Italy, new political uncertainty

This is a brief article about the positions we can take if one country has political problems or its economy is weakening versus other countries or economic areas.

Italy

The president denied a group that was elected because he thought that having a eurosceptic finance minister wouldn´t be right for Italy. This generated a big sell-off on the Italian bonds due to the political uncertainty. After two days Giuseppe Conte was presented as a prime minister. There are a lot of doubts about the future because the new government rejects austerity. In addition, one of the measures is reducing the tax to 15-20% for individuals and corporates. Probably this is good in order to expand the economy or promote new investments. On the other side, this will generate larger déficit. 

    FBTP Jun18,  daily, Source: TradingView

The volatility has increased in the last five days. The FBTP Jun18 was in free falling the last Monday and Tuesday. After that, it has recovered.

FGBL-FBTP Spread

     FGBL vs FBTP Jun18, daily, Source: TradingView

The spread vs the Bund and the FBTP has increased dramatically. In the best scenario, a trader would have bought the FGBL Jun18 and would have sold the FBTP Jun18 at the beginning of the week or even when it broke the 26 level. The reason behind this is covering and hedging in some way because the bund is more stable So basically, we are reducing volatility. The Italian Bonds yield’s jumped due to the political uncertainty and the possibility of breaking the relationships with Europe.

Sum up

We have seen how volatile the markets can be in these situations. One of the best ideas is spreading versus a safer bond as I showed above. In my opinion, Italy won’t leave Europe. I will talk about Spain in the following post. Thanks.

Have a good trading!!!

European Financials review

Today is the turn of the European Financials. Are these companies in a good shape? Should we wait? We have seen an incredible run since 2009 and the main reason was the quantitative easing programs applied by the different central banks around the world. We can see that the Fed is tightening while the ECB and the BoJ keep running the easing programs. 

Eurostoxx

     FESX (Eurostoxx) continuous future, source: TradingView

As you can see the Eurostoxx has been raising since 2012 with the exception of 2015 and 2016. In this period we saw macro improvements in the European economy apart from the inflation data.

Eurostoxx banks 600

     FESB (Eurostoxx Banks 600) continuous future, source: TradingView

In contrast to the Eurostoxx, the banking index hasn´t shown a continuous growth. After the recovery from 2009, this index fell until 2012. We saw important highs in 2014 that couldn´t be broken in 2015. After that and due to the Chinese Black Monday, this index was falling until the middle of 2016. The last bull run was between 2016 and 2017. At the moment is testing a resistance around 127.00 that worked as a support in the previous year.

At this point, it is difficult to say if the movement will continue to the upside or will look for lows. The earnings picture so far has been mixed. HSBC, Europe’s biggest bank, reported profits matching expectations. On the other side, the French banks' earnings disappointed the market. Societe Generale and BNP Paribas traded lower on Friday due to their earnings report. The general concern in the sector is the rising costs. The monetary policy applied by the ECB doesn´t help the banks. Hopefully, the loan growth should pick up sooner or later.

EUFN iShares MSCI Europe Financial Sector Index

Let’s have a look at this interesting ETF. As a brief explanation, the iShares MSCI Europe Financials ETF seeks to track the investment results of an index composed of developed market European equities in the financial sector. The reason to invest in an exchange-traded fund is to avoid stock picking and taking advantage of tracking a sector in this case with a small cost. These are the portfolio characteristics:

       EUFN (iShares MSCI Europe Financials), source: iShares (Blackrock)

The P/E ratio is not the one that the value investors look for but it’s appealing if you compare with the current market levels. I would like a lower P/B ratio but it´s acceptable. One of the problems with the financial sector is that it´s cyclical, conservative and it’s not as profitable as it used to be. In the case of Europe is even harder to make money at the moment due to the ECB policy. Hopefully, adopting new technologies and AI will bring positive returns to this sector in the future but this is a long-term goal.

