Trading with point and figure

Dentalfloss · Mar 20, 2019

more scalps

Dentalfloss · Mar 20, 2019

Dentalfloss · Mar 20, 2019

scalp the pullback

Dentalfloss · Mar 20, 2019

lining up

Dentalfloss · Mar 20, 2019

OIL
will supp hiold..??

Dentalfloss · Mar 20, 2019

Dentalfloss · Mar 20, 2019

wham

Dentalfloss · Mar 20, 2019

stops very tight now

Dentalfloss · Mar 20, 2019

Good Morning: The Long & the Short of it and The Bigger Picture - xx March 2019 - ADM ISI

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Ostwald, Marc
09:06 (5 minutes ago)

to Marc

- All eyes on the Fed and Brexit, digesting mixed signals on US/China
trade negotiations, Canada budget, Vale Minas Gerais re-opening,
NZ Current Account; awaiting UK inflation and CBI Trends; Germany
5 year and a slightly busier day for corporate earnings

- Fed: dot plot and economic forecast changes, balance sheet plans in
focus; "patience" to be re-emphasized; some risk of disappointment
given lofty market expectations / hopes

- UK inflation data expected to be very well behaved, despite some
short-term upward pressure from energy prices

- Brexit: probability / risk of 'no deal' Brexit still elevated

- Does sliding volatility have some echo in pre-Lehman complacency?

- Charts: VIX, V2X, MOVE, GBP 1mth ATM volatility; Iron Ore, Steel Rebar,
LME Aluminium; Fed rate probabilities by meeting, Fed Balance Sheet,
US 10 yr term premium, Chicago Fed US financial conditions (long-term)

- Morning Call audio file:
https://www.mixcloud.com/MOstwaldADM/adm-isi-morning-call-20-march-2019/

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********************
** EVENTS PREVIEW **
********************

So it would appear that the key overarching themes for the week - Brexit and the FOMC meeting - could simultaneously be at crescendo volume levels. Per se it is perhaps fortunate, or perhaps not, at least for those yearning for a more 'normal' run of ephemeral items. Outside of these, there are the NZ Current Account report to digest ahead of tonight's Q4 NZ GDP, while South Africa looks to CPI to distract from its well documented Eskom and array of structural woes, while the UK has the full gamut of inflation readings on offer ahead of tomorrow's BoE MPC decision (aka event roadkill). Govt bond supply takes the shape of EUR 4.0 Bln of German 5-yr, while Brazil's COPOM is expected to again hold its Selic rate target at a record low 6.50%. We should also be keeping an eye on Kazakhstan, where the 'unexpected' (to quote a close ally of Putin) resignation of one of the last Cold War area legacy leaders, Nursultan Nazarbayev, leaves an ostensible power vacuum in central Asia's largest economy. While the news flow on the US/China trade negotiations continues to be a case or 3 steps forward and 2 back, at least they are still very much negotiating, and there is no brandishing of actually imposing threatened tariffs - this was never going to be easy, above all given the divisions over monitoring and intellectual property rights. Less constructive, but wholly understandable in a similar vein is the news that Germany is setting up investment fund vehicle to foil foreign takeovers, essentially in response to China's expansionism, Trump's protectionism. One markets observation begets this question - take a look at the attached volatility charts (VIX, Eurostoxx V2X, US Treasury MOVE and GBP/USD 1 mth "at the money" option"), and then ask whether this in pure risk assessment terms smacks of the same sort of complacency with regards to the current array of risks (Fed, global economy, Brexit, US/China trade, etc) that was broadly pervasive just ahead of the Lehman collapse?

** U.K. - February CPI / PPI and yet more Brexit drama**
- Be it fortunate or not, UK CPI has settled back to around target over recent months, and the February readings are forecast to see headline and core unchanged at 1.8% and 1.9% respectively. PPI Input will be boosted by the rebound in energy prices, and it will be interesting to note whether the stockpiling ahead of Brexit that has been seen in the Manufacturing PMI has had any impact on other raw material prices, however PPI output is seen up just 0.1% m/m 2.3% y/y. All of that is clearly moot given the ongoing Brexit drama, even if the GBP clearly got a passing boost from yesterdays' much stronger than expected labour data. PM May will apparently send a formal letter to formally request an extension of Article 50 today, but only until end of June 30, and without the mooted extension option, which according to reports almost sent the Cabinet into total meltdown yesterday. Another
vote on May's Withdrawal Agreement is being mooted for 28 March, but much will depend on what happens at the EU summit, and on balance one would have to observe that the probability of "no deal" remains high, notwithstanding, indeed arguably precisely because of last week's votes, which seem to indicate that actually this is the preferred option not only of the Tory party grassroots, but now also a majority of Conservative MPs. Per se the key issue is whether the cross party Cooper-Letwin-Boles-etc grouping can muster enough votes to take control away from PM May and her cabinet. For those that have not read this, there are a lot of uncomfortable home truths for the UK establishment https://www.irishtimes.com/opinion/...e-english-ready-for-self-government-1.3830474

