Sunday, December 22, 2013

Merry Christmas and Happy New Year

  • Here at Archbridge Capital we had a profitable and fruitful year and Wish to extend our Season's Greetings to all our readers. We look forward to seeing you all in the New Year. May 2014 be an even better year. To Good Trading and a prosperous New Year
                                                       FROM ALL OF US AT ARCHBRIDGE CAPITAL
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Disclaimer: This report was prepared and distributed by Archbridge Capital AG, a company regulated by the Swiss Financial Market Supervisory Authority FINMA via VQF. The report was prepared and distributed for information purposes only. It contains information and opinions, which may be used as the basis for trading undertaken by Archbridge Capital AG and its officers, employees and related associates. The report should not be construed as solicitation nor as offering advice for the purposes of the purchase or sale of any asset, security or financial instrument or provide any investment advice or service, nor is it an official confirmation of terms. All information, opinions, estimates, forecasts, technical levels and valuations contained herein, are subject to change without notice. The report also contains information provided by third parties. Whilst Archbridge Capital AG has taken all reasonable steps to ensure this information is correct, Archbridge Capital AG does not offer any warranty as to the accuracy or completeness of such information. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Archbridge Capital AG does not accept any liability whatsoever for any direct or indirect loss arising from any use of this material. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool or strategy is not necessarily indicative of future performance or results. This information is not intended tax or legal advice. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. As electronic publications are subject to alternations, Archbridge Capital AG shall not be liable for the improper transmission of this message, including the completion of information contained herein, the delay in its receipt, any possible interference, any possible damage to your system, or transmission of viruses.




ABC ScoreCard

  • Here at Archbridge Capital we are judged on our performance. We are done so continuously and relentlessly. And we exist because judgement has been favourable. In that spirit we thought it was worth tracking how we did on our published research, even though our published research occurs after we have already entered/exited into the positions we advocate. 
  • We have published a number of views/trades in our publications in the last few months (list and results to date below). 
  • Out of the four suggested trades since our last scorecard ALL have been profitable (one has been Neutral). 
  • Overall the portfolio has been profitable. Please note that it is the fact that profitable trades are much more profitable in comparison to losing trades that assures the portfolio overall to be profitable.
  • "There are good trades that make money and bad trades that make money. There are good trades that lose money and bad trades that lose money. Money in the long-run is made from continuously taking the good trades." - Old Trading Adage.
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We shall end 2013 by updating our Score Card. Please note that we have substantially reduced all our positions before the illiquid Christmas Season, although our Macro-economic themes remain in place. Please find below trades we thought would make money back in the year and what should be done with them going forward. Since September, all recommended trades have made money.


THE GOOD:

Long US Equities: Positive

This trade has done very well since the last scorecard published in September. Equities are increasingly responding to the underlying economic growth and the great rotation is slowly beginning: we are seeing a substantial outflow out of bonds and some of it is finding its way into equities. 



Long US$ vs EM FX: Positive

The US$ has indeed strengthened against some EM markets, especially those with current account deficits, as predicted. However, since the last score card the South African Rand has not moved substantially. The Turkish Lira on the other hand has performed handsomely and we suspect this story of EM weakening is not over yet. As a vital guideline we believe this story will only come to a halt when real rates in the EM become substantially positive - and they are far from that especially in Turkey, where further currency pressures are to be expected. 


Short US Treasuries: Neutral

This trade has performed well, with tapering now having started and with the markets realising that the US is in a cautious monetary tightening cycle. The Fed is careful not to destroy the recovery that is in place, while being aware that extraordinary measures like its QE programmes cause unwanted risk-taking. Though since the last ScoreCard on September 17th this trade has been neutral we see further profit potential going forward. 


Short JPY long USD: Positive

We view this trade as a structural trade where the monetary policy over the next year or more of the USA will be the exact opposite of Japan's. The USA will tighten monetary stimulus further, while Japan will continue to loosen it. If what we believe about China's slowdown becomes reality over 2014 we could see Japan doing even more QE than currently planned over the next year. We expect to see levels above 115-120 in the US$ JPY trade, though this will take some time. In the meantime we would suggest keeping stops wide and positions moderate, since corrections to 93 could occur over this time scale.


