The free-fall in oil prices…WTI down $50 (47%) since June…hit Market Psychology HARD last week…risk aversion soared…credit spreads widened with a vengeance…Treasury yields fell to near All Time Lows…credit risk inspired contagion hit all asset classes…the DJIA…which had closed at a Record All Time High Friday Dec 4…fell 680 pts (3.7%)…creating a Classic Key Reversal Down…closing lower than all FIVE previous weeks!
Crude: WTI closed the week at $57.50…down $50 (47%) from June highs…down $20 (26%) the last 3 weeks….benchmark Canadian Crude (Western Canada Select) traded at a $17.50 discount…at only $40!
NatGas: NYMEX January delivery Nat Gas was $4.65 mid-November…contagion knocked it down 21% in 3 weeks.
Coal: the Market Vectors Coal ETF (overall performance of the global coal industry) closed last week at its lowest since early 2009…down over 70% from 2011 highs…down 25% since August.
The TSE lost 1400 pts (9.25%) the last 3 weeks and is barely positive YTD.
Interest Rates: US Treasury bonds were bid aggressively higher all week…the 10 year closed the week at 2.08% yield…a 2 year low…only a hair away from All Time Lows…Best performing asset 2014? US long term Treasury bonds…up 25%…compared to the S+P 500 up only 8%….BUT…
Junk and High Yield Credit…especially Energy related…got HAMMERED last week…with yields at 3 year HIGHS for the sector…energy yields were worse…credit spreads widened with a vengeance!
Currencies: CAD closed at 86.40…its lowest since 2009…it takes C$1.155 to buy US$1.00. CAD was 94 cents at the end of June when Crude began to fall…CAD is down only 8% since June…while WTI is down 47%. Other oil producing country currencies are down much more that CAD…CAD in NOT just a “commodity currency” but while Market Psychology is in its current “shoot first and ask questions later” mood CAD will get sold.
Mexican Peso: Since June the Mexican Peso is down 15%…the Norwegian Krone is down 23%…the Australian Dollar is down 11.5%…the Russian Ruble is down 70%.
The USD Index weakened ~1% last week as Euro and Yen “bounced”…nearly all other currencies fell Vs. the USD.
Gold: closed last week at 6 week highs…following a very interesting Reversal from the December 1 lows.
Short Term Trading:
We’ve been making US Dollar bullish trades in the currency markets all year. Since early November we’ve been especially shorting (and writing calls against) CAD and AUD futures as commodities generally…and Crude specifically…tumbled. We’ve added to short CAD positions each of the last 2 weeks as CAD weakened past 1.14 and then 1.15. On Friday…as CAD fell to 5 ½ year lows we wrote short-dated OTM puts (profit lock) as IV soared.
We bought gold early December…we were very impressed with the Dec 1 Reversal…we would add if gold rallies above $1250.
We sold short the S+P early last week…added to the position Thursday…then sold very short-dated OTM puts against part of our short position Friday (profit lock) as put values soared with the tumbling stock market.
Trading Perspective:
We expect global deflationary pressures to intensify…inflicting pain on the “Reaching for Yield” trade. We remain USD bulls…USD Cash is King! We are near-term bearish stocks.
With only two weeks left in the year money managers may try to lock in YTD performance by selling or hedging…margin calls and tax-loss selling may create additional pressure…credit market contagion worries will keep Market Psychology risk averse…currency markets may be especially choppy on thin year-end volumes.
