Month: December 2019

Via Saxo Bank,

Continuing almost two decades of tradition, our experts have made 10 Outrageous Predictions for the year ahead. Their consensus-smashing forecasts would send shockwaves through the markets, if they come to pass. So will they prove pure fantasy or visions of reality?

Engines of Disruption

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1. Chips go cold in AI winter

Diminishing returns on chip applications sees the SOX Index of semiconductor stocks collapse 50%.

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2. Stagflation rewards value over growth

The iShares MSCCI World Value Factor ETF outperforms the FANGs by 25%.

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3. ECB folds and hikes rates

European banks make a comeback as the EuroStoxx bank index rises 30%.

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4. In energy, green is not the new black

The green revolution gets a reality-check as dirty energy starts to pay once again.

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5. South Africa gets electrocuted by ESKOM debt

USDZAR rises from 15 to 20 as world cuts credit lines to the rainbow nation.

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6. Trump announces America First Tax

A 25% tax on all foreign-derived revenue scrambles supply lines and pushes inflation higher.

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7. Sweden breaks bad

Sweden’s pragmatic attitude shift leads to a massive increase in fiscal spending that drives up the SEK.

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8. Dems win clean sweep in 2020 election

Democrats take control of the presidency and both houses of congress. Big healthcare and pharma stocks collapse 50%.

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9. Hungary leaves the EU

HUF collapses to EURHUF 375 as Hungary’s leadership and the EU fight over the country’s place in the Union.

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10. Asia launches digital reserve currency

An Asian, AIIB-backed, digital reserve currency tanks the US dollar by 30% versus gold.

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Saxo’s “outrageous predictions” can be downloaded here.

While the last few weeks have seen endless headlines that “a trade deal is close” which, thanks to headline-scanning algos has ignited an endless short-squeeze to lift stocks to record highs, the last two days have seen a very sudden and very dramatic plunge in stocks on the heels of some less-than-positive trade-deal comments.

This has plunged the market’s odds of a deal notably…

Source: Bloomberg

But, the velocity of the collapse in stocks has many wondering what else is going on. The answer, as Nomura’s Charlie McElligott explains below is simple – what forced self-reinforcing buying pressure on the way up is about to feed a vicious cycle of selling on the way down as stocks face an imminent “gamma flip.”

As we warned earlier today:

3100 is critical: this is the massive gamma wall. All downhill from there pic.twitter.com/YZb7jmk90W

— zerohedge (@zerohedge) December 3, 2019

And McEligott explains:

The interpretation of Trump’s “better to wait until after the election” for a China trade deal comments is that the Hong Kong human rights bill sponsorship by POTUS has clearly caused agitated the Chinese side (plus this morning’s Reuters report stating that the White House is considering kicking Huawei out of the US banking system), and in conjunction with the narrowing window to act on the Dec 15th tariff “fill or kill,” is likely incentivizing monetization of of the +9% gain made in S&P since early October via profit-taking in recently Options- ($Delta still 94th %ile since 2013 even after yday’s selloff) and Futures- (Asset Manager S&P Futures $notional position currently 99.6th %Ile since 2006 at $141.7B) positioning “extremes.”

This “extreme positioning” into a dynamic where traders are incentivized to monetize into year-end—especially ahead of the Dec 15th “tariff risk”—has been at the core of my view over the past few weeks that there was a local / tactical “window for a pullback” into late November (start Dec ain’t bad though).

As such, this risk-off dynamic is driving the bid in Rates / USTs (Reds and Greens +6 to +8 ticks, while we’ve seen Real Money and Central Bank buying flows in the front-end—thus the “bull steepening”), which too then will almost certainly result in a reversal later today of the US Equities factor dynamic experienced on Monday (Momentum down, Value up); instead, today’s UST rally will then dictate a resumption of the “Momentum” bounce-back experienced over the past 3 weeks, as longs in “Duration” Equities (“Min Vol” Defensives and “Secular Growth”) are set to rally, with “Cyclicals” are likely to again fall.

Touching on my constant refrain over the past two years—that being where a “macro shock” then acts as catalyst for Dealer Gamma “flip” and / or in conjunction with a Systematic Trend deleveraging impulse—we see a mixed-bag, as our Nomura QIS CTA model shows the majority of Equities futures positions remain “in trend” and ABOVE estimated deleveraging / “sell” levels.