THE BAD

Not this time and for that we are grateful.

THE UGLY

Not this time and for that we are grateful.


Overall, we had a solid period with all of our recommendations bearing fruit and making gains, even when published after we had already entered into the trades ourselves ahead of time.



Disclaimer: This report was prepared and distributed by Archbridge Capital AG, a company regulated by the Swiss Financial Market Supervisory Authority FINMA via VQF. The report was prepared and distributed for information purposes only. It contains information and opinions, which may be used as the basis for trading undertaken by Archbridge Capital AG and its officers, employees and related associates. The report should not be construed as solicitation nor as offering advice for the purposes of the purchase or sale of any asset, security or financial instrument or provide any investment advice or service, nor is it an official confirmation of terms. All information, opinions, estimates, forecasts, technical levels and valuations contained herein, are subject to change without notice. The report also contains information provided by third parties. Whilst Archbridge Capital AG has taken all reasonable steps to ensure this information is correct, Archbridge Capital AG does not offer any warranty as to the accuracy or completeness of such information. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Archbridge Capital AG does not accept any liability whatsoever for any direct or indirect loss arising from any use of this material. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool or strategy is not necessarily indicative of future performance or results. This information is not intended tax or legal advice. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. As electronic publications are subject to alternations, Archbridge Capital AG shall not be liable for the improper transmission of this message, including the completion of information contained herein, the delay in its receipt, any possible interference, any possible damage to your system, or transmission of viruses.



Saturday, December 14, 2013

Press Snips CNBC

  • We, here at Archbridge Capital are trying to inform our readers about some of the trades that we take ourselves and to demonstrate our views about the markets. In short we put our money where our mouth is and are quiet otherwise. Obviously, we do not publish all our trades and also do not publish our ideas before we have put on the trades ourselves, as we do need to leave some advantage to our investors and ourselves. 
  • We believe that in that spirit we should also update you every once in a while, when we are in the press giving interviews on CNBC, the BBC or Bloomberg. Although we are a Swiss based company, recent interviews have been conducted by our CIO who speaks Turkish amongst other languages.
  • The below CNBC TV interview published a while ago highlights our views on FX trades, European Deflation, Emerging Markets and some ideas for portfolio allocations in 2014.
  • Please note that all below interviews are in Turkish.
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The first clip of the CNBC Interview dated November 2013 discusses our View of Emerging Markets in 2014





The second clip of the CNBC Interview dated November 2013 discusses our View for the TRY-US$ in 2014



The third clip of the CNBC Interview dated November 2013 discusses our View for the Eur-US$ and deflation risks in 2014




The fourth clip of the CNBC Interview dated November 2013 discusses Tapering effects on the markets in 2014






The fifth clip of the CNBC Interview dated November 2013 discusses our View of US equities for 2014




The sixth clip of the CNBC Interview dated November 2013 discusses some protfolio allocation ideas for 2014







Disclaimer: This report was prepared and distributed by Archbridge Capital AG, a company regulated by the Swiss Financial Market Supervisory Authority FINMA via VQF. The report was prepared and distributed for information purposes only. It contains information and opinions, which may be used as the basis for trading undertaken by Archbridge Capital AG and its officers, employees and related associates. The report should not be construed as solicitation nor as offering advice for the purposes of the purchase or sale of any asset, security or financial instrument or provide any investment advice or service, nor is it an official confirmation of terms. All information, opinions, estimates, forecasts, technical levels and valuations contained herein, are subject to change without notice. The report also contains information provided by third parties. Whilst Archbridge Capital AG has taken all reasonable steps to ensure this information is correct, Archbridge Capital AG does not offer any warranty as to the accuracy or completeness of such information. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Archbridge Capital AG does not accept any liability whatsoever for any direct or indirect loss arising from any use of this material. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool or strategy is not necessarily indicative of future performance or results. This information is not intended tax or legal advice. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. As electronic publications are subject to alternations, Archbridge Capital AG shall not be liable for the improper transmission of this message, including the completion of information contained herein, the delay in its receipt, any possible interference, any possible damage to your system, or transmission of viruses.




