Tuesday, 5 May 2015

Reflation trades reflating the P+L.

Yours truly can breath again having held his breath for probably longer than is safe, losing a few brain cells along the way. The enforced hypoxia experienced in my short bund holdings has been somewhat similar to that portrayed in movies where the hero manages to free himself from the sinking car and make it to the surface with only a second to spare. In fact it's better than that, the short bund position has launched through the P+L surface like a Trident ballistic missile. Trident - soon to be banned by the new USSR (Union of Scottish Socialist Regions).

A 3% move lower in price over the last couple of weeks takes a lot of years of 0.07% yield to compensate. About 42 years in fact, which is a tad problematic on a 10yr bond. Of course not everyone bought at the top. The ECB started buying on March the 9th but yields are now higher than when they started. Not a problem when you are funding the QE at -0.20% cash rates and can run to maturity but are 10 years without a rate hike to over 25bp likely? But apart from ECB reputation it's the good old pension funds and real money accounts who are going to get hosed. My mind turns back to our friend at JPMorgan Asset Management -here

Oil stocks and other commodity linked overweights are all looking perky. Even the ones hedged against short FTSE. Long the FTSE global commodity names against short FTSE index is one way to cope with the impending mayhem that domestic stocks are likely to experience on Friday when every UK political leader prostitutes their principles in a bid to put together a coalition government whilst insisting their moral integrity. Ed Miliband may even have to call for the stone tablet equivalent of tippex. Polyfilla I guess.

Oil is still grinding upwards and completes the picture for the reflation trade. WTI through $60 which, being $18 above the low, is far enough away from the $24 it would have been if it had fallen $18, to call the $20 buck oilers just plain wrong. Despite the size of long positions in the futures markets I am not too concerned about oil topping soon. There are plenty of hastily applied commercial hedges that won’t be looking too clever when presented at the next oil company AGM. I continue to run long oily stuff since buying when the oil stocks showed us the base in March- here

And throughout all of the above it still feels that the market is trying to fight the move. The bund bulls, oil bears and general deflationistas have gone quiet but there hasn’t been a deafening roar that things have turned. This is apparently a correction. A term that marks the first touch of red hot steel on the posterior as the call of the cuckoo marks the start of spring.

I remain concerned that bonds are the San Andreas fault of the global markets and are going to trigger high leverage unwinds. Particularly stupidly priced tech and biotech stocks. So I am happy to remain long commodity stuff (even my dormant long AUD/USD is paying handsomely) and despite EM knock-on concerns via bonds I am also happily owning African commodity stocks (ex-South Africa I add).

Inflation is coming and with it a test of Draghi's 'til the end' QE commitment.

No comments: