FX and Fixed Income trading

Monday, 18 June 2018

Sunday, 3 June 2018

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!!!

Sunday, 20 May 2018

Appaloosa 1st quarter changes in its portfolio

The other day I read an interesting article on ZeroHedge (http://www.zerohedge.com/news/2018-05-18/tepper-trounces-competition-outperforms-peers-600-ytd). It was related to the portfolio changes on the Appaloosa’s portfolio. Appaloosa Asset Management is outperforming its peers, this is why I decided to investigate what they are doing differently from the rest. Reading the 13-F from the biggest hedge funds can help you understand how they take the investment decisions. However, you won't be able to know the price in which they entered or exited the positions.

I´ve only focused on the new positions:

Lam Research Corp (LRCX)

Lam Research Corp, source: TradingView

The strong fundamentals and the high margins will help the stock to go up.

Lam Research Corp ratios, source: TradingView

Wells Fargo (WFC)

Wells Fargo, source: TradingView

This company has been punished in the markets due to the regulatory constraints. However, it showed earnings that beat expectations. I think Wells Fargo is capable to provide good returns for investors via earnings growth, dividends. The net margins are good and the P/E ratio is better than its sector peers.

UBS Group AG (UBSG)

UBS AG Group, source: TradingView

This investment brings geographical diversification. It’s the largest global wealth manager and has a large exposure to Asia. It offers a 4% dividend plus buybacks. It showed the best quarterly results in 3 years on the 23rd April. The lower revenues and rising cost are one of the main concerns. I think investing long term in this company is not a bad idea. However, I would prefer to buy under 15CHF.

Applied Materials (AMAT)

Applied Materials, source: TradingView

The strong fundamentals are driving the price of this stock higher. The sound financial situation allows the company to increase the investments. The biggest concern at the moment is that the makers of displays and chips to store data in high-end phones are slowing some projects. (The best example is the disappointing sales from the iPhone X)

SMH semiconductor ETF (SMH)

SMH semiconductor ETF, source: TradingView

This chart shows the incredible performance of this semiconductor ETF. I would like to remind you that I am not an expert on this sector. I can understand the growth from 2013 until now, basically, it has been driven by a strong demand for this devices. When something becomes popular there is two ways of making money:

-Mass production with the smallest cost possible

-Limited production of high performance devices

At this point is up to the clients. Will we see strong demand in the best devices out there? (We have seen disappointing sales in some of them) Will the price of these devices decrease ? If so, the net margins will do as well and their rating will be downgraded. I’m not saying that is a bad investment, I have only expressed my point of view.

ALPS ETF

There are 16 ETFs listed under this asset management. I believe that they use for diversification purposes.

Knight Swift (KNX)

Knight Swift, source: TradingView

This company has great fundamentals. The financial leverage is really small. The main concern is to hire and retain truck drivers as the company said when the 1st quarter earnings were released.

Boyd Gaming (BYD)

Boyd Gaming, source: TradingView

It has good fundamentals for a short-term investment. The resistance is around 40 so it doesn’t have a lot of upside potential (in the short-term). The analysts think that this kind of business has one of the lowest growth prospects.

Platform Speciality Prods Cor (PAH)

Platform Speciality Prods Corp, source: TradingView

It has an attractive P/E ratio and upside potential. I believe that Appaloosa bought under 10. One of the biggest problems is the financial situation.

United Contl Hldgs Inc (UAL)

United Continental Holdings, source: TradingView

The enterprise value to sales under 0.80 and the P/E under 10 make it attractive for investors.

Nvidia (NVDA)

Nvidia, source: TradingView

Nvidia is a successful company that its share price can continue to rise in the following year. The sales growth forecast is positive for the next years and if we consider that the margins are high, we will see this stock higher.

Sum Up

Today’s article has been different from the other ones. I haven’t analyzed all the stocks properly but I’ve given a quick overview. In the case of the stocks above, they have good fundamentals and some of them are down around 20% from the last max. If the market continues rising, Appaloosa will deliver a strong performance.

As I said, we can learn a lot with the 13 F even if we don’t know the prices in which the trades were executed. Obviously, we should do our own research but we can compare if some of the biggest funds are taking the same positions. Another thing to consider, that I haven´t mentioned, is the type of investor, maybe they are looking for a short-term investment while you can be considering a longer time frame.

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

Sunday, 6 May 2018

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

Saturday, 28 April 2018

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

Monday, 23 April 2018

Fed Funds vs Eurodollars futures

The interest rate markets offer a lot of possibilities and strategies. You can trade the outright, the intra-product spread (calendar spread or calendar spreads combinations) and you can create your own spread with different futures (inter-product spread) Sometimes I analyze the outrights and certain spreads but today I’m going to introduce a strategy used by some of the biggest market participants.