Saturday, December 7, 2013

Press Snips BLOOMBERG TV

  • We, here at Archbridge Capital are trying to inform our readers about some of the trades that we take ourselves and to demonstrate our views about the markets. In short we put our money where our mouth is and are quiet otherwise. Obviously, we do not publish all our trades and also do not publish our ideas before we have put on the trades ourselves, as we do need to leave some advantage to our investors and ourselves. 
  • We believe that in that spirit we should also update you every once in a while, when we are in the press giving interviews on CNBC, the BBC or Bloomberg. 
  • Although we are a Swiss based company, recent interviews have been conducted by our CIO who speaks Turkish amongst other languages.
  • The below Bloomberg TV interview published a while ago highlights our views on FX trades, European Deflation, Tapering effects and how Yellen's arrival will change the Fed.
  • Please note that all below interviews are in Turkish.
___________________________________________________________________________________

The first clip of the Bloomberg Interview discusses tectonic shifts in FX and how to set-up trades
The interview is dated 18th of November 2013. 






The second clip of the Bloomberg Interview discusses deflationary pressures in Europe and its effects on exchange rates (FX)
The interview is dated 18th of November 2013. 






The third clip of the Bloomberg Interview discusses the tapering time schedule ie when tapering will start and end. It also debates what the market effects of this shall be.
The interview is dated 18th of November 2013. 







The fourth clip of the Bloomberg Interview discusses Yellen and her impact on FED policy
The interview is dated 18th of November 2013. 




Disclaimer: This report was prepared and distributed by Archbridge Capital AG, a company regulated by the Swiss Financial Market Supervisory Authority FINMA via VQF. The report was prepared and distributed for information purposes only. It contains information and opinions, which may be used as the basis for trading undertaken by Archbridge Capital AG and its officers, employees and related associates. The report should not be construed as solicitation nor as offering advice for the purposes of the purchase or sale of any asset, security or financial instrument or provide any investment advice or service, nor is it an official confirmation of terms. All information, opinions, estimates, forecasts, technical levels and valuations contained herein, are subject to change without notice. The report also contains information provided by third parties. Whilst Archbridge Capital AG has taken all reasonable steps to ensure this information is correct, Archbridge Capital AG does not offer any warranty as to the accuracy or completeness of such information. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Archbridge Capital AG does not accept any liability whatsoever for any direct or indirect loss arising from any use of this material. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool or strategy is not necessarily indicative of future performance or results. This information is not intended tax or legal advice. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. As electronic publications are subject to alternations, Archbridge Capital AG shall not be liable for the improper transmission of this message, including the completion of information contained herein, the delay in its receipt, any possible interference, any possible damage to your system, or transmission of viruses.

Sunday, November 3, 2013

"Is that clear?" - "Crystal, Sir"

  • US policy will determine asset price directions in 2014
  • US $ will gain against EMs with weak current account balances like TRY. US$ will gain against countries with opposing monetary policies like the JPY.
  • China will slow but not crash affecting China dependent currencies like AUD and some commodities.
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    A lot has been made of monetary changes especially in the USA. It is time that we took a closer look at the state of the USA and its potential effects on the rest of the world, since we believe that these changes will dominate investment themes for the foreseeable future.

    The first point to make is that easy money is going to be reduced and monetary policy will become tighter, since the US economy will be gathering speed in 2014. When the crisis hit in 2008/9 monetary authorities were faced with the dilemma that interest rates should in face be negative in order to off-set the massive deflationary forces of the great recession. If we put that into a central banker's concept then the Taylor Rule would in fact suggest that interest rates should be negative 4-6% in the USA at the height of the crisis.
                                     
