Loonie Leaps with GDP Beat; Bernanke on Tap

Economic growth for the Canadian economy during Q2 was released this morning, and after a string of softer-than-expected indicators over the measurement period, expectations were for annualized growth for Q2 to come in at a 1.6% clip, with an increase of 0.1% in June from the prior month.  Business investment in plant and equipment increased by its fastest pace since Q2 of 2011, as annualized economic growth for the quarter bested expectations with a 1.8% print, with the monthly reading for June also showing that the Canadian economy grew faster than forecast, with a 0.2% increase over the prior month.  With the pace of economic growth slowing by less than expected (the previous q/o/q annualized print was 1.9%), the Loonie’s overnight gains have accelerated and pushed the USDCAD below the 0.9900 handle, eyeing the mid-.9850s as its next target.


At 10:00am EST Federal Reserve Chairman Ben Bernanke will begin his speech at the Jackson Hole economic symposium, where market participants will no doubt be parsing his address to search for clues on whether or not the Fed will be providing markets with another injection of monetary stimulus through a third round of bond purchases.   While economic indicators for the American economy have been picking up, the absence of pressure on consumer prices and a stubbornly sluggish unemployment rate have many market participants calling for the Fed to step in to support the economy.

Regardless of whether diminishing returns to scale for each round of successive QE actually warrants further unsterilized bond purchases, it seems unlikely that Mr. Bernanke will front-run his policy-setting meeting in mid-September and tip his hand today in Jackson Hole.  That being said, Bernanke largely avoided any discussion of policy options last year at Jackson Hole, and then the Fed rolled out Operation Twist at their next meeting.  So while history has shown that major policy announcements at Jackson Hole are an exception, not a given, if Bernanke fails to put forth any hints of additional monetary stimulus, it doesn’t completely rule out a move in September.


At about the same time Bernanke is taking the podium at Jackson Hole, Factory Orders for the US and Chicago PMI will both be released.  While substantial deviations from economists’ expectations of 1.9% and 53.5 respectively will provide investor sentiment with knee-jerk reactions, the overall tone for the trading day will come from the Fed Chairman’s speech.


Make sure to contact your dealing teams to devise a strategy on how to position yourself ahead of what is sure to be a volatile September.


Have a great long weekend! 

Inflation Estimates Support EUR

European equities seem content to shrug off some of the dour economic data that has failed to inspire confidence in the region, and instead are trading higher midway through their session just before Bernanke’s speech in Jackson Hole.


German retail sales for the month of July imploded from last month’s gain to resume their downward trend, as rising fuel prices hit consumer’s pocketbooks, forcing them to rein-in consumption.  Retail sales declined by 0.9% on a monthly basis in July, missing economists' expectations for a 0.2% gain by a wide margin. The one positive piece of information from the report was that June’s reading was revised up to +0.5% from a prior reading of -0.1%.


The employment picture out of the euro zone was mixed, with unemployment for the area remaining flat as June’s reading was revised higher by to 11.3%.  Stabilizing at 11.3%, unemployment is now at a record high for the zone, with the divergence between the core and periphery continuing to be a worrying factor.  With unemployment in Germany and Finland running around 5%, the respective 15.7% and 25.1% levels of Portugal and Spain are largely viewed as extreme examples of an unsustainable gap between the core and periphery countries.  The positive development was that unemployment in Italy remained flat as well, beating expectations that things would become worse for the region and the unemployment rate would rise past 10.7%.


After three months of remaining stuck at 2.4%, the CPI Flash Estimate for the euro zone on an annualized basis showed a pick up in consumer prices.  Inflation is expected to have accelerated by 2.6% from August of 2011 according to initial estimates, besting analysts’ forecasts for a rise to only 2.5%.  The warmer-than-expected price-level reading reduces chances of an interest rate cut at the ECB’s next meeting on Thursday, as the ECB’s main policy mandate is to maintain price stability.
In other news, the Spanish government has approved a decree for banking reform and the creation of a bad bank to clean up the banks’ toxic assets and get credit flowing again.  Finance Minister Luis de Guindos says that the bad bank will be in place for 10 to 15 years and seek private investor capital in order to absorb the questionable real-estate assets currently bogging down bank balance sheets.  The EUR has responded positively to the inflation print and developments out of Spain, rocketing through the 1.26 handle against the USD.  Yields on the ten-year Spanish benchmark debt security are largely unchanged, pivoting around the 5.79% level.

August 31, 2012: Overview

High-yielding assets are showing strong bid tones as markets ready themselves for Ben Bernanke’s imminent speech at Jackson Hole this morning.  Flash estimates for euro zone inflation and reports that the Spanish government has approved a plan for banking reform has European equities firmly in the green and the EUR on the offensive; the Stoxx, FTSE, and Dax are up 1.44%, 0.58%, and 1.34% at the time of writing.


