2015.07.30 Daily

FOMC in last night was within market expectation that they should open the door to first rate hike in this year and the possible hike in September. I believe FOMC could afford to increase it soon although market expects December or next year. Not only US economy but also US financial market looks somewhat stronger than emerging countries’. The corporate earnings and sales were very solid rather than market expectation, so equity price could arise further. USD was appreciated maybe under the confidence of both of economy and equity market.

Apparently, US economy seems to be so firm with positive labor market and corporate profits, while pending home sales slipped last month which could mean subdued asset market not the inflection point. Contrary to US, today, Korean companies’ profits were very disappointed and cause the weak equity market. Korean economy looks very gloomy especially with Chinese economic slowdown. KRW turned to be depreciated against USD in 4 days again. In bond market, foreign investors sold their position in 2 consecutive days and yields were up by 1-2bps, today. That said, Korean financial market showed triple weakness.

Many strategists argue more weakening for Chinese equity market because they believe Chinese government has manipulated the market as using huge supports. They expect the unwinding of this in line with a suggestion from IMF who could decide whether Renminbi would be selected in SDR or not. They unlikely see recent upturn in residential market and Baltic dry index because they only focus on tumbled trade volume caused by Chinese economic slack. But, I want to advise them to think about the cause and ramification.

What is prior? Economic downside pressure or restructuring which have led the contraction in consumption from governors? Pessimists would likely or want to believe in first thing. But, we all know that the true is second one. It looks somewhat clear that Chinese government could handle their economy and financial markets at all, but pessimists have argued the panic market, maybe with their short-sell position for Chinese equity and would pray for this.

Today, SHCOMP was down -2.2%, and they likely are very pleasure with this. I see further volatility in markets not only in Shanghai but also other global financial markets. Likewise, in KTB futures market, the foreign traders seemed to be nervous today, but they could smile tomorrow.

We would meet the GDP data in US tonight, and this may decide the short-term direction in markets. But, it would be just one material under the market fluctuation at most. Anyway, pessimists could continue to dream the end of the world further. I much wonder the end of them, not of world. Deteriorated economy was just past event, from now on, the more important thing is to view the future after unprecedent monetary easing globally. As they continue to dream, almost markets price has been convergence to prepare big explosion. It would be much interesting.

2015.07.29 Daily

I missed to write the daily yesterday due to early finish up the work. From now on, let’s talk about KTB futures market and foreign traders, who I don’t call them for the investors.

I thought they deserved to buy KTB futures because they could gain from one of two sides, capital gain in futures price or KRW appreciation, or both of them. Meanwhile, they accelerated to buy futures in both of 3 year and 10 year market toward historical maximum position, and this seemed somewhat unacceptable for the market because it means they may have conviction that BOK should cut the policy rate soon or Fed might be dovish in coming FOMC. I think, they consider this aspect with technical analysis which is their main weapon in KTB futures market. Many markets in global including KTB futures and FX markets such as EUR, BRL, and etc have moved on a big volatility recently in line with the convergence of moving average lines. Continued convergence should lead explosion toward one direction commonly. And foreign traders maybe bet on strong KTB futures, I guess.

And then, their winning looks possible? It is maybe not. I expect range movement in many prices would continue further under two opposite factors, possible reflation and remaining deflation woes. Foreign traders in KTB futures market tend to follow the trend, and they usually won in the strong trend. But they sometimes failed to gain when market price moved in a box. I see this pattern as the second one. Yesterday, their recent profit was thrived by the weakened market with not special materials. I think they were embarrassed on it because UST yield dropped last day and Chinese stock market was down further although shaped a positive candle. They should feel the possibility that they could fail this time.

But, today KTB futures market was strong despite of the weak UST market and strong SHCMP. It makes me embarrassed. But I understand this as a simple volatility ahead of FOMC and a stupid short-cover by domestic investors. About coming FOMC, It seems not easy that Fed reveals the hawkish stance or signals first hike in next meeting yet. They should consider recent somewhat negative data, such as today’s consumer confidence index that recorded about 1.5 year low in labor market expectation especially and recent woes about Chinese equity market. On the other hand, they would be not easy to turn to be dovish, neither. They are afraid to be too late to start monetary tightening in terms of possible inflation. They would maintain data dependent stance and financial markets would move in recent ranges as well.