                                             Taylor Rule augmented Rate & suggested Rate



    However, nominal interest rates cannot become  negative and hence monetary authorities needed to find new methods to inject growth into the economy. The chosen method and probably the best possible option available was QE, in other words increasing the money supply within the country in order to increase liquidity within the financial system and in order to persuade banks to increase loans into the economy. Additionally, QE would keep longer term interest rates at lower levels, which again would assist in making credit cheaper and more readily available. This would have the benefit for investment decisions and would push investors to take more risk. Taking risk would in turn become a positive tailwind for the economy as investments, start-ups  equity purchases, property purchases and increased consumption would assist to fight the economy's slowdown. This expansionary economic impulse would also benefit the unemployed, as an expanding economy would need more labour.





    All of the above have to a certain extent materialised: Unemployment has fallen, economic growth has increased, longer term interest rates have fallen substantially, housing has recovered, bank lending has improved especially to small and medium sized companies, and the equity markets are at an all time high. Combined wealth effects should now also assist consumption to rise over the next 12 months. Overall the US economy is improving substantially even though growth numbers for 2013 do not fully reflect this. This is due to the large amount of fiscal tightening that was imposed by the US government in their infinite wisdom, which has shaved off more than 1.5% of GDP in 2013. It is a credit to the US economy that despite these headwinds (which include a reduction of 0.1% of GDP due to the federal shut-down) growth is positive around 1.5-1.9%. Next year these headwinds should be eliminated for the most part (by the end of Q1 2014), which should enable the US to grow at substantially faster rates approaching 3%.

    All of the above indicates that the US will do better over time and that current monetary policy is too lax for the underlying economic growth rates. Looking again at the Taylor Rule, we can see an implied Fed Funds Rate of around 2% without any QE. Given current Fed rates at 0.25% and QE of 5bn$ per month, current implied Fed funds rates are still lingering in deep negative territory. This stimulative environment should assist the US to recover even faster but it poses difficulties to monetary authorities, as asset price inflation has potential to build especially as the output gap becomes smaller and smaller. The Fed is aware of these dangers and has already announced that it will scale back its monetary expansions in 2014, we believe tapering will begin in March 2014 and will be finished in the first half of 2015.

    The effects of eliminating QE injections will be profound for the markets both in the US and abroad: We have already seen that the mere talk of reducing QE has resulted in 1) Long term interest rates to rise substantially 2) EMs to suffer an exodus 3) the US$ to reign supreme...what can happen when the actual event occurs...


    The key areas of danger for the world economies lie in policy errors, where the Fed reduces QE too quickly and stifles economic growth at home, while capital flees EMs and leaves them with substantially reduced asset prices and lower growth rates. However, we believe that policy errors will not occur as our forecast of US economic strength is substantial and Yellen is more dovish than Bernanke and has a very good grip on economic analysis. Current weak US economic data has to be interpreted in the light of consumer frustrations due to the government shut-down and associated policy uncertainty.


    The whole world will not recover at the same fast pace that the USA has set out. In fact our analysis points to the USA being one of the only major DMs that will reduce monetary stimulus. When the crisis began monetary policy was synchronised and every country fought the deflationary forces of the Great Recession by cutting interest rates to negative real rates and increasing credit. This has benefited some countries more than others. Especially EMs had a huge capital inflow of around US$4tr in the last years since 2008-9. This capital will now begin to leave those countries for safer alternatives, FDI will not be the exclusive territory of EMs any longer and this will have profound effects.






    The USA has been the liquidity provider to the World for decades and any reductions in the US current account balances have resulted in liquidity reduction which have caused the rest of the world to suffer substantially. During such tightening periods the US$ has been the main beneficiary and hence we are bullish the US$ as a theme for 2014. As our long term readers know, monetary tightening will also affect US treasuries negatively, as well as other real rate dependent assets like gold negatively (see "Gold under the mattress...again? October 9, 2013).

    Let us have a quick look against which countries the US$ will win the most. In the EM world countries with large external deficits who have benefited the most from previous capital inflows and have not taken monetary steps to offset the coming liquidity crunch will suffer the most.






