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MARKET COMMENTARY BY NAUFAL SANAULLAH
Tuesday, October 19, 2010
China tightens and BofA faces putback lawsuit Wild day in markets today, as news of PBoC hiking 1yr deposit and lending rates by 25bps sent risk selling off and USD rallying early on. About two hours before market close in New York, news of a lawsuit against Bank of America filed by PIMCO, NY Fed, & Blackrock sent financial names selling off hard and indices and other risk assets following suit. No material impact from macro data today, as German ZEW current conditions came in at a nice 72.6 vs 64.0 expected (though EURUSD still plunged), while sentiment at -7.2 vs -7.0 expected, and housing starts in the US rose 0.3% MoM in September vs an expected 3.0% decline. The Bank of Canada also decided to keep rates on hold, as was widely expected, but CAD sold off hard anyway, due to the Chinese rate hike and risk-off sentiment, bringing crude prices down with it. The S&P sold off about 1.6% today, putting the 1161 support zone mentioned yesterday in danger of being broken. Futures currently are trading around 1163, but today’s 3.96 million spoos traded (vs a 20d volume of 19.4m contracts) suggest bearish volume and a move back to at least the 1150 S/R level. Volume was the highest since July 1 and it appears to me that equity is putting in a near-term top for now. How it reacts around 1150 will determine if this pullback turns into a reversal or is a dip to be bought.
lawsuit comes after BofA announced a $7.3b loss this quarter due to a one-time credit charge due to new debit card fee regulations, although ex-charge earnings beat estimates. BofA isn’t the only bank facing massive putback risk, as CNBC (citing Dick Bove analysis) places Citi’s around $22b. Moody’s CRE index declining 3.3% in August to its lowest levels since 2002, also announced today, doesn’t help asset/collateral values, and may manifest in bank and REIT equity values finally. All of this makes QE even more certain than it already was, although more importantly it diminishes the efficacy of it (relative to before the news) because banks will have to keep reserves (excess, provisioning, etc) high and/or increase them due to these new MBS repurchase risks, rather than lending it out. At the same time, this also brings up the potential for the Fed to go back to purchasing MBS in its QE programs, and if/when that is announced, expect a similar move in financials (specifically BAC, WFC, JPM, etc) as is currently occurring in mortgage insurers like RDN, MTG, ABK, & MBI, at least in the near-term of the announcement. The potential for a QE purchase program would also help to explain why PIMCO has been buying MBS for its TRS. For now, however, banks look very weak and their CDS spreads are telegraphing further deterioration (JPM +5bps, WFC +7.5bps, BAC +12bps today). BAC’s technical are looking increasingly bearish, and after reversing yesterday’s dead-cat bounce with a 4.4% plunge on 574m shares (it averages 221m shares traded daily), a selloff back to single digits looks to be in the cards (much to the dismay of Paulson & Co). The volume expansion and bearish price action is evident on its chart.
Fins obviously down big after the BofA putback suit. Due to its Countrywide Financial acquisition, BAC is facing $47b in putback risk, with only $872m in provisioning reserves for them (a 30% decline from Q2). PIMCO’s recent MBS demand (as represented by its TRS holdings) most likely is rooted in the prospect of originators and servicers buying back massive amounts of MBS at par (ht Zero Hedge). The news of the
The other big news event today came out of China, as the PBoC hiked 1yr deposit and lending rates 25bps (though keeping the 306bps 1yr deposit/lending rate spread intact) in its first tightening since 2007 after inflation accelerated to 3.5% in August. Chinese GDP, retail sales, IP, and PPI data are due on Thursday, so it will be interesting to see if the rate hike is telegraphing data strength (one of four scenarios presented this morning by GS’s David Clark: “The hike is preempting good data later this week. So while initial reaction will be risk off, it ought to be faded.”) Besides the
accelerating inflation, the rate hike probably was at least somewhat spurred by new lending in September coming in almost ¥100b higher than the expected ¥500b. 81% of this year’s quota has already been filled, so the balance of power between the anti-overinvestment camp and the officials wanting declining real rates will play out soon. It is interesting to note that while CNY has been appreciating vs USD, it has been more a function of QE causing USD to decline more than anything else, as CNY has underperformed AUD, JPY, EUR, and SGD. Recent JPY strength (which I had been calling for but now am finally getting positioned against) helped China’s exports, but a reversal in JPY (such as if/when Japan’s ballooning debt/GDP and deteriorating demographics catches up to its JGBs) could be a harbinger for disaster for Chinese exporters. Australia’s balance of trade fell back below A$2b in August, and if that trend continues, the Chinese inventory stockpile trade is done, which has massive implications for AUD/risk, as well as China’s export-driven economy. Politics will determine the course China’s economy takes, and if more tightening is coming after today’s 25bp benchmark hike and last week’s 50bp reserve requirement hike, Chinese growth could stall hard. At the moment, I see this as politically unpalatable and thus probably unlikely, but pressure to fight overinvestment appears to be evident, and even more so is the fragility in China’s economy and financial structure, given how late to the game the PBoC is in hiking. The tightening sent risk selling off across the board and the USD surging, as extreme net-short positioning was unwound in the dollar. This sent AUDUSD and EURUSD plunging, as well as crude oil. The triangle developing in AUDUSD since October 8 targets 0.96 (incidentally also around where price is likely to meet the channel support trendline), which it is about 100 pips rich to presently, but 0.94 is the more important level, as a break below should send it plunging. Also important to note that the resistance represented by AUDUSD’s summer 2008 highs at 0.9847 remains intact, as the recent rally to parity was short-lived and the selloff back to the 0.96 handle signifies a likely top in AUDUSD for now.