This is the current composition of this ETF:

      EUFN (iShares MSCI Europe Financials), source: iShares (Blackrock)

Diversification is one of the ETF advantages. As you can see, these are the top ten holdings on this fund. 

     EUFN (iShares MSCI Europe Financials), source: TradingView

The EUFN tried to rise to 2014 highs in the first weeks of 2018. Sadly this attempt failed and now is down 10% from the highs of the year. This product has been ranging between 14$ and 27$ in the last 8 years.

     EUFN (iShares MSCI Europe Financials), source: TradingView

This chart shows the EUFN prices for the last 3 years. After comparing the last two charts, I consider that buying below the 18 level is interesting for the long term with a take profit in 24. Obviously, you should be able to handle a 20% drawdown on this investment which is quite high for certain investors.

Sum up

I decided to introduce this ETF because I consider that it is an interesting instrument where you can diversify your portfolio for a reasonable price. In my opinion, I consider this ETF suitable for medium-term or long-term investment. This sector has good fundamentals. Some of the main risks are the correlation with other markets, these companies operate globally so they can be affected by shocks around the world, they are adapting new technologies to their operations and the central banks' policy affects them directly.

Have a good trading!!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Europe situation, Euribor, one of the best trades from 2017

Mario Draghi didn’t surprise the market with his speech. He acknowledged a moderation in the pace of the eurozone recovery but he said that it´s early to change the monetary policy. Some analysts believe that the ECB will wait until July to provide forward guidance. I don´t want to speculate but maybe the dovish message was due to the strength of the euro. I would like to remind you that the ECB is buying assets for the value of €30bn a month. The question here is what is going to happen with these markets as soon as the central banks stop these quantitative easing programs.

Euribor Spreads

I will use the Euribor contracts listed in Eurex because I don´t have access to the ones listed on ICE. Sadly these contracts aren´t traded as much as the ones on ICE but they show similar prices. 

     Euribor Jun18-Jun19 spread, source: Barchart

The difference between these contracts is narrowing what indicates a flattening of the Euribor curve. It seems that the current level can act as a support.

     Euribor Jun19-Jun20 spread, source: Barchart

As you can see the curve steepened from September 2017 to March 2018. At the moment is near the support at 0.400. The Jun20-Jun21 spread has the same shape and this is very interesting for me. In the case of the Eurodollar, you can see how the spreads show that the curve is steepening for one period in flattening after 2020. The truth is that the ECB hasn´t changed the policy in the last 8 years and the inflation is still low. Can we see any movement in the outrights?

    Euribor Jun18 futures, source: TradingView

This contract changed the trend one year ago. In my opinion, the European economy looks pretty much the same as 2017.

     Euribor Mar19 futures, source: TradingView

This contract is more volatile but it shows exactly the same movement as the previous one.

Euribor Dec19 futures, source: TradingView

The last 3 charts show how the different futures went up in 2018. What are they discounting? Is the current European economy worse than in 2017? Will we have a global recession in 2020?

One of the best trades

We have briefly seen how the Euribor futures behaved during the last year. As I said the European Central Bank hasn´t changed the economic policy while the Fed has been raising rates for a while. Considering this, the idea was clear: long Euribor futures and short Eurodollar futures.

    Euribor Dec18 – Eurodollar Dec18 Spread, source: TradingView

This trade has been amazing (and I think that it can continue at least for a couple of months) and probably we will read about it in the next “Hedge Fund Market Wizards”.

Sum up

The ECB delivered the words that we expected. Draghi has a difficult job and the protectionism threaten doesn’t help. The Euribor futures are not moving at all, their movements are tied with the European Central Bank forward guidance and the data. The Euribor-Eurodollar spread has been one of the best trades from 2017. It has captured the different economic policy in two economic areas. 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Europe strength, UK inflation

We had a lot of data today. Early in the morning, we have seen an outstanding German GDP. The next big announcement was the UK CPI that surprisingly has shown the same reading as the previous one. Followed by this, the German ZEW economic sentiment and the European GDP.At the same time, the central bank governors from the Fed, BCE, BoE, and BoJ were in a communication event hosted by the European Central Bank. Let’s check more in detail what happened with the British Pound and the Euro.