    Other countries that will take a major FX move against them will be countries that actively expand monetary policy while the US is decreasing theirs. Japan is one such country which requires massive monetary expansion in order to escape the deflationary environment that has been plaguing the country for the last few decades. In short, we are short the Yen and Turkish Lira vs the US$ and intent to remain so for the foreseeable future.



    One more country and its influence needs to be quickly explored here: China is one of the most important markets for commodities, as it has become the largest importer for crude oil, consumes about 40% of copper and largest soya consumer on the planet. Its ravishing growth rates over the last decades of 10%+ have caused investors to turn their heads and take note. FDI has in turn sky-rocketed to astronomical numbers, and have become China's single biggest economic growth driver. The 2008 "Great Recession" has caused a nice and uniform monetary response from developed markets and emerging markets: all in unison expanded their money supply and credit growth. China was no exception in that the government decided to increase the gates of credit and poured money into the economy, thereby causing asset prices to inflate and growth rates to be sustained for the most parts, especially property prices.





    Now, however, the game is changing, as discussed above FDI is slowing into EMs and finding a new home in DMs. The Chinese authorities are aware of this and are trying to turn the Chinese economy into more of a consumer driven economy. They are doing this by increasing the value of the renminbi, while trying to limit credit expansion. Looking at China's levels of debt we see clearly that debt levels are reaching such extremes that growth rates will begin to decline in the future. (Total debt levels above 200% begin to slowly eat into longer term growth rates.)






    We do not see a crash for 2014 since managed economies have an amazing ability to continue propping up their economies for a lot longer than anyone thinks. We have seen this movie in Japan a few decades ago, where the Japanese government continued to keep their 'ghost' banks solvent even when there was no economic reason to do so. The same and more applies to China, since the Chinese government in effect is the sole decision-maker for credit and its expansion. However, we do believe that China will slow down and its growth rates will diminish more next year than the markets expect. It would be easy to see their GDP growth falling by another 1% next year to around 6-7% yoy growth. This would affect China's appetite for some commodities and would also affect exporting countries that are China dependent, like Australia.










    Disclaimer: This report was prepared and distributed by Archbridge Capital AG, a company regulated by the Swiss Financial Market Supervisory Authority FINMA via VQF. The report was prepared and distributed for information purposes only. It contains information and opinions, which may be used as the basis for trading undertaken by Archbridge Capital AG and its officers, employees and related associates. The report should not be construed as solicitation nor as offering advice for the purposes of the purchase or sale of any asset, security or financial instrument or provide any investment advice or service, nor is it an official confirmation of terms. All information, opinions, estimates, forecasts, technical levels and valuations contained herein, are subject to change without notice. The report also contains information provided by third parties. Whilst Archbridge Capital AG has taken all reasonable steps to ensure this information is correct, Archbridge Capital AG does not offer any warranty as to the accuracy or completeness of such information. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Archbridge Capital AG does not accept any liability whatsoever for any direct or indirect loss arising from any use of this material. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool or strategy is not necessarily indicative of future performance or results. This information is not intended tax or legal advice. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. As electronic publications are subject to alternations, Archbridge Capital AG shall not be liable for the improper transmission of this message, including the completion of information contained herein, the delay in its receipt, any possible interference, any possible damage to your system, or transmission of viruses.

    Wednesday, October 9, 2013

    Gold under the Mattress...again?

    • Physical buying by EMs explains the gold rally of the recent past
    • Given macroeconomic developments and monetary policy Gold's fundamental direction is down
    • Any short-term rally due to US Congress wranglings should be faded and seen as opportunities to sell gold
    • Oil Supply outages are coming back on-line and in 2014 supply should outweigh demand, weighing on the oil prices and time spreads
    • Oil is especially vulnerable if we believe the Iranian situation will be resolved peacefully, which has more credibility now than ever before
    • We are shortish of oil and oil spreads but are unwilling to risk a lot on this trade since a single event risk (Iran) has the power to change the landscape substantially
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    GOLD

    Gold had a very strong rally from the lows it made at the end of June, where it reached below 1200US$. The rally that followed requires explanation since it was a fast rally to prices reaching above 1450US$. Now gold prices have begun to come off again. This truly does require an explanation.

