Market Thoughts – Preparing to Hyperventilate

I am aware that I will score No Brownie Points for saying I respect Vladimir Putin, albeit grudgingly, but I have been watching him for a while now, since Syria last year and his masterly move that left Obama on the lurch and caused another few million honest Syrians to lose their homes and others, their lives.

Today  we have Obama back and way behind the game as he supports last year’s public enemies to fight the new face of terror, ISIS, that has managed enthrall at least 500 Britons to fight in their ranks as well as countless other nationalities who have run over to the Middle East to fight alongside them.

What is going on ?

I wish I could say they are total idiots and kids who have lost their bearings just because I am not in their shoes but they obviously have enough personal reasons to do so. And my analogy, and a Japanese idiom I think, would be that a cornered rat would bite the cat.

But for the malleability for our ability to reason, chiefly from media influences, we all look past the past and focus on the present geopolitical turmoils looking squarely to blame the culprits without delving into their creators.

And who is to say who is right except that we are here to make money from the markets and thinking about wars and conflicts would be a useless distraction.

Thus I can say we better prepare to hyperventilate because markets are about to get assaulted on several fronts this week ranging from central banks to key US economic data, in the backdrop of Ukraine, ISIS and Al Qaeda.

2 Sep 1230 pm Reserve Bank of Australia
3 Sep 2200 pm Bank of Canada
4 Sep est 1400 pm Bank of Japan
4 Sep 1900 pm Bank of England
4 Sep 1745 pm European Central Bank

US Economic Data and Releases
2 Sep 2145 pm Markit US Manufacturing PMI
2 Sep 2200 pm ISM Manufacturing
3 Sep 1900 pm Mortgage Applications
4 Sep 0200 am Fed Beige Book
4 Sep 2015 pm ADP Employment Change, Nonfarm Productivity, Initial Jobless Claims
5 Sep 2030 pm Change in Non Farm Payrolls, Unemployment Rate, Average Hourly Earnings

The inevitability of the situation is that we have moved into a globalised economy within a framework of national politics to paraphrase Henry Kissinger in his latest essay on WSJ.

All us little countries better fall into place in the categories placed for us. EM-Asia, EM-Latam, EM-CEMEA, etc. No individuals please, just categories as identities to sink or swim together.

The G3 rules this week and we better get ready for a ride.

Citi pointed out 2 interesting developments this morning.

1. That USD long positions are heavy in only 2 currencies – the EUR and JPY. As for the rest, the market is pretty neutral.

2. EM, especially EM Asia, has seen inflows in 2014 from both real money and fast money accounts. But there is a need to differentiate between discretionary(short term) and structural(long term) flows. And there is good reason to believe, based on NDF flows, that the inflows are short term.

For that we have the DXY USD Index (which is 57.6% EUR, 13.6% JPY and 11.0% GBP) at 82.75 now, higher than last week this time when I wrote calling for 84.00.

DXY 5Y CHARTChart : DXY Index 5 year chart

All signs for the USD to continue from strength to strength but we need to see the strength against the rest of the world which are buoyed currently by the expectations of ECB QE later on this week.

Therefore we are in an extremely precarious position now – a deck of cards or dominoes which is tied to US economic data and the ECB this week and expectations are for strong data and the ECB to announce additional stimulus.

I think the market could be over pre-empting the results and ignoring the geopolitics because wars are impossible to quantify. I use the CFTC S&P futures positioning as a gauge and it would appear that both retail and institutional positions are running light (and maybe, scared).

cftc s&p 500 positioning

Another overlooked development in the past week has been German Finance Minister Schaeuble conceding that the ECB has reached its limit in helping the Euro area even as Draghi did say in his Jackson Hole speech 2 weeks ago that the markets have lost faith in him.

All that taken in, it would appear that markets are unprepared for disappointments and war this week.

I will put the DXY trade on hold at the moment, load up on VIX and Gold, the least favoured trades of the year.

GoldChart Gold/USD target 1310

vixChart VIX Index target 14

My reason is that we have so used to the idea that everything will be taken care of by the central banks that we have forgotten how to look after ourselves.