** U.S.A. - FOMC meeting **
- Video preview via IG TV:

- While the US FOMC will keep its Fed Funds rate target at 2.25-2.50% this week, and is expected to do so for the rest of the year, though markets are now attributing a roughly 1 in 3 chance of a rate hike in December, it will be the 'dot plot' and economic forecast revisions which command most attention, initially. It will be recalled that December's forecasts (recap here: https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20181219.htm ) anticipated 2 further rate hikes in 2019 (one less than Sept), and one further hike in 2021, and the FOMC also cut the longer run rate FF estimate to 2.875% from 3.125%. The rate path will certainly be lowered, though there may be some widening in the range of projections further out. NY Fed's Williams has suggested that the current Fed Funds rate (2.25/2.50%) is 'neutral', and that this is the new 'normal', which does leave the Fed with a quandary about how to respond to a sharp slowdown in the future, in so far as there is inherently not much interest rate 'ammunition'. If the FOMC wants to maintain some flexibility, then the 'dot plot' may well still project one rate hike this year, and perhaps one in 2020, but much depends on whether the 'long run' rate is also cut. If the latter proves to be the case, then a projection of just one more hike looks more likely, above all in order to signal that the FOMC does not anticipate that CPI and Employment trends would give it cause for a 'restrictive' policy setting, and this in turn would also fit with the 'patience' narrative. In terms of the economy, the 2019 GDP forecast may be reduced (last 2.3% y/y vs. 2.5%), but should be unchanged for 2020/2021. The headline PCE deflator projection for 2019 will probably also be cut, but core PCE deflator forecasts held at a steady 2.0%. Market reaction could well be a little confused, as a very dovish stance is all but heavily discounted, and thus anything implying that the next rate move is still likely to be higher would probably be seen as 'disappointing'. On a more technical level, though relevant to the other key issue for this meeting, namely the fate of the 'balance sheet reduction' programme' (aka QT), some market participants are also looking for a 5 bps cut in the IOER (interest on excess reserves) to 2.35%. As much as the dovishly leaning governor Brainard, and indeed NY Fed's Williams, have been at pains to couch the policy outlook in terms of the Fed's dual inflation/employment mandate, it is, as I have maintained for a very long period, financial conditions which remain a key factor (see the attached long-term chart of the Chicago Fed's US financial conditions index). Hence the collective FOMC judgement on an appropriate target for the level of bank reserves held at the Fed (see attached chart) will be material to determining the pace and timing of when the QT programme is concluded, and opinions at the Fed on this differ. The recent Boston Fed paper on the Fed's balance sheet suggested something in region of $1.5 Trln, but this is at the highest end of estimates, with the broader consensus suggesting $1.0-1.2 Trln as being appropriate. If that is what is agreed, then the current pace of QT ($50 Bln per month) could be tapered with the objective of ending QT by Q4 2019. It has to be observed that a) the Fed is in uncharted territory with this, and therefore b) the rationale for the move will hardly be scientific, though as Brainard observed, the Fed clearly does not want to find itself in the position of perhaps wanting to cut rates later in the year, or early next year, while at the same time still be actively reducing the size of its balance sheet. Another key aspect on ending QT is any decisions relating to the composition of the Fed's balance sheet, i.e. will it choose to run down the MBS component rather than US Treasuries. Be that as it may, ss the long-term financial conditions index chart underlines, markets are clearly far more sensitive in this day and age to a modest tightening (or indeed easing) of conditions, which is in no small part due to the 'financial repression' of the post GFC era. It also underlines a further point, which central bankers in developed countries seem loathe to address, namely how their policies have fomented the ballooning growth in debt, and how that is impacting their policy levers. In contrast to the 70s and 80s, it is all too obvious that rising interest rates are not the type of problem that they were then, i.e. higher debt servicing costs per se, but rather the now high level of debt principle, most of which is never repaid, and is thus in constant need of refinancing (in that context, the 'Age of Leverage' speech by BoC deputy governor Wilkins last week is a recommended read: https://www.bankofcanada.ca/2019/03/the-age-of-leverage/ ). To be sure, in a world where an ageing demographic (and relatively high savings rate) is hungry for fixed income assets offering relatively steady income flows, it is all too easy to gloss over this. But the fact remains that the higher and rising level of debt absorbs more and more of free cash flow, which could otherwise be directed towards investment (of all forms) and lending in the real economy, and one might add that the post GFC bank capital requirements / regulations only serve to exacerbate the scale of this problem. If this hypothesis is correct, then attempting to use interest rates and latterly unconventional policy measures to influence growth, inflation and lending, based on the assumption that economies function as they used to, is a prima facie example of 'not being able to see the wood for the trees'. It is to be hoped that last week's very honest assessment by ECB's Ollie Rehn that a fundamental review of why ECB policy has failed to get inflation back to target is very necessary and has to be debated. This applies as much to the ECB as other major central banks.