    If you dig down into the data, you will find that cumulative gold imports through July surpassed the 26.7 million ounces (831 tonnes) that was imported to China for the whole of 2012.





    Gold had its 'golden moment' (excuse the pun) back last year when the prices rallied to near 2000us$. As soon as the Fed signalled a pullback from its monetary stimulus (QE) and the markets began to understand that this would mean an effective rise in real rates and with it a fall in gold prices. The markets were very long gold for the last number of years and hence the metal fell dramatically and quickly. It fell until it reached lows of 1182US$. At the same time funds were fleeing EMs and finding its way back to the strengthening DMs, after a near 4trillion US$ had left them for EMs after the 2008-9 crisis. 



    EMs ended up with much weaker FX rates, a falling equity market and higher interest rates. Policy responses were relatively muted. Especially, raising interest rates in order to stabilise their faltering FX rates was unpopular, as some EMs were concerned with diminishing their growth rates if they intervene too aggressively. The response from the population was key to lack of policy response from governments. (Central banks excluded, who also supported in the buying of physical gold especially in Russia and Turkey).


    The population of these EMs seeing their investments falter and their currencies becoming less valuable with limited policy responses became fearful that an EM crises would develop and bought physical gold in vast quantities. So vast, in fact, that the physical demand for gold began to overshadow financial demand (or lack thereof), the gold curve shifted into a rare backwardation and prices rallied fast and hard.

    This kind of panic-induced rally cannot be a longer term driver of financial instruments in the medium to long term and we believe that the Fed by effectively delaying tapering has given the EMs more time to adjust their policy responses and have also eased the panic-buying of physical gold by EMs.

    Even the current wranglings of the Congress will have difficulty in creating a sustained rally, since a debt default is unlikely (even a short term technical payment delay would have very little impact on the underlying economy) and the current shut-down should be over before permanent GDP growth numbers are affected. Given that Congress has already agreed a bill that will retro-actively reimburse all payments affected by the shut-down the economic effects should be limited and reversible, unless this wrangling becomes a multi-month event. In such a case real harm to economic growth would be done which could delay Fed tapering beyond end of year or even beyond Q1 next year. We believe such an event as unlikely and see an agreement reached within the next 10 days (even if the agreement is a temporary one.) In sum, we believe that a default will not occur. In essence, this implies that all spikes caused by the current uncertainty represent selling opportunities for gold.

    When tapering commences in earnest probably around year-end or latest Q1 2014 the reactions should be more muted and the outflow out of current account deficit EMs more orderly. In short, there is not much to prevent much lower gold prices going forward even though some short-term pressures are holding the glittering metal up at the moment. Perhaps it is time to get the gold from under the mattress...


    OIL

    Supply Surprise

    We wanted to take the opportunity and highlight some of the issues that have caused our oil call for this year to be wrong. Our analysis was based on a fundamental analysis which demonstrated that supply would substantially surpass demand. However, with supply outages in Lybia, Sudan, Iraq and the Iranian embargo have culminated in a supply disruption of more than 2.7 million b/d. This in a market where demand growth is around 1.3-1.5 million b/d per annum. The supply outages added to the around 1.3-1.5 million b/d expected Iranian embargo effect and have meant that additional supply had to be provided by the Saudis of around 1 million b/d in order to balance the market. As a result stocks were not built and prices and time spreads did not fall (and as our longer term readers know, we were stopped out of that trade).

    It seems, however, that the landscape may be shifting, that the worst of the supply disruptions may be behind us: For one, Lybian supply has started to come back on-line and it is expected that they will begin to supply more than 750 k b/d of oil shortly, after its supply fell from 1.4mill b/d to 250k b/d. Even more of supply should start coming online from Lybia as problems with the striking fractions there are being overcome.