In short-term, all of market participants focus on the Chinese equity market and today is very strong spurred by capital injection by government. Does this mean the market trajectory should be downward soon? I have no idea. In fact, some colleagues already bet on Chinese equity market burst. People consider the excessive margin position only, although they see that position shrank rapidly. They do not seem to consider net short position to China.

2015.07.27 Daily

Let’s talk about three subjects, disconnected correlation between EUR and oil price, today’s tumbled Chinese equity market (black Monday?), and heavily stocked long position of foreign investors for KTB futures in both of 3yr and 10yr.

First, we saw the disconnected correlation between EUR and commodities price last week. What is implied in this? I understand this just as the volatility. EUR/USD faces the convergence of all of moving average, so it could be connected to too high volatility soon. Last week’s strengthen EUR would be in line with this volatility, I think. Dropped commodities price seemed somewhat odd as not only EUR appreciated against USD, but also BDI was high last week. Someone said this divergence could mean that market starts to focus on the economic fundamental, not on the monetary policy further. Combination of depreciated EUR and plunged oil price was driven by the power of some governments such as US and Euro area, he thinks. But for now, market recognizes these themes as be separated from each other under he argues. It’s possible, surely. But, I think this analysis seems somewhat hasty, because we experienced this only for one week under the recent market has moved with big volatility. I maintain my view that EUR would go to strengthen versus USD with improvements in Euro area’s economies and possible diminishing importance about ECB’s QE in 2H this year. And this would lead commodities price to be pushed higher at last in line with global economic rebound. Until then, all of markets would move with huge volatilities, I expect.

Second, Chinese equity market, especially in Shanghai market contracted rapidly by -8.5%, so someone called this black Monday. It’s somewhat regretful because today is the day that our project team about Chinese equity market published the material about the forecast of equity market and economic influences and would announce in the team meeting. We expected the movement in Chinese equity market and economic impact would be moderate under restricted negative wealth effect and willingness of control by government. But, the market is not easy. Anyway, we would face the headwind that global economy could be in downside risk with deflationary pressure in line with dropping commodities price. Recent adjustment in US equity market is affected by the expectation that 3Q would be hard to gain further earnings than 2Q that was showed firm or solid earnings. And on the economic fundamentals, it would be same. Under subdued inflation in 3Q, and with Chinese equity’s uncertainty, global players would want to see the world as the fear of deflation. Maybe they would be pleasure in 3Q, but their gain would be very restricted, I guess, because the big picture already is drawn on the opposite side. As someone argued, Fed seems afraid of 1966’s case which former Fed missed to start tightening policy. At that time, the projections about inflation failed to forecast the trajectory of CPI and wages. That said, the inflation could not move toward on linear path, if it starts to move. We would face the inflationary pressure soon, maybe in 4Q this year, I expect.

Third, how is KTB futures market? But, I don’t have adequate time to write… I will continue my article following this, tomorrow…. Sorry...

2015.07.23 Daily

Although I see yesterday’s KRW appreciation would be the inflection point to turn around toward appreciation with the pattern of named hanging man candle, USD/KRW exchange rate turns to increase rapidly today as Korean GDP number was disappointed and USD was moderately strong against EUR last night. Discouraging GDP data led the bull bond market in line with continuous buying KTB futures by foreign investors. I expected the peak point of KRW against USD would be the range from 1,160 to 1,170 under monthly candle analysis, but today’s exchange rate is 1,165.1 won. As further, today’s candle type is the big positive candle which signals possible appreciation further and strong momentum toward higher. Maybe the level in FX market would somewhat meaningless, I feel. If I am a FX trader, I was short on USD/KRW and would loss-cut today and initially get the new position to be long on USD. But, the amount of position would be somewhat small because I’m a little bit skeptical about some arguments expecting to be depreciated toward 1,200 won soon. Nevertheless, the momentum to be high seems very strong now.

In Wall Street Journal, there are some interesting articles today. One is about Chinese bond market opened to specific foreign investors recently. The third largest bond market in the world was opened to oversee central banks and sovereign wealth funds, but they seem to hardly feel attractiveness about that. WSJ points four reasons. First, the history in Chinese bond market is very short. This market hasn’t been through the whole cycle from current easing cycle to unforeseen tightening cycle that could cause the credit crunch, so market participants feel some afraid about this. Second, the on-shore yield is lower than off-shore yield. Main investors including money managers already invested in off-shore market’s bond and if the expected yield of this is higher than on-shore’s, they do not need to buy on-shore bond. Third, turnover ratio is very low. WSJ compare this with US and Japanese bond market, but I do not agree with this, because Chinese financial market is developing and would be more liquid at all. And last, there are too many securities in Chinese bond market. Foreign investors feel some difficult to study and select good securities among them.

