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News & Views: Tuesday, November 4


What you need to know for today's trading day.

This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time.

Oil Tumbles on Saudi Price Cut as European Bonds Rise (Bloomberg)

Japan's SoftBank slashes profit target, costly Sprint purchase weighs (Reuters)

Apple, Google Set Disney Video Deal (WSJ)

RBA Keeps Record-Low Interest Rate as Aussie Stays High (Bloomberg)

More Unknowns Leave Central Banks Facing Greater Internal Strife (Bloomberg)

On an absolute basis, USD-denominated Nikkei futures gave back about 2.62% in the overnight Japanese session once their markets reopened. From the beginning of Friday's Globex session to yesterday's close these futures were up 10.05% - including trading up the limit on Friday. It still recorded the largest positive risk-adjusted return across all assets overnight, however. Conversely, the USDJPY cross is showing the largest negative risk-adjusted return in currencies in sympathy to the lower nominal yields in the US. There was no obvious event catalyst to spark these changes - Japanese PM Abe stated overnight that he expects the BoJ to follow through on its committment to achieve its price target and indicates there was some conversation between the government and central bank to help spur the easing.

Both WTi and Brent crude are showing the largest negative risk-adjusted returns across all assets overnight and their futures curves remain in a state of disarray (contango). This is wreaking havoc on CTA strategies - who deploy the most leverage in these markets - they except to earn the 8%-10% of carry when these curves are in backwardation through rolling up the curve to pay for the hedging costs. That is a major reason why we have seen a destruction of spec long positioning over the past four months.

The Reserve Bank of Australia (RBA) remained on hold last night even though it included new sharp words in its statement that the Aussie dollar "remains above most estimates of its fundamental value." Unfortunately, that type of jawboning is not new for the market and the bar is already set high - the central bank released a paper two months ago detailing the details why it sees the currency overvalued. Market participants expect the RBA to either actively intervene in the currency markets to further lower the price of its currency like other central banks have done recently, or because of a downturn in economic activity lately, cut interest rates. The AUD is showing the largest risk-adjusted return across all currencies overnight when paired against the CAD, USD, and NZD.

Oddly, in fixed income, both European credit and its respective sovereign yields are amongst the top performing assets overnight.

In China overnight, I noticed a news article from the South China Morning Post that the People's Bank of China (PBoC) was opening up the interbank bond market to non-financial firms. The move is being done in conjuction with the Shanghai-HK Connect program that will allow more access by foreigners to its domestic markets and the ability for locals to trade in Hong Kong. The central bank's goal is to help lower funding costs for small and medium-sized firms and diversify credit risk in the financial system. Additionally, a separate article in the China Daily from a PBoC Deputy Governor stated that China will relax restrictions for foreign investors to invest in the country. I seem to be sensing a trend here?

- Australia trade balance (Sep) widens to -2.261B vs -1.85B expected, prior -1.013b
- Australia retail sales MoM (Sep) up 1.2% vs 0.3% exp, prior 0.1%
- Eurozone PPI YoY (Sep) down -1.4% vs -1.5% exp, prior -1.4%

Twitter: @MichaelSedacca

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No positions in stocks mentioned.

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