There’s no point dissecting Sunday night/ Monday morning’s oil crash save to say that the market is a dangerous place to be for those with unfavourable leveraged positions.
We have had flash crashes before- notably in EURCHF in 2015. One observation is that markets that rely on support by a nation or a cartel are not free markets. The Swiss rather famously and tenuously supported EURCHF with “utmost determination” until they didn’t. Saudi Arabia has just flexed its muscles in the oil markets.
Call it what you wish; flash crash, market risk or moral hazard; there will be some significant casualties in this oil rout. High-frequency traders may well have benefited. Certain hedge funds and speculators probably not. Oil companies will have to assess whether this is a short-term blip or longer-term reality. Oil stocks are likely to be hammered and are probably not the fabulous 7.0% dividend yield touted by some TV pundits on Friday.
Enough on oil. Coronavirus cases multiplied aggressively in Italy over the weekend. Reports from China and South Korea are that the numbers of new cases are diminishing. After a choppy week last week in equity markets, the likelihood is that we are in for more volatile markets this week. The rollercoaster nature of markets I described in my blog of last week will make trading difficult. My advice is to trade with caution.
The value of coordinated central bank intervention in cutting interest rates is difficult to fathom. Without a doubt, US president Trump will attack the Fed. Are we not taught in business school that nobody is bigger than the market? So, the markets will find a point of equilibrium. Trump’s noise and central bank intervention will only make a difference when the market bottoms out. Perhaps central banks should keep dry what little power they have left!
This week’s economic events will once again play second fiddle to larger market dynamics. Japanese annualized 4th quarter GDP hit negative 7.1% early on Monday morning. Consumer Price indexes from China (expected at 5.2% Y/Y Feb) on Tuesday and the US (expected at 2.2% Y/Y Feb) on Wednesday is a wait and see. Will the ECB cut interest rates on Thursday?
Aside from it’s “safe haven” status and limited carry trade unwinding I find yen appreciation difficult to digest. I don’t see a hugely negative GDP figure as a compelling reason to belong yen. I shall be watching USDJPY and yen crosses for a potential rebound. Those more seasoned traders looking to remain in the game will in my mind, continue to move out of whimsical products and companies with vulnerable balance sheets.
It’s tricky to pick market bottoms and I don’t think we are there yet. To coin a trading mantra, “Remember, every bottom has a hole.” Oil traders have just witnessed that to some extent. Another mantra which may be more relevant is “if in doubt, stay out!” It’s likely that there will be more losers than winners in current markets, and as in 2000 and 2001 (when the Nasdaq plummeted by nearly 80%) day traders will suddenly go into hibernation
Good Luck and Good Trading! Ben Robson
Ben Robson is the CEO of Spectrex Commodities and author of Currency Kings- How Billionaire Traders Made Their Fortune Trading Forex And How You Can Too.
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