Sentiment is similarly positive before the opening bell in North America, as futures are positioning equities for a solid open before Ben’s speech at 10:00am EST.  The Loonie has generated a strong amount of buying interest after Canadian GDP numbers came in better than economists had previously forecast; USDCAD slammed through the 0.9900 handle before finding some support just above 0.9850.


West Texas Intermediate is trading fairly light this morning, rising along with equities and other risk-correlated assets, briefly piercing the $96/barrel mark just ahead of the bell.  Gold is changing hands around $1,660 per ounce, essentially unchanged as traders are unwilling to place large bets before they hear what the Fed Chairman has to say.   

 

 

 

 

Jackson Hole for Beginners

There is a lot of hype for the upcoming Jackson Hole meeting tomorrow, and it is probably time to review why this meeting is so important. As mentioned in yesterday’s WMU, growth is present in the US economy, but it is anaemic at best. Unemployment is hovering around 8.3% and refusing to move, while US Core CPI is signaling weak inflation pressure at 0.1% m/m. Current GDP growth is simply not providing the conditions necessary for unemployment to abate. This is the prime concern that has plagued the US for the last four years since the great crisis.


Now we are in the final months of the election, and both parties have clearly staked their preferred economic schools of thought, with the Democrats sticking with Keynesian principles while the Conservatives have shifted to an Austrian framework. Quantitative Easing goes against everything in the Austrian framework, which is why the current tenure of Ben Bernanke is a contentious one when you draw the political lines. While the Fed is supposed to be completely independent, the added political element is sure to make Bernanke’s decision a little more clouded.


It seems the markets have already priced-in another round of QE, which leaves currencies sitting in a very precarious position should Bernanke disappoint. Markets have a habit of building themselves up in anticipation only to be let down in the end. If there is no new solid information released by Bernanke regarding QE, markets are poised for a big selloff. Should it go the other way, broad-based USD weakness should be the name of the game.


Stay tuned in here as the story unfolds.

August 30, 2012: Overview

Wednesday was another day of underwhelming performance across markets, with equities and currencies remaining locked within their tight ranges (USDCAD moved a whopping 20 points all day). Unfortunately, we could be in for the same fate today, as everyone seems content to wait on Ben Bernanke’s next move from Jackson Hole tomorrow. The Fed Beige Book was released yesterday and, surprise surprise, it highlighted that the economy was expanding gradually but still at a pace that is far too slow for the Fed’s liking. US Unemployment Claims came in essentially unchanged at 374K this morning, while Personal Spending came in on expectations with a 0.4% rise.


The euro is getting a bit of a bid this morning on the back of a strong Italian bond auction and comments from Chinese Premier Wen reaffirming his faith in euro zone bonds. The Australian dollar has pushed through its 50-day moving average to the downside, and now looks vulnerable to further falls. Oil is hanging around the $95 level as we wait to hear if there is any significant damage to the Gulf’s oil-producing assets from Hurricane Isaac.

 

 

Where is the Chinese Growth Machine?

Storm clouds are brewing over China as data continues to highlight an increasing slowdown in the country.

First, the China Banking Regulatory Commission (CBRC) released statistics this week that painted a somewhat worrying picture of the country's banking sector. What worried markets was the rise of non-performing loans (NPLs) on the balance sheets of the country’s largest banks. The ratio increased 4.2% q/o/q and a staggering 11.9% from the previous year. This is a typical scenario that has played out over countless credit-driven asset booms of the past: NPLs continue to climb until they become crippling, forcing banks to stop lending, which in turn freezes the economy.

Further, in a recent report on the country, the New York Times recently explained that managers across China were reporting significant buildups in unsold inventory, especially businesses concentrated in the export sector. Industries including steel trading, ship building, and solar-panel manufacturing have reported a massive surge in bankruptcies as companies across the country are increasingly becoming cash-flow negative. Overinvestment in infrastructure and capacity throughout the economy is causing a massive supply glut, with companies realizing there are simply no customers out there willing to buy their products. Meanwhile, growth in Europe is hemorrhaging and growth in the US is sputtering, meaning that Beijing may have no choice but to pick up the slack in the economy and loosen the money supply.

Analysts have always been wary of official statistics out of Beijing, but when a government entity comes out with a report showing a large increase in NPLs, markets start to wonder what is true. Beijing might have to be particularly aggressive this time, with the possibility of nationalizing bad debt on the banks’ balance sheets being an option.
All of this has been weighing hard on the Aussie dollar lately, as the currency now sits just above its 50-day moving average at 1.0350, having fallen from a high of 1.0618 at the beginning of the month. Should statistics continue to disappoint to the downside, the AUD could be poised for significant losses. This also means that, with an increasingly troubled economy, China is going to be very reluctant to continue strengthening the Chinese yuan, which could further complicate relations between Washington and Beijing, possibly providing renewed ammunition for a trade war. 