HOWEVER looking at SPX options, we see the Dealer $Gamma position nearing the potential “flip” level to “SHORT GAMMA” ~ 3073 (spot 3083 last), which would of course beget more selling the hedge the lower futures travel and further incentivize that massive Asset Manager futures “length” to monetize profits on the multi-month rally:

• Both the Equities and Global DM Bond / Rates positions for CTA’s remain firmly in “no man’s land” relative to any sort of “deleveraging triggers”

• Today’s estimates for the S&P futures position for CTAs show no reduction of the current “+100%” signal until all the way under 2916 (which would see the signal drop to just “+25%”)

• In TY (current signal at “+75%” Long), we would not see any selling / deleveraging until all the way down at 121.41 as the DEEPLY “in the money / in trend” 1Y window (“Long”) would “flip” and turn the signal entirely “-100%” Short—and that’s not gonna happen, LOL

Back to Equities however, the larger risk today for a “sloppy” move lower in US Stocks would be via Dealer “Greek” exposures via Options positioning, as our analysis of the Dealer Gamma position across consolidated SPX / SPY options is just ~12 handles ABOVE a potential “flip SHORT” level ~3073—but in true “negative convexity” / “short Gamma” fashion, we are accelerating as we turn lower.

And sure enough, S&P Futs plunged through that critical level…

We are going to need a serious walk-back of Trump’s comments to rescue this one… where’s Kudlow!?

Well that escalated quickly…

Stocks are accelerating their losses after reports from Fox News that the December 15th tariffs are still going forward…

Yuan is collapsing…

Source: Bloomberg

And Treasury yields are plunging…

Source: Bloomberg
 

Authored by Mike Shedlock via MishTalk,

Yesterday’s Oct construction spending report was much weaker than expected. That’s on top of huge negative revisions for Sept.

Gigantic Miss

Economists at Econoday expected construction spending to rise 0.4% in October. Instead, spending fell 0.8%.

Worse yet, the Census Department revised september spending from 0.5% to -0.3%.

All told that is a gigantic economic estimate miss of a full 2.0 percentage points.

Residential Construction

Despite glowing new home sales reports, residential construction spending peaked in February of 2018.

Government spending has kept total construction spending flat.

If this was a single report, I would suspect an outlier. But the key chart lines point to early 2018.

New Home Sales Highest in 12 Years

Six days ago I reported New Home Sales Highest in 12 Years.

Q: Does today’s report make sense?

A: Actually, it does.

Median Sales Price of Houses Sold for the United States

The median home sales price peaked in the fourth quarter of 2017.

Builders are building cheaper homes because no one can afford anything else.

Dow futures are now down almost 800 points from post-China-PMI highs, plunging this morning after President Trump’s comments on a delayed trade deal…

And the market is now discounting less of a chance of a trade deal…

Source: Bloomberg

Once again it seems like bonds were on to something all along…

Source: Bloomberg

Cue – Kudlow to save the world with a “deal is close” headline.

In a rare moment of transparency for Iran’s state-run media, a domestic television station reported that Iranian security forces shot and killed protesters – whom they described as dangerous “rioters” conspiring to undermine national stability – in several Iranian cities during a wave of unrest sparked by a massive hike in gasoline prices.

The report is the first time the Iranian government has even acknowledged the killings, which were largely carried out by state security forces.

As Bloomberg explains, Iranians have come to regard cheap gasoline as a birthright, since low gas prices are one of the few sops that the government can throw the impoverished Iranian people. Many underemployed Iranians work as cab drivers, an easy, low-cost gig that can quickly line the pockets of any impoverished Iranians.

At least 208 people were killed during the protests, according to Amnesty International, though Iran’s UN delegation insisted this claim was inaccurate.

Iran infamously blocked access to the Internet during the unrest that gripped the country, cutting off the flow of information from non-official sources.

According to the state TV report, many of those killed during the unrest were “rioters who have attacked sensitive or military centers with firearms or knives, or have taken hostages in some areas.” Others killed were described as passers-by, security forces and peaceful protesters, though the report didn’t attempt to assign blame for their deaths.

In one case, the report said security forces confronted a separatist group in the city of Mahshahr armed with “semi-heavy weapons.”

“For hours, armed rioters had waged an armed struggle,” the report alleged. “In such circumstances, security forces took action to save the lives of Mahshahr’s people.”

Separately, state TV acknowledged confronting “rioters” in Tehran, as well as in the cities of Shiraz, Sirjan and Shahriar, a suburb of Tehran, where Amnesty said there had been “dozens of deaths.” The suburb was one of the areas that saw one of the highest death tolls during the protests.

Amnesty didn’t offer much of a breakdown of deaths across the country, saying only that “the real figure is likely to be higher” than what it reported.

However, the report did note that there is a “general element of fear” inside Iran.

“The authorities have been threatening families, some have been forced to sign undertakings that they won’t speak to the media,” she said. “Families have been forced to bury their loved ones at night under heavy security presence.”

Thanks to President Trump’s sanctions, Iran’s economy has taken a nosedive. Recently, the World Bank estimated Iranian GDP at $6,000 per person, compared with more than $62,000 in the US.

Prior to this latest report, Iranian leaders denounced the protests as a “conspiracy”, and also announced that more than 700 banks were torched.