CME Interest Rate Products, source CME

The spread

I’m not going to focus on the back of the curve. The products to make this strategy are Eurodollar futures and Fed Fund futures. Before I explain the strategy lets define these products:

Eurodollar futures are based on a 3 month LIBOR.
Fed Funds futures are based on the average daily effective Fed Funds rate and calculated the last business day

Considering the different value per basis point we need to calculate the spread ratio:

Spread ratio, own elaboration

In order to get the ratio, we should divide the Eurodollar value per basis point by the Fed Fund value per basis point. In our case, we will trade 10 Eurodollar contracts and 6 Fed Funds contracts. Considering the forward-looking aspect of Eurodollar futures, the Sep contract will cover from September to December. We need to choose 2 different Fed Fund contracts between these maturities, in the example October and November.

Spread calculation in basis points, own elaboration

In the example, the spread in basis points has been calculated as (Fed Funds average price – Eurodollar price) *100

Eurodollar-Fed Funds spread, source TradingView

What and why are we trading on this spread? Basically, we are betting that the spread between these 2 products will narrow or wide in the future. Having in mind that the eurodollar is based in 3-month commercial loans will be more volatile (for the duration and the credit risk) than the Fed Funds (1-month loan between banks insideUnited States)

We can use this spread to bet that the interest rate curve will change. Let’s say that if there was a high probability of an interest rate hike, I would position myself short Eurodollars and long Fed Funds.

Fed Funds Rate, source TradingEconomics

If you compare this chart with the previous one, you can see why you need to be right and always taking the direction of the market with the Eurodollar contracts.

Sum up

I hope you like this brief introduction. This spread will allow you to diversify the strategies. There are 2 main risks: taking the wrong side of the position and the execution risk. The second one is obvious because there are 2 different products on this strategy. It´s easier to make a calendar spread because you can find them listed on the exchange.

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

Thursday, 19 April 2018

US Bond and Interest Rate Futures Spreads, US Interest Rate curve inversion

It’s been a while since my last post. I’ve been busy but I will try to write more frequently. Today, I’m going to talk about US interest rates and bonds. In one hand the US economy is performing pretty well, at least for now. The GDP is good but not as the government promised. The employment is strong but the figures show that it’s been driven by part-time jobs and this doesn’t help in the long term. The bank earnings usually reflect the economic performance, and they have reported better than expected profits. On the other hand, the Federal Reserve is tightening. The debt hasn’t been reduced. The protectionism won’t help. This is not new and I believe that you have already read about this.

Fed’s Williams warned earlier this week that the yield curve inversion can be seen as a warning signal. An inverted curve has always been a recession signal.

How can we understand if the curve is flattening or steepening?

Basically, if we simplify the process and we only do the yield difference between 2 different products or the same product with different maturities. If the difference grows over the time, the curve is in a steepening process. If the difference decreases, we will see the curve flattening. Once we understand this we can have a look at different markets:

US Bond Spreads

5Yr T-Note - 2Yr T-Note futures spread, Barchart

In this case, I’ve chosen the price difference between the 5 Yr T-Note and 2Yr T-Note futures. It’s not as intuitive as if I had taken the yields but it’s easy to understand. Obviously, an investor would look for a higher return on a long duration investment than in a short duration investment. If I have 2 assets with a different duration that offer the same return, I will choose the short duration asset. The reason behind this is that I would be able to compound the returns. When there are good news and the economy is doing well, the traders sell the bond futures and considering that the longer duration is more volatile the spread between them will increase. In our case, we can see that the 5Yr-2Yr spread is decreasing.

10Yr T-Note - 2Yr T-Note futures spread, Barchart

The 10-2Yr spread is decreasing and it’s very close to the 8 year low (12.71)

3 month Eurodollar futures

Eurodollar Sep18-Jun19 spread , Barchart

This is a 6-month spread in which is going up. You can think that the traders are discounting more interest rate hikes during 2018.

Eurodollar Jun19-Jun20 spread , Barchart

This is a bigger spread that covers 12 months. It’s more volatile than the previous one and it´s testing an important support. The most interesting thing is that shows how the interest rate curve is flattening between 2019 and 2020.

Eurodollar Jun20-Jun21 spread , Barchart

If you were surprised with the last chart, take a look at this. Basically, the curve is flat between 2020 and 2021 and probably it will be inverted in the coming weeks or months.

Eurodollar quotes

Eurodollar futures quotes, CME

I would like to recommend this short article that offers a different perspective with the same conclusion:

https://www.ft.com/content/f24fbc80-431c-11e8-803a-295c97e6fd0b

Highlights and future questions

All the experts are warning about a possible recession between 2020 and 2022 and as we have seen the curve is inverting at this point. How will the central banks react? Will the Fed choose between fighting inflation or the job market? How will the governments try to reduce the debt? What will happen with the private debt?

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