This morning the market is exploding higher on news that the situation in Ukraine is de-escalating. Markets are surprised at Putin’s comments, but we know that Putin has some other pressing business:
Before moving on to his new task, Putin gave a press conference that assuaged the market’s concern that Russia was interested in annexing Ukraine. As the press conference continued, the markets pushed higher on every comment:
S&P 500 E-mini trading this morning</a> </div>
I tuned into RT.com and watched the press conference in its entirety. It was highly entertaining to watch Putin masterfully spin this situation in his favour. Obviously the markets are buying his assurances that he is not overthrowing Ukraine, but merely ensuring social stability. I am not going to bother judging the morality of his motives. The reality is that all nations that march into other countries without a clear unanimous mandate from the rest of the world, all have plenty of ways to justify their motives. But at the end of the day, they usually are doing so to serve their own interests. Rarely are the occupying countries interested in serving the needs of the citizens of the other country. Unfortunately it is not just Russia that is guilty of this behaviour.
But this morning, the markets are wanting to believe Putin’s assurances that the motives of the Russian invasion were merely humanitarian in nature. Although I understand that it is a relief for markets to hear some rational arguments from the Russian leader, they are being fooled by his calculated comments. The reality is that if Putin was worried about the situation in Ukraine spinning out of control, he could have led a united force that would have entered into Ukraine and stabilized the situation. But instead he quietly slipped 6,000 troops over the border and established a military presence on Russia’s long sought after Crimea peninsula. With his Russian army on the ground in Ukraine, he is now claiming that it is for their own good and that he is only there to help. Too often great super powers have used the excuse that they are only there to help as a cover to advance their own interest and this time is no different.
Putin is not leaving the Crimea anytime soon. To think differently is naive.
However, our job is not to make geo-political analyses, but instead to figure out where the markets are heading. With this morning’s developments, there is now a decent possibility that the situation in Ukraine settles down, with Putin having “won” a strategic warm water port for Russia and being content with merely occupying the Crimea indefinitely. That means that although there would always be a chance of escalating tensions, the short run concerns would be removed and the market could go back to not worrying about Ukraine. And that is most likely why we are rallying so hard this morning.
If the markets are able to take the Ukraine situation off the front burner, the question remains where will we go from here?
My most pressing concern is trying to decide if the recent European stock under performance is solely on Russian aggression concerns, or if my trade has started to work.
EuroStoxx 50 Index / S&P 500 Index</a> </div></p>
Over the last couple of days, European stocks have been hammered as compared to US stocks. I am long US stocks versus short European, and although I did cover a quarter of this position in yesterday’s portfolio reduction, if the move has been solely on the back of geo-political events, then I would be foolish to not cover the rest into the dip.
This morning this spread is moving back up on Putin’s soothing words. For now I am going to watch, but I am concerned that I have been handed a gift with the geo-political events and that I am squandering it.
Although I am going to sit tight with my equity positions, I am going to re-short the bonds that I covered yesterday when I reduced my whole portfolio by a quarter. The economic data continues to come in higher than consensus, and yesterday was no exception. Personal income and spending both were stronger than expected, the Markit PMI also surprised to the upside and the ISM was both stronger in terms of economic activity as well as prices paid. Fixed income rallied yesterday on a safe haven bid, but if that worry has been removed, bonds might prove vulnerable.
I am re-shorting my 2s and 5s that I covered, but I am also going to add a new position of short the 10 year. We hit 2.60% in terms of yield yesterday, which was a level that we bottomed at in January.
US 10 Year Treasury Yield</a> </div>
I continue to believe that the market is being overly pessimistic about US growth, while at the same time underestimating the Fed’s resolve in continuing to wind down the QE program on schedule. Prior to this morning, I worried that if the Ukraine situation escalated that all the Fed’s plans would be put on hold. But I think that although Putin is not going to leave anytime soon, it will be stable enough that the market will soon forget about it.
Before I leave you, I want to relay one last thing. As I mentioned earlier, this morning I watched the entire Putin press conference. It was quite funny to hear Putin chastise reporters for asking questions that he felt were dumb. But the most amusing part came towards the end. One of the reporters asked about the rumours that Ukrainian President Yanukovych was dead. Putin responded that he himself had seen the exiled President just a few days ago and that “Yanukovych will live longer than those who circulate that sort of gossip.” Now that is not something you hear at a world leader’s press conference very often… Make no mistake about who Putin is…
For how long after this photo do you think this guy lived?</a> </div>
UPDATE: All position sizes except for long gamma positions and the two small stock positions were adjusted downward by one quarter on Monday morning due to the increase in volatility. Even though it was an upward surge of value for the portfolio (always better than the negative surge), the increase in volatility mandates getting smaller.
UPDATE: New position – Short 10 Year US Treasury Futures. Conviction 3
UPDATE: Short US 5 Year Treasury Futures. I expect the Fed to continue to withdraw stimulus aggressively. Adding back to the short this morning. Conviction 3
UDPATE: Short US 2 Year Treasury Futures. I think the downside is a move from 31 bps to 25 while the upside is a move up to 50 bps. Adding back to the trade this morning. Conviction 4
Long a tiny position of puts on TSLA and FB. Just for shits and giggles. Conviction 1. Stop – none: when they go to zero the market will do it for me.
Short Euro. Added to this trade into the recent rally. Conviction 4
Short Nasdaq 100 futures, short Eurostoxx futures, and short Nikkei futures. Fed is going to taper until something breaks. Conviction 3. No stops for now
Short European stocks via ESTX50 index vs Long S&P 500. I continue to believe that the ECB is too tight relative to the Fed and the BoJ, and that this will translate into relative weakness of European equities. Conviction 4
Short Yen. Establish short Yen last week. Now I will sit tight and wait. Conviction 3
Short JGB futures. I can’t call myself a macro trader without this widow maker on the sheets. Small position for now, but will add aggressively at the first sign it is working. Conviction level: 1. No stop.
Long Yen volatility. I believe we are entering a period of increased volatility for the FX pair. Conviction: 3
Long 30 year US treasury volatility. Swapping half of this position into Yen volatility. Conviction 2
Long various deferred crude oil futures contracts. I own a variety of different expiries in years from December 2014 all the way to December 2020. Conviction level: 4. No hard stop.
Long precious metals smorgasbord. Long gold, silver and platinum futures. I also believe that the closed end ETFs (CEF.A CN Equity or PHYS US Equity) which are now trading at discounts versus years of trading at a premium are a good way to play this idea. Conviction level: 4. Using the year end lows as a stop for half the position.
Long grains. Long deferred corn, wheat and soybean futures. Although this trade has not worked at all, I really like it long term. Conviction level:5. No stop period.
Long Ithaca Energy IAE CN Equity. See previous posts. Conviction level: 5
Long Input Capital INP CN Equity. I have not yet written this up, but I really like this story. More to come in coming days. Conviction level: 5