EURUSD broke below last week’s lows today and is now back down to the 1.37 handle, as the DXY had its best day in two months. Now the rising periphery spreads may come back into play as far as the argument at the margin, while the triangle on a 30m chart suggests a move to just above 1.35. If this is indeed the top in EURUSD (as I have been calling for), then a break below 1.33 (very significant S/R, as well as the 31.8% Fibo retracement) would trigger the next large wave down to parity and beyond. But first things first, September 29 lows right above 1.35 are probably next to provide a bid to the euro.
Crude sold down about 4% today, as the USD rallied and CAD fell hard. Its chart is close to invalidating the diamond pattern breakout from late September, as the ceiling right under $84/bbl is proving too stubborn to be broken. Oil is just barely clinging on to the 80 handle at the moment and today is a very bearish technical development for energy-related securities. Today’s 305k contracts traded is the highest volume since crude’s surge off the lows late August, which preceded a strong 12% rally that is reversing now in my opinion. As prices fall, I’m getting neutral risk in the nearterm as I allow the charts to dictate whether today signaled a reversal or is setting up a buying opportunity, but I’m all-out bearish on oil/energy, especially after parity held with conviction in USDCAD.
The Chinese tightening no doubt also contributed to crude oil’s weakness today, as well as copper’s 3.4% selloff on its
highest volume since the Flash Crash back in May. This is because the rate hike is bad for exporters to China, including Australia and Germany (explaining the AUD and EUR weakness today). The hike also may be a potential catalyst for the failed German export-driven recovery, given recent EURUSD rates around 1.35-1.40 (horrendous for exports). WPS, a developed nation ex-US property index ETF, flagged today as a turning point in Chinese-related securities (like AUD and copper), as it hit its 61.8% Fibo retracement from 2007 highs yesterday (and sold off 2.3% today). A break below the 50% Fibo level, requiring a 7% drop in WPS from here, would signal a great shorting opportunity in copper and AUD (for the longer term), in my opinion.
As far as other new trades, I went long mortgage insurers on the back of the MBS repurchase fiasco, long USD vs SGD and CHF, short energy names, and short some targeted equities to get risk-off exposure (as well as a couple hedges—UNG, NOG, YHOO, and AVARF [rare earth metals bubble chart play]). OPEN TRADES Long /ZN | 125’15 | stop 124’20 | +1’16 Short APOL | 51.90 | stop 54.00 | +28.02% Long AGU | 80.00 | stop 75.00 | +4.24% Short STRA | 160.00 | stop 165.00 | +20.00% Short ESI | 67.31 | stop 73.15 | +15.57% Long MEE | 35.35 | stop 34.30 | +5.60% Long TBT | 32.65 | stop 31.80 | +1.59% Short /ZB | 133’24 | stop 135’15 | +1’13 Short BAC | 13.32 | stop 13.75 | +11.41% Short WFC | 26.00 | stop 27.00 | +5.58% Short ISRG | 285.10 | stop 295.00 | +6.52% Short BLK | 179.89 | stop 182.20 | +2.92% Short COF | 40.04 | stop 41.20 | +3.20% Short VMW | 80.00 | 83.20 | +8.60% Short PNC | 51.94 | stop 53.75 | -2.18% Short AKS | 14.20 | stop 14.95 | +4.51% Short EUR/SGD | 1.8220 | stop 1.8330 | +190 pips Short GBP/SGD | 2.0740 | stop 2.0900 | +15 pips Short GE | 16.73 | stop 17.50 | +3.95% Short /SI | 24.30 | stop 25.10 | +4.12% Long AMZN | 159.10 | stop 152.00 | +2.80% Short EUR/USD | 1.4060 | stop 1.4210 | +145 pips Short AUD/USD | 0.9935 | stop 1.0005 | +60 pips Short AUD/SGD | 1.2865 | stop 1.2955 | +0 pips Short NZD/USD | 0.7575 | stop 0.7610 | +40 pips Long EUR/NZD | 1.8530 | stop 1.8300 | -45 pips Short CAD/CHF | 0.9500 | stop 0.9610 | +105 pips Short EUR/CHF | 1.3435 | stop 1.3510 | +85 pips Long ZSL | 17.58 | stop 17.15 | +8.02% Long MIPS | 9.90 | stop 8.90 | +3.94% Long VECO | 39.00 | stop 36.30 | -4.59% Long JCP | 32.55 | stop 31.85 | +0.55% Long /LE | 100.51 | stop 99.50 | +0.67% Long USD/JPY | 81.26 | stop 80.90 | +24 pips CLOSED TRADES Long MSFT | 25.40 | sell 25.00 | -1.57% NEW TRADES Short GBP/USD | 1.5805 | stop 1.6050
The recent correlation between the ex-US property index and AUDUSD (due to the Australia-China copper/property development complex) is very significant. To wit:
Finally, I went short GBPUSD today ahead of the BoE minutes as the PBoC hike sent USD rallying. Its chart is looking increasingly like a double top at 1.60.
Long USD/CHF | 0.9635 | stop 0.9550 Long UNG | 5.58 | stop 5.45 Short CLR | 45.82 | stop 48.50 Short /CL | 81.84 | stop 85.00 Short CHK | 22.55 | stop 23.15 Long USD/SGD | 1.3020 | stop 1.2950 Long NOG | 18.08 | stop 17.20 Short PRU | 53.55 | stop 55.10 Long YHOO | 15.65 | stop 15.35 Short /ES | 1164 | stop 1183 Short SHLD | 74.36 | stop 7640 Short NFLX | 149.37 | stop 159.50 Long VXX | 14.50 | stop 14.08 Short LULU | 43.45 | stop 45.50 Short HRB | 10.85 | stop 11.50 Long AVARF | 4.00 | stop 3.70 Long RDN | 9.20 | stop 8.00 Long MBI | 12.13 | stop 11.15
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