UK inflation data

As I said before, the UK CPI has been released at 9:30. The reading was 3,00%, the same as the September figure. This makes pressure to the Bank of England. Will they raise rates in December? On the other hand, the uncertainty about getting a Brexit deal is growing. If the policymakers don´t reach a deal focused on trade, the British economy will suffer due to the contingency plans from the private companies. In this theoretical scenario, the BoE will be in trouble because the inflation will peak and they have a limited margin to raise the overnight rate due to the high level of debt held by the households. This scenario has a low probability in my opinion.

GBPUSD December 2017 future

     Source: TradingView, GBPUSD Dec 17 futures, daily

Here we can see a bearish trend in the British Pound vs the US Dollar that seems that it’s consolidating and creating a strong resistance around 1.3070. This trend signals the disappointment of the rate rise in the current situation and the uncertainty of Brexit.

     Source: TradingView, GBPUSD Dec 17 futures, 30 min

The reaction of the strong UK CPI has been negative for the GBP in the first two hours after the release. After that, it has recovered. 

    Source: TradingView, GBPUSD Dec 17 futures, daily

The Pound has broken higher while I was writing this post. Head and shoulders confirmed.

European data

Europe has shown its strength with the macroeconomic data today. This morning Germany has released a strong Gross Domestic Product. The GDP (YoY) was in line with the expectations, but the GBP (QoQ) was better than the forecast.

      Source: ZeroHedge, chart taken from Bloomberg

The Geman ZEW economic sentiment was slightly worse than expected, 18.7 vs 20 expected by the analysts. The European GDP growth was in 2.5% and the industrial production 3.3%. These figures confirm the good moment of the European economy.

EURUSD December 2017 future

     Source: TradingView, EURUSD Dec 17, daily

The USD has been raising vs the Euro since September. The European Central Bank has shown its conservative side while the Fed is clearly hawkish. Today the central banks' governors agreed that the economic policy will take part only if the improvement of the economies continues. 

Source: TradingView, EURUSD Dec 17, 30 min

The Euro has rocketed today with the positive data. The strange thing is that we haven’t seen any retracement.

Conclusion

It’s been a good day for the euro but there are some issues to resolve. The main concern is the European inflation is not as high as the BCE would like it. The strengthening of the euro can lead to keeping the inflation low and Draghi knows about it. In the other side, the Bank of England is raising rates in order to fight the inflation.  This is not well seen by the market participants due to the Brexit uncertainty. In the other side of the Atlantic, Janet Yellen confirmed that the Fed will raise rates according to the economic improvement. Working nowadays in a central bank is not easy, considering that they need to be careful with their language, prepare the markets to avoid repercussions on the real economy and guide consumers about the expected outlook. All of these things shouldn't affect your trading but I think macroeconomics is helpful at least to understand the big movements.
Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

Most important moves of the week

Introduction

We have seen interesting moves this week in the financial markets. The most important was the ECB decision to cut the monthly asset purchases but extend them until September 2019. The market considered this decision very supportive and dovish by the ECB. The euro was hit by this decision and the problems in Spain. The UK released a better than expected product that helped the British Pound to hold its value versus other currencies. On the other hand, the energy markets have moved a lot. The Crude Oil Brent closed the week at 60.44, the 2 year high.

Crude Oil Brent

    Source: TradingView, Crude Oil Brent Dec17 future, daily

The Crude Oil Brent has broken key levels and has risen like a rocket in the last two days. I fell on Monday and I questioned my bullish idea as it could keep raising and break the 58.20 level. On Tuesday it closed at 58.33, above the key level formed the week before.  The selling pressure wasn’t strong enough on Wednesday at this contract closed flat at 58.45. The big movement was in Thursday and Friday. After Wednesday support, it tested the 59.54 on Thursday. It continued the bullish trend on Friday. It closed at 60.44, which represents the 2 year high.