Another one is some hedge funds to prepare for a liquidity drought. They see a kind of bubble in junk bonds market because too many retail investors were in this market through many vehicles such as ETFs that could lead the rapid outflow of hot money if US Fed starts monetary tightening. So, they increase cash position in their portfolio, buy CDS premium on some junk bonds, and buy put option against some ETFs. I think they see the junk bonds market as the bubble. But, as think further, it would mean whole bond market bubble in line with recent woes about drain liquidity in the market. I think we would face the strong headwind from irrational monetary easing like QE as this printing money starts to play in anywhere and thus inflation arises soon. If then, bond market sell-off could be realized and we would be so painful. But, I hope this inflation would come with reflation, not with stagflation. The opportunity could come that pessimists, the majority in the world now, would be blown out of the world.

2015.07.22 Daily

Let’s talk about Korean bond rate today. USD strengthening movement unwound yesterday and KRW appreciated a bit today. I saw its peak as 1,160~1,170 and I think it starts to turn around since today. Yesterday and today are maybe the inflection points in FX market. Foreign investors buying KTB futures seems so convenient because they saw this picture that the divergence of monetary policies between US and Korea deepen further as Korean officials pursue to easing stance in both of fiscal and monetary conditions despite Yellen, US Fed’s chairwoman seems to want to hike the rate quickly. On the other side, if Korean government has to increase policy rate despite the burden of household debt, foreigners could earn gains from KRW appreciation and this would be bigger than the loss from downward price of KTB futures. Or US fed could turn to be dovish on its policy stance. If then, foreign investors gain on both of capital gain from KTB futures and FX position. So, they seem to be very encouraged on their position.

In stock market, especially in US, after closing the market and announcing earnings of main firms including MS, stock price declined rapidly despite their earnings beat the market expectation. This point seems to be very meaningful. In US equity market, participants do not expect other good news further as I think. So, it would be the inflection point in short-term in equity markets. And if this scenario is realized, Fed’s stance for monetary policy could change to be dovish. That said, in short term, the opportunity to gain returns is on short USD and long bonds, I think.

2015.07.21 Daily

US treasury yield curve flattened last night in line with the expectation of Fed’s rate hike and short-end bond price was down. In terms of US rate hike, USD continued to strengthen and oil price was down, either. Contrary to bear market in US treasury, German bund rate rallied further following last week in line with the procedure of Greece’s deal with creditors.

Range movement in global bond markets would be continued with somewhat volatility and it would be underpinned by weak inflation expectation with low oil prices. Some analysts including Barcap argued that the inflationary pressure would be subdued in this summer with seasonal effect. Someone sees the Iranian deal with US as the willingness of US that does not want oil prices to be accelerated further. In this case, the oil market could lose the upside momentum for some time and this could cause the disinflationary pressures.

However, unless oil price moves toward much lower than current level, main focus would be on the effect on consumption side. Maybe in line with Yellen’s thought, earlier step in lowering oil price, people used to increase their saving, not consumption because the volatility means uncertainty for economic and sentimental factors. After lowering movement, however, if the momentum is moderate, individuals could increase their consumption demand due to expended disposable income from lower energy prices. This means reflation or possible demand side pressure to inflation. So, I expect global yield curve to steepen quickly at the end of this year.

On the other hands, how is the Korean bond market? Recently, KRW depreciation against USD is the hottest spot in the market. In currency market, fair value could be hardly calculated by fundamental analysis, so market players see the momentum mainly. They often see the three factors and say if those all factors indicate same direction, the momentum would be very strong. Those factors are the willingness of government, consensus by foreign investors, and supply and demand factor. And now, Korean government pursues to accelerate external investment from domestic capital and recently announced the policy to boost capital outflow despite the effectiveness of this is somewhat skeptical. And foreign investors focused on USD appreciation now. They seem to use short position in KRW because the yield spread between US and Korean treasury would continue to be narrowed ahead of Fed funds rate hike, and carry cost using KRW is relatively cheap. And last, supply of USD would somewhat limited because the export economy has been deteriorated recently and demand side of USD could increase in line with investment abroad and temporary demand for FX hedge in Chinese equity fund. In Chinese equity fund, if the price tumbles seriously, the demand for buying USD should increase.

