Tuesday, 12 January 2016

The games at the Colosseum.

It's bad, It's very bad. It's so bad that we know we might as well join the crowds and head down to the Colosseum to watch the great spectacle of the markets being put to death.

Will they be crushed beneath the great weight of falling Chinese demand? Or torn apart between copper chariots,  or scorched to death with burning oil, or will they be Fed to the rates lions? Or perhaps just killed in the stampede of wild sellers?

And so it was on Sunday night (Monday morning to you Kiwis). The show started well. There were oohs and ahhs from the crowd as the South African Rand was hurled to near death, falling 7% in only 4 minutes. Then DM equity futures took a beating falling 2%. The crowd roared with delight when the Chinese stocks walked in and were lanced between the eyes. They were loving it.

The program included a drubbing for the CNY, with the likes of Nomura forecasting a sizeable move in the fix.

(H/T @etleggett for the clip)

But it didn't happen. The CNY just dusted itself down and stood there unharmed. The CNY fix was pretty much unchanged.

And that was where it started gong wrong. From then on all the not-quite-corpses staggered to their feet and started to head off up. By London open equities were pretty flat to up with the Dax having put in a 300 point turn higher from its overnight base.

The crowd were confused but hoping this was just part of the show, the tease, as something was going to come into the Arena and finish the job in style. And lo, the drums sounded, the US arrived and oil came pouring down. 6% down. The crowd screamed and cheered every dollar oil fell. This would finally do for the markets and indeed, they choked, spluttered and fell again.

But then something extraordinary happened. Once oil had done its worst, the markets again staggered to their feet and the last hour in New York saw them revived. The rumours of their death are somewhat exaggerated.

So, enough with the commentary, what next?  Clues -

- Spikes blow off in the basket cases such as ZAR. All the more interestingly happening at stop loss social hour known as New Zealand open only to pull back again in sensible time.
- Continuation of calls for 19 USDZAR and $20 oil (extrapolationists in force)
- Oil doing 6%.
 -China Fix unchanged - defusing the apocalyptic deval camp (please remember to look at the basket not just vs USD)
- Press suggesting this is 2008 again.
- George Magnus on TV a lot. George is a genius on China (follow him at @georgemagnus1) and rightly gloomy, but when they invite him on the whole time you know the story is tabloid.
 -AUD/USD recovering
- Past darlings being ditched - FANG and biotech.
 -High yield holding in.
- Risk appetite indicators at extremes.
- Iron prices recovering despite the headlines being grabbed by copper.
- Stocks holding.
- Baying crowds on Sunday night fully prepared  for Armageddon.
- Tuesday tomorrow
- Huge sell off on price alone for the whole year (a whole week).
- Price is News - it certainly was last night.
- RBS says 'sell everything' and AEP amplifies it
- High yield holding in.
- CNH funding at 70% - most likely due to short positions being squeezed in the face of direct intervention. CNH is back to flat on the year.
- No new bad news, apart from the death of David Bowie.
- Finally I have started getting those emails. You know the ones, from the sort of people you don't hear from for ages but when you do their messages are serious amalgams on all the reasons why the world is about to implode yet none of the reasons listed are new (last emails in similar vein recieved in the first week of  September).

The masterplan had been to wait for Jan 19th for the turn but with the markets having come so far so fast, and imagining the algo boys must be wetting their shorts due to bursting momentum bladders, I have once again jumped the gun and started buying equities in both DM and EM.

The punchiest trade of all is to buy Russia. But the Oil situation is not resolved yet and I'd like to see some form of 4 or 5% bounce before even entertaining that thought.

Finally some comments on the Aramco IPO suggestion

Great for Saudi as it  :
- Diversifies income away from oil
- Amortizes future cash flows allowing them to effectively borrow against future sales.
- Sucks in investors into having a strong interest in protecting the stability of their investment i.e. Saudi Arabia.

Good for investors :
- Allows them to hedge their future oil demand through shared ownership of supply
- An easy way to go long oil whilst receiving a coupon.

Incredibly dangerous for investors :
- Never trust any insider cashing in on future cash flow unless you know they are desperate for short term cash. Saudi may look short of cash but they aren't really yet.
- You are buying a share in huge oil reserves but not in the land or armies that sit on top of them. Ownership of these can change.
- You are taking a view on oil prices and prices can go down as well as up.

Idea for Russia - Buy the lot and then 'protect' your investment.

I am praying that when I wake up tomorrow morning the markets haven't dumped. Goodnight.

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