US Dollar Index

      Source: TradingView, US Dollar Index futures, daily

As you can see it’s been a tough year for the USD. In June, and due to the interest rate hike by the Fed, seemed that the US Dollar Index could go up. But it didn’t. The weakness in the energy markets and the geopolitical problems didn’t allow the USD to rise. The market expected more hikes in 2017, unfortunately, with the hurricanes, the Fed officials were obliged to delay this decision. We have seen good economic data this week in the US:

Macroeconomic indicator	Reading	Expected
Core durable goods orders (MoM)	0.7%	0.5%
New home sales	667K	557K
GDP	3.0%	2.5%

The Fed is showing confidence and a hawkish approach because they have confirmed that the interest rate hikes will continue in the next year and they will reduce the asset purchases. 

     Likelihood of December Rate Hike, CNBC, https://www.cnbc.com/2017/09/18/traders-are-getting-ready-for-another-fed-hike.html

       December FED rate hike probability, Bloomberg, http://uk.businessinsider.com/markets-almost-certain-fed-hiking-interest-rates-in-december-2016-11?r=US&IR=T

These charts show how the likelihood of a rate hike in December is increasing, and the dollar has done the same movement since September. Is anyone building a big position?

All of these facts were the key to help the USD. Technically the most important thing is that the downtrend was broken 1 month ago. The most important levels for me are 92.63 (as a key support) and 96.585 (as a resistance)

Another interesting fact is that Janet Yellen won´t continue as a Fed president.

Euro

    Source: TradingView, EURUSD Dec17 future, daily

The Euro has fallen this week due to the dovish speech by the ECB this week and the USD strength. This is always the same if you don’t deliver what the market participants expect, the value of your assets decline. As I said in my last article, I understand that the ECB prefers to be cautious with the QE cuts. Having a weak currency in a growing environment can help the inflation to peak. It has broken 2 key levels this week as you can see in the chart. I think it can keep going down and test the 1.1530 level. In part, the last decrease was due to the issues in Spain.

British Pound

    Source: TradingView, GBPUSD Dec17 future, daily

Surprisingly for me, the GBP is holding its value vs the dollar. We have seen a better than expected GBP in the UK. It’s difficult to know what will happen in the Brexit negotiations. There are a lot of doubts and speculation about what will happen. The biggest investment banks confirmed that thousands of employees will be relocated to Europe. 

    Source: TradingView, GBPUSD Dec17 future, daily

We have seen the same down movement than in the EURUSD. We can see a double top that indicates that the GBP will rise vs the Euro. The 0.8733 level is a very important support that has been tested several times.

I hope you like it.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverage involved

#Trading #fx #euro #gbp #USD #energy markets #brent #macroeconomics #UK #US #Europe #fundamentals, #Bloomberg #FED #interestRate #qe #Assetpurchases #ECB

Headlines of the week, British pound, Brent and Economic calendar for the next week

United States

The most important economic releases this week were the US Core CPI (MoM and YoY) and the US retail sales. As you know both were lower than the market expected and the treasury yields and the USD closed lower yesterday. The US inflation data offset the higher gasoline prices.  Robert Kaplan, Dallas Federal Reserve Bank President said that that the Fed should periodically review its inflation target and other frameworks. I think this is interesting but I don´t know how they can apply it. The economic policy takes time to affect the real economy.

UK

In the meantime, crossing the Atlantic, Mark Carney said on Friday that he expects that the BoE will raise interest rates but he declined to comment when. The biggest headline was that there are rumors that Britain is to be offered a two-year Brexit transition deal. The British Pound jumped as soon as this news was published in the media.