Considering those three factors, KRW faces headwind against appreciation. Market players likely want to see the peak of the price. While the downward pressure of KRW, the bond sell-off by foreign investors is not strong yet. This is main different point in case of last currency shock. Some foreigners sold the KRW bond, but it seemed not as the trend yet. Rather, in KTB futures market, foreign investors started to buy both of 3 and 10 year futures. They seem to think current KRW depreciation would not mean a sort of crisis in Korea, and should get the chance for the timing to buy Korean assets.

How is the level? In a chart, the ceiling seems to open much higher, so it would be difficult indicate the target level accurately. But, in longer term chart, for example in the monthly chart, we could see the negative and thick leading span, and the lagging span meets the main moving average line and negative and thick leading span as well. So, I forecast the peak price of USD/KRW would be about 1,170 won. Now, it is about 1,159 won, so it seems very close to peak-out. If then, the winner would be the foreign traders who are buying KTB futures recently. Although Korean bond rate could be pushed higher, they could gain from FX positions with KRW appreciation, I guess.

2015.07.20 Weekly

Global Weekly Strategies

Drop in oil prices caused by Iranian event led long-end rate decline last week. For longer-run, global low potential growth rate is consensus in line with so called secular stagnation, so long-end rate has implied this prospect since last year. And what is the key risk factor? It would be the inflation risk sooner and market started to consider this expectation or woes depending on upturning oil price from its trough at about 40 dollar per barrel. And then, what is affecting oil price mainly? It is likely EUR currency. In terms of demand power, main consumption demand of OPEC countries is decided by EUR, not USD mainly because their almost import came from euro area. That said, EUR is likely a key factor on global inflation or long-end rates.

Before Greece deal with its debtors, I expect Grexit and its impact would be very limited because huge investment banks such as JP Morgan and Barclays Capital argued the possible Grexit already. The main risk of Grexit is not an impact on Greece’s economy, but a contagion risk to peripheral countries including Spain and Italy. As European economy started to robust since late last year, the contagion risk in them would be very restricted, so it is a timely good chance to throw out the old risk from Greece, I thought. If then, ECB would consider whether they have to remain QE program started on the woes from Greece problem, and then bond rate could be pushed higher like the case of 2013, so called US QE taper tantrum. QE tapering by ECB could lead EUR appreciation against USD, and this affect oil prices to increase. Long-end bond rate would be much volatile in line with both of tapering and inflation woes.

How about US? Fed chair, Yellen signaled the possibility of the first rate hike in this year last week. She revealed somewhat woes about the timing of fist rate hike. If Fed hike rate earlier, they could increase rate slowly, but in opposite case, maybe they have to hike the rate quickly and this would be a bigger risk than first one. That said, Fed wants to increase funds rate earlier, but market implied rate does not consider the dot table by Fed. So, like a former case, EUR appreciation, could make markets plunge to frustration in US bond market as well.

However, Greece seems to remain in Euro area for some time on a deal with credit debtors, especially with Germany. Depreciated EUR and bullish peripheral bond was the ramification of this, I think. ECB commented they would remain their QE program in last week’s meeting.

Whether EUR against USD appreciate or not could be affected by the economic cycle in Euro area, after all. So, my base scenario would delay to be realized.

The market will show fluctuations, especially in yield curve and breakeven in TIPS. The inflation risk or exit from deflation fantasy would be subdued for 2 or 3 months. But, if spread between short-end and long-end rate moves wider or breakeven decline, increase the steepener position or buy TIPS against 10 yr straight bond. On the other hand, UST 5-30 or 10-30 spread seems somewhat wide. I recommend betting curve steepeners on 10yr rate and short or mid-end rate, not on 30yr rate.

And about China, the hottest spot in global markets? I’m somewhat frustrated about this, but in my base line, the fundamental in China would be solid in 2H this year showed by some data of exports to China of their main trade partners and property market prices. Anyway, last week’s data such as GDP, FAI, IP and retail sales seems bluffing.