Overview
Finally back in the Singapore saddle after touching Hong Kong and Japan in the past two weeks. On the latter, while we may see clear signs of Abenomics starting to work being reflected in inflation, changes in how Japan pensions invest, a much weaker yen and a bull equity market, the average Japanese citizen is really not yet reaping any benefits.
If anything they may be even at a disadvantage given that SMEs that rely on imports have seen their costs rocket with a weaker JPY and of course when the Japanese travel abroad they are no longer as "rich" as they used to be.
While we have seen a step-up in bonuses, we need a structural step-up in base salaries and time for that deflationary and saving mind-set to shift.
Greece
The no vote is signalling that the Greeks are tired and done with the euro – this would be the cleanest cut and quickest way of working things out through the system. If they had voted yes, it would have potentially led to a liquidity shock but net, net it would be a much better outcome for non-Greeks.
The majority has spoken: Greece votes a resounding no in the referendum. Photo: iStock
In fact, I would be slightly shaken (cannot get surprised any more with Greece/Europe) if the Greek Prime Minister Alexis Tsipras and lecture-prone Finance Minister Yanis Varoufakis don’t resign this week – latest by end of the month.
Then, of course, the shortest election from start to finish is probably, what? One-and-a-half months to two months? And given that Syriza was democratically elected (yes, we can argue it hoodwinked and made paradoxical preposterous promises, but dude, that’s politics, people still voted for it) what new party would come in?
What happens to the country until then? They have a July 20 payment due to the European Central Bank of EUR 3.5 billion, which it obviously cannot make given its missed payment last Tuesday to the IMF. Technically Greece has defaulted and the banks are completely finished – I am just bamboozled that there are still deposits left in the country.
So the question is, if you are the European Central Bank do you re-extend funding to the Greeks, when you know full well they will default in their payment to you? And you are not sure what government will be elected, but the quickest new government body that could potentially agree on new financing and austerity measures is at best two to three months away – or more like Q4 in all honesty.
So do you (1) Throw good money after bad? People like to always quote ECB’s Draghi “Whatever it takes” to uphold the euro, but what if (2) “Whatever it takes” is actually letting Greece fall out of the Eurozone.
If the Greek banks have to open up with no liquidity being provided by the ECB, they would have to result to printing their own currency. The nation would be drowned in IOUs in no time.
From my perspective, every day the probability of a Grexit increases – while few things are 100% certain (unlike volatility, which structurally will be going up this year), to me by this time next year, Greece will be out of the EUR and European Union. I actually really think this will be by the end of this year.
Ready to exit ... Greece is highly likely to be out of the European Union by
the end of the year. Photo: iStock
Hopefully for the Greeks, I am wrong – but I think if we have not already, we are fast approaching the point of no return – the damage made by Tsipras and Varoufakis has been that deep. It's almost as if they are suffering from multiple personality disorders, one minute cussing out the IMF and European officials, the next minute saying they agree, then calling a referendum while the talks were still ongoing.
A brilliant analogy was given to Lehman Brothers, where Dick Fuld (the then “legendary” Lehman CEO) was so stubborn and devoid from reality that he single-handedly sank the ship (the South Koreans were ready to do a deal, but Dick thought he knew better).
Tsipras and Varoufakis will go down in history as politicians that played game theory with their country as participants and lost – big time. Hopefully I am wrong.
It’s worth noting that some betting shops have paid out on a yes.
AUDUSD: 0.7523, -1.72%
I talked about the Aussie last week, lamenting how its time was drawing near and it had been a stubborn beastie! The trading gods must have caught KVP’s weekly, as we hit new lows on Friday of 0.7509 before closing slightly up 0.7523, which was a -1.72% pullback versus the USD.
This Tuesday we will see another RBA meeting and while I believe the RBA will have to cut at least one more time this year, I am (for once) with consensus on this one and not expecting a cut on Tuesday. Structurally AUDUSD is going lower, 70¢ by year's end and somewhere between 60-65¢ by the end of 2016 feels right.
AUDUSD hits new lows of 0.7509, -1.72% for the week. These are levels not seen since 2009
Source: Bloomberg
Again watch this chart that I posted last week. This will be the final shot between the eyes on AUDUSD once the Fed hikes and US treasuries go past 3.00%.
US and Australian 10-year differential will close and reverse into 2H15, setting up for AUDUSD's next leg down
Source: Bloomberg
Incidentally I closed our SaxoStrats long AUDUSD puts on Friday, as we hit the profit target level for 2.0 times the premium. Not bad for a trade that’s a little over two months and as always the best thing is you know what your risk is, as you are long options – I sleep very well.
Volatility: VIX: 0.7523, -1.72%
As some of you will have noted for the past two to three weeks – maybe even longer now –I’ve been banging the table about the volatility disconnect – particularly in US equities. If you had picked up the VIX sub 13 and even sub 12 as I had flagged, given the high of last week of 19.80 and weekly close of 16.79, you would be well in the money.
Those who had picked up 1m ATM VIX calls at 12 or 13, would have made over +200%
Source: Bloomberg
Chinese equities and keeping 2823 HK on the tactical radar
Chinese equities continue to struggle, even post the double cuts (interest rate and reserve requirement ratio), lowering of trading fees, some loosening of margin rules and "encouragement" of state pension funds to get involved.
I don’t believe the Chinese equity market rally is finished, this is a healthy correction, from what has been a policy driven rally from the very beginning. I think we will see new highs – touched on more on this on last week’s piece from Hong Kong, so I will not echo too much, please see original take here.
2823 HK is the A-share tracker (I-shares FTSE 50) which is my new friend and will be on my trading radar for at least the next six to 18 months, as I expect there will be a lot of opportunities to profit from options on this index (which we offer, funnily enough).
Something simple like, taking $100K of premium and splitting it into four clips: All to be done 1-2m ATM calls, with the first out the door and the next three to be done on any further pullbacks greater than -5%. Delta hedging would be instrumental, but the swings to the upside that I believe are coming should still be able to cover one’s premium, i.e. +100%. Don’t pay attention to the noise, just watch the tape.
Expect a lot more initiatives from authorities, I think these equity markets are higher by the end of the year – note this is purely tactical, policy and retail psychology driven. The chart looks terrible and oversold, with the 3,400 (200-day moving average) being the next key level on the Shanghai Composite. Two other key levels are the 50% and 61.8% fibonacci retracement levels of 3,600 and 3,230 – these three are stops to work with for those looking for the long side and potentially trigger points for those looking to short.
Shanghai Composite is now down close to -30% from the highs; key support levels: 3600, 3400, 3230
Worthy of note
It's worth noting there are quite a few interesting charts on the FX asset class, combination of USD strength and oil weakness is seeing quite a few currencies that seem to be breaking out: NOK, SEK, CAD, CHF.
Then also we have other over-extensions or continued momentum? GBPNZD, AUDJPY. Quite a few of these are looking interesting either as "jump-on" trades or waiting for a turn. I personally am watching EURGBP with interest … to pick up some puts or outright shorts.
Key macro data points to watch over next week
Central banks: Speakers/other: (July 6-12)
- Fed speakers – Williams (July 9), Kocherlakota (July 9), Brainard (July 9), George (July 10), Rosengren (July 11), Yellen (July 11)
- Other speakers – BoC’s Poloz (July 28)
Meetings/minutes this week (July 6-12)
- RBA 2.0%e, 2.0%p (July 7)
- MA 3.25%e, 3.25%p (9 July)
- BoE 0.50%e, 0.50%p (July 9)
- SK 1.50%e 01.50%p (July 9)
- Yellen on US economic outlook (July 11)