Europe

There is a controversy between  Jens Weidmann (Bundesbank president) and the European Central Bank. He said that there is no need for the ECB to continue providing monetary stimulus through bond purchases.  Mario Draghi doesn´t see enough inflation progress. According to Reuters, the ECB is likely to reduce support but continue to buy the asset purchases.

China

Apparently, China´s economy has shown signs of stabilizing and growing more strongly. If it continues in the second half of the year, the commodities will rise.

GBPUSD Dec 17 Futures

    Source: TradingView, GBPUSD Dec17 futures, daily

As I comment before, the last move has been driven by the possibility of the two year transition period between Europe and UK. We can see the bounce back on Thursday when it was published on the news. Apart from that, it's the second time it closes above the 1.3285 resistance I signaled in one of my old posts. 

Brent Dec17 Futures

    Source: TradingView, Brent Dec17 futures, daily

The Brent rose yesterday and tested the resistance at 57.21. I think it can keep rising the next week due to the demand increase. 

Economic Calendar

Own elaboration                                                                           

It´s going to be a busy week for the UK traders as they have CPI, Average Earnings + Bonus, Claimant Count Change and Retail Sales. In the US, we should look forward to seeing Industrial Production, Building Permits and Existing Home Sales. Tuesday is the most important day of the week if you trade European products.

Sum up

This is a little review about the most relevant things of the week. For now, the markets are moving as I expected and shared in other posts. Let's see what happens next week.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverages involved

Index analysis, DAX, FESX, S&P500 and Nasdaq

Today I´m going to talk about some of the biggest indexes around the world. The year to date performance is really good in all of them. We have seen an improvement in the economic data which always help the stock market and brings confidence to the consumers. If you understand the movement of the stock market, you can guess what’s going on around the world, sadly, you need the experience to do it. Let’s say that I consider the stock market as it was a leading indicator of the economy. Other examples of leading indicators are the bond yields, the interest rate yield curve, new housing starts and money supply. Apart from them, the rest of the economic indicators are based on the last month or the last period of time.

For example, when the market participants expect positive data and the economic indicator is negative, there is a big movement in the market.

Let´s see how the indexes are performing this year:

DAX

    Source: TradingView, Dax Index, daily

The Dax went up during the first six months of the year. After this period, and due to the big fines of the German automotive sector and the uncertainty of the German elections if fell to the 11900 level.  It’s been raising since September without stopping.  As you can see it tested two times the 200EMA but it couldn´t consolidate the downward movement.

   Source: TradingView, Dax Index, daily

This is the German index from July until now. As I said before it went down to the 3rd support (11941.5) where we can see a double support. The technical figure and the buying pressure helped the Dax to look for highs again. At the moment, it´s around 12900 and probably this movement will continue in the short term.

Eurostoxx (FESX)

    Source: TradingView, FESX Index, daily

You can think that it´s the same chart as the section before with different scale. The shape is the same. I really like the FESX because there is a lot of liquidity. This index represent the 50 biggest companies in Europe. It respects the technical levels. The main difference with the Dax is that it has exposure to different countries in Europe. The peripherical countries in Europe don´t perform as well as the most conservative ones like Germany, and this fact is reflected on the EuroStoxx index. This is why there are more retracements than in the Dax or S&P500. 

    Source: TradingView, FESX Index, daily

This a stable contract full of liquidity as I said before. The shades highlighted in yellow are really important because they show of the buyers took control of the situation and reversed the downward move.  When the 20EMA crossed the 50EMA, this contract accelerated the move.

S&P500

   Source: TradingView, SP500 Index, daily

What can I say about the S&P500? It’s the best chart I´ve ever seen for a technical analysis book. It respects the trendline I drew on the chart. The moving averages don’t cross between then and this shows the strength of this bullish trend. The broken triangle pattern led the S&P500 to 2480, where it retraced to the trendline and rocketed to the current levels.