Japan Threatens Intervention, US Growth Slow but Still Alive

Overnight, Japanese Vice Finance Minister Nakao was quoted as stating:  "If needed we will take very decisive action in the market, that is our stance.” The yen remains stubbornly strong in the face of another QE3. Since 2003, Japan has a long history of threats of intervention. It also has a long history of acting on those threats. USDJPY largely shrugged this off, and is still trading around the 78.50 handle.

Some very interesting developments came on the data front this morning as US second-quarter GDP was revised up to 1.7% from 1.5%. The figure is not amazing, and is in fact still down from the 2% posted in the first quarter of 2012, but it nonetheless highlights that things are not all terrible within the world’s largest economy. Growth has been stubbornly slow, but it is still there, and ultimately the country is faring much better than its European counterparts. Some have argued that the case must be pretty strong for Bernanke to announce QE3, as both the financial and political costs are starting to mount. We will have to wait until Friday to find out if this recent bright spot in economic data will have any effect on future US monetary policy.


In the meantime, Hurricane Isaac has made landfall with less destruction than anticipated, which has caused oil to shed some value, trading just above $95 at the time of writing.


And finally, US pending home sales are out at 10:00am EST this morning, which should continue to show a slow and minimal improvement as the US housing market continues to pull itself out of its hole four years on.  

 

 

August 29, 2012: Overview

Markets are firmly stuck within recent ranges as traders from every single market around the world wait on Bernanke’s Jackson Hole speech. It was announced at the last minute that ECB Governor Mario Draghi would not be making the trip, leaving many to speculate that he must be busy at work fine-tuning the last details of his own bond-buying programme. Weak trading volume is being reported across the board, further adding to the complacent nature of recent price action.

Aquantum plans model-driven Ucits fund after opening in Munich

Index provider Aquantum Group has received permission from Germany's regulator to open an asset management business, to include a base in Munich, and has announced plans for a Ucits-compliant fund for its model-driven investment strategy.

 

    

The business will provide systematic managed futures funds and managed accounts. To date, managed futures strategies, which are defined by being computer-driven, have around $320bn in them.


Joining these ranks, Aquantum plans to launch its first Ucits fund in the first quarter of 2012 using the Luxembourg platform of Universal-Investment, the largest independent investment company (KAG) in German-speaking Europe, with assets under management of €138bn.


The new asset management business will be headed up by Thomas Morrow, formerly a senior scientist at Winton Capital Management.


Morrow launched Aquantum in 2008, which proved to be a golden year for computer-driven funds.
The sector overall made 14% while hedge funds overall lost 19%, and equities markets slumped by more than 43%, according to data providers.


Last year, as the Eurozone debt unfolded and intensified, and the region's equities markets fell by over 15%, Winton Capital Management stood out.


The computer-driven hedge fund manager Winton took a total €2.52bn into its regulated funds according to Lipper statistics. This was comfortably more than any other hedge fund Lipper screened, and in contrast to the pains at Europe's regulated funds, which were hit by €70bn of net redemptions.
The approach Aquantum will be taking with its strategy involves applying advanced mathematical models to data in order to exploit market inefficiencies.


Aquantum can trade across a variety of asset classes and is not limited to the trend-following trading strategy, and can also engage in counter-trend trading, spread programs, pattern recognition and machine learning.


Morrow said: "Given the popularity of our indices, the establishment of a full-scale asset management business is a natural next step."


Christian Schneider, Munich-based partner with the firm, said it is a good time for allocators to consider systematic strategies such as Aquantum's, for a number of reasons.


"The major features that appear in this arena are liquidity and low correlation to traditional asset classes. And of course with the Ucits [framework] you have a higher level of regulatory relief. [Allocators] can speed up internal processes tremendously."


He also mentions the aspect of ‘crisis alpha' and ‘tail risk hedge' inherent in many managed futures strategies. This showed itself in the crisis year of 2008.


"It is the ideal product to be prepared" for such difficult times, Schneider says.


"It can go long and short in response to prevailing market conditions, which gives it a very good positioning in good and bad times."


In the Ucits fund, Aquantum's strategy will be active in about 50 markets, but not in commodities. Aquantum could use a commodities index to reflect commodity exposure, but for now it has decided against this.


Schneider said, however, that commodity exposure will be offered in managed accounts. For such segregated accounts clients can also ask for various modifications of the main strategy.


The minimum commitment