    Let us look at the demand side of the equation: Even if the world economy is slowly recovering, current demand is only around 1.2m b/d and even if next year's demand figures would rise to 1.5mill b/d, supply from increasing oil production from the USA combined with non-Opec supply should be able to cover all of next year's demand increases. (USA supply increases should be around 1million b/d, while non-OPEC supply should reach 500k b/d in 2014). Add to this a potential for the Iranian embargo to end and the other outages to come crawling back and we could have a potent mix for lower prices.


    Iran - the Wildcard

    If we now see the surprise supply outages come back online, we should have more oil supplied than demanded. The big unknown in all of this, is Iran. If the USA can reach some agreement on a peaceful resolution of the Iranian nuclear programme issue, then the US and EU embargoes of Iranian oil would cease and an additional 1.5million b/d would hit the market. This would in essence swamp the market with oil, even if the Saudis withdraw their additional 1million b/d. Even if the Saudis withdraw enough oil that causes the market's supply to balance demand, it nevertheless means that stocks in the world would be built, and spare capacity would increase, giving the oil markets a larger buffer for unknown oil shocks. This in itself should lower prices and especially reduce the backwardation within the oil curves.






    Disclaimer: This report was prepared and distributed by Archbridge Capital AG, a company regulated by the Swiss Financial Market Supervisory Authority FINMA via VQF. The report was prepared and distributed for information purposes only. It contains information and opinions, which may be used as the basis for trading undertaken by Archbridge Capital AG and its officers, employees and related associates. The report should not be construed as solicitation nor as offering advice for the purposes of the purchase or sale of any asset, security or financial instrument or provide any investment advice or service, nor is it an official confirmation of terms. All information, opinions, estimates, forecasts, technical levels and valuations contained herein, are subject to change without notice. The report also contains information provided by third parties. Whilst Archbridge Capital AG has taken all reasonable steps to ensure this information is correct, Archbridge Capital AG does not offer any warranty as to the accuracy or completeness of such information. Any views or opinions expressed do not necessarily represent those of Archbridge Capital AG. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Any person placing reliance on the report to undertake trading does so entirely at their own risk and Archbridge Capital AG does not accept any liability whatsoever for any direct or indirect loss arising from any use of this material. You should be aware that returns can be volatile and you may lose all or a portion of your investment. Past performance of any investment or trading tool or strategy is not necessarily indicative of future performance or results. This information is not intended tax or legal advice. Unless otherwise stated, any pricing information given in this posting is indicative only, is subject to changes and does not constitute an offer to deal at any price quoted. As electronic publications are subject to alternations, Archbridge Capital AG shall not be liable for the improper transmission of this message, including the completion of information contained herein, the delay in its receipt, any possible interference, any possible damage to your system, or transmission of viruses.


    Sunday, September 29, 2013

    The Fed - a Pleasure delayer

    • Objectively the Fed delaying its tapering is a very good thing.
    • Treasury weakening has been delayed but also more potential weakening in the future granted.
    • Emerging Markets (EMs) have been given a chance to get their house in order, but many will fail or ignore this opportunity.
    • EMs with current account deficits that have benefited over the last five years from QE (4trUS$ has flown into EMs in the previous 5 years) are at risk especially those that resist raising interest rates.
    • We are bearish the TRY vs the US$ and expect to see 2.15-2.20 eventually.
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    A lot has been made of the postponement of tapering and we agree that it was a surprise for the markets in general, but we think an objective and strategic evaluation is necessary: 

    Tapering not having started is in fact a good thing as it reduces the probability of policy errors, thereby assuring that the underlying growth in the USA which we see via a lot of data points and forward looking indicators including a stronger housing sector, a 50% smaller current account deficit, stronger lending by banks especially to medium term enterprises, stronger manufacturing outlook including new orders as well as stronger PMI data. We also have to remember that the USA is currently being exposed to a very high fiscal headwind which approaches 1.5% of GDP for 2013. Given the headwinds will dissipate we expect the US to grow by around 2.5-3% in 2014.








    Additionally, we are seeing further international supportive forces for US growth next year including a recovering Europe and the pricing out of tail risks to continue. The main risk of a Chinese slowdown has been averted this year due to yet more credit expansion (micro injections and management) by the centralised government. Although we believe that towards the end of 2014 China's growth rate will slow substantially, we are also aware that centralised governments can micro-manage and support an economy for much longer than people expect and hence we will get concerned about China only in the second half of next year or thereafter, if at all.