    Source: TradingView, SP500 Index, daily

This shows the last 4 months. You can see how technically this contract trades.

Nasdaq

    Source: TradingView, Nasdaq Index, daily

This is almost the same case as the S&P500. I’ve noticed that the buying strength is decreasing. If you see the red lines drawn by me, each rise is not as strong as the previous one. It means that maybe it’s consolidating or maybe the sellers will be back testing the 5900 or even the 5775 levels.

The main reasons for these strong performances are: improvement in the economies, the consumer confidence the change in the economic policy from the central banks When will this move stop? I'm not sure, but this move is supported in part by the central bank stimulus policies. I think the transition of these supportive economic policies will be a challenge and it can affect all the financial markets.The approval of the US tax reform can boost the US markets in the short term. I hope that this post helps you.

Have a good trading! 

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverages involved

FOMC, currencies review

As you know, today is the FOMC meeting minutes. This is one of the most important events if you trade fx, US government bonds or US indexes. And even if you don’t trade them, be aware, because the most part of assets will be moving later today.

Let´s start with the interest rate decision.  You can think that this decision doesn’t affect you in your day to day, but this is wrong. It affects to rate that the borrowers need to pay back (mortgages, personal loans, student loans, car financing…), your investments, the asset valuation, the money flow

.

Second, all the economic performance and events that affect the economy are reviewed by the FOMC committee and president of the Fed makes public the economic policy that will be implemented in the coming months.

These are simple explanations to clarify why it’s an important event in the financial markets. If you know how to interpret the words of the FED president, you can make good medium-term investments. For example: if the FED raises the interest rate and they expect the economy to keep growing, one of the most successful strategies is investing in financials (banks, insurance companies…) This is not the purpose of this post.

Euro

    Source: TradingView, EURUSD Dec17 futures, daily

This contract was analyzed the other day. It broke the first resistance at 1.18020. The bullish move in the euro is due to the strong German Industrial Production and the deferral of the independence declaration in Catalonia.  If the Fed sends a bullish speech, we can see this contract going down to around 1.1750.

These are the levels  I published in the weekend:

Resistance 3	1.20965
Resistance 2	1.19550
Resistance 1	1.18020
Support 1	1.17235
Support 2	1.15460
Support 3	1.14435

GBP

    Source: TradingView, GBPUSD Dec17 futures, daily

The British Pound has recovered a little bit this week. If we see the news around the UK, we can think that the pound is really high and it should fall. Europe is putting pressure on the UK. There is a substantial probability of a Non-deal Brexit, which would be bad for the GBP. In the other side, we have a strong US economy. I think Yellen will clarify the effects of the hurricanes to the US growth. I think we can see the GBPUSD between 1.3100 and 1.3066 in the coming days.

Important levels:

Resistance 3	1.3615
Resistance 2	1.3283
Resistance 1	1.3153
Support 1	1.3066
Support 2	1.2952
Support 3	1.2848

JPY

    Source: TradingView, JPYUSD Dec17 futures, daily

We can see a bullish trend in the dollar. The shade highlighted in the chart show how significant is the 1.1257 level. I don´t see strength in the JPY movement this week.  A hawkish message can help to consolidate the price between 1.1343 and 1.1257 (0.88160 and 0.88160 in the chart). 

Resistance 2	0.88160	1.1343
Resistance 1	0.88835	1.1257
Support 1	0.89905	1.1123
Support 2	0.90945	1.0996
Support 3	0.92225	1.0843

Trading the FOMC meeting minutes is really difficult. You shouldn´t only consider the interest rate decision. The FOMC minutes can provide you an idea of the path to follow in the coming months. If you do intraday trading, you will see the liquidity disappear and big swings in the prices due to how the traders or algos interpret the message provided by the Fed president.

Have a good trading!

Disclaimer

I wrote this article myself, and it expresses my own opinions that shouldn't be used as a trading advice. Trading carries considerable risk due to the high leverages involved