In Credit Suisse’s Top 10 market notes from this morning, we found an interesting comments, one which according to the author could mean some semblance of normalcy was returning to the market.
This is what CS said:
No signs of short covering in Energy/Materials yet the spaces outperform — this is a change –Pain trade now down?
Notable that Goldman most short rolling basket (GSCBMSAL) underperforms -0.13%, and our short baskets showing very little signs of covering in energy and materials… This is a change from recent days/weeks where days that energy/crude/materials act well we would see massive signs of covering in these baskets
Pain trade down in Energy? LOs are increasingly becoming more constructive/bullish on the commodity (Oil) from here (and thus the stocks) and our Prime Services data is showing that E&P net is increasing noticeably MTD. So net, net to me short covering is well underway and most getting longer. What folks are NOT considering (fully) is Saudi Arabia and MBS hinting at boosting production higher from here (20mb/d by 2020) or that they are uncharacteristically selling their crude on spot now (headlines out yesterday) and they are possibly beginning a new price war, which could elongate the this down-cycle. Oil going lower from here would ruin the party and thus be the pain trade….not many folks I talk to or have talked to are acknowledging that risk; at least openly.
To this we can only point out that the above is only half right: while CS was correct that the short covering indeed had been muted early on, it has since sprang as, for whatever reason, the shorts got their squeeze tap on the shoulder once again.
As for the second point, we did cover the all too realistic possibility that Saudi Arabia was about to boost its production yesterday in the latest price war with Russia for dominance of the Chinese market, one which has spilled over into the spot market.
But while that had a short-term impact on the price of oil pushing it to a fresh 4 day low, today’s price action continues in an upward direction, driven perhaps mostly by the weak dollar as algos trade on their favorite correlation.
For now this means that oil has reverted to its oil inverse proxy, the dollar which is sharply lower today. However, all that may change in just 24 hours when the Fed reveals its latest statement. If the “risks are balanced” language returns, then and only then will Credit Suisse be right, as it will ignite the Dollar’s next leg higher as suddenly June rate hike odds are repriced and in the process send oil lower, and force all the recently onboarded “weak hands”, this time on the long side, to unwind their positions.
via http://ift.tt/1rxrrnl Tyler Durden