    To summarise, tapering is assuring that the USA will continue to grow and that the slow anaemic growth rate will increasingly turn into a more sustainable expanding economy, helped by the stronger growth of its main trading partners. Indicators like the dry freight index, which has been quietly ticking up of late and trade volume figures are encouraging for global growth rates going forward. 





    The upshot of this is that a more gradual rise in the longer term rates in the USA will occur than with immediate tapering, but that the rise in rates will be longer and more sustainable. In fact, if Yellen does become the next Fed Chairwoman then we can expect her to err on the side of caution and allow for rates to stay lower for longer and allow for inflation to exceed its target of 2%. This would mean that inflation expectations would be allowed to rise during this time, and this will help to push longer term rates even higher than they would otherwise have been.

    From a trading standpoint this implies that the rally in US Treasuries will actually give opportunities to enter/re-enter the market at phenomenal levels (especially if the debt ceiling turns into a problem next week) and for longer than expected. It will also mean that the target levels may have to be increased way above the 3.5% in the 10 year that we were envisioning. Tapering will occur, if not in October then by latest in Q1 2014. From an economic standpoint this is the better decision, though the Fed's communication skills are another issue for another day.

    The above observations will also apply for other instruments that are dependent on real rate changes, like gold (we are still long term bearish of the yellow metal), but more about gold in our next note. Let us first look at what US monetary policy really means for other affected countries, which tend to be EMs. Please note our thanks to Ed Yardeni and Mauldin for their graphical inputs.


    THE WIDER EFFECT OF TAPERING

    In essence the efforts of communicating that tapering was coming, which began in May and the clear signals it gave to the markets were in essence a warning shot, a wake-up call especially to emerging markets that have large current account deficits, that have benefited the most from hot money inflows during the financial crisis years, where money was leaving the DMs and flowing into EMs. Countries like India and Turkey which fit that bill were under tremendous pressure over the last months and have only found solace in the announcement that tapering would be delayed. 

    The main point for those emerging markets is that this is an opportunity to get their house in order, to restructure their debt and increase interest rates, in order to firm their currency. This should be done even if that puts some pressure on growth rates, as this would be a gradual and relatively slow, easily digestible policy, which would assist in avoiding large FX moves, and a potential stampede of foreign capital out of those markets. 

    Some countries, like India seem to have started that process recently, whereas others are insisting that interest rate rises are unnecessary. The latter will see their currency under a lot of pressure going forward as capital has more and more places to be gainfully deployed including the US and EU. Hence EMs with large current account deficits and relatively low (especially the ones with negative real rates like Turkey) interest rates will see their currencies falter while their bond rates will appreciate. This will also not be a good environment for equities nor bonds in those countries. In the specific case of Turkey, it does remind us of days past, when another central bank tried to support its currency via interventions but found they did not have the reserves to do so and gave up in the end. I believe it was George Soros who benefited from that policy miscalculation...



    Taking the example of the Turkish Lira, which has appreciated all the way to 1.93 from their 2.08 highs after the 'non-taper' announcement and is now weakening again against the major currencies, even the relatively weak US dollar: One has to ask the question what would change this weakening process over the future and barring drastic rate rises, which the central bank has excluded, only a very weak US$ would come to mind. The catch here is that the US$ is already very weak based on its trade-weighted index and if anything the postponement of tapering has assisted in weakening the US$ to levels that it would not have reached if tapering had commenced. When tapering does commence in earnest and effective real rates begin to rise in the USA before the other DMs we are going to see a strengthening in the US$ which will accerbate any weakening of the $-TRY rates.

    From a trading standpoint this implies that we would want to be short of the TRY vs the US$ and increase our position straight after the debt and budget agreements have been struck, since those have the potential to weaken the US$ further in the short term. We expect the TRY to eventually weaken to the 2.15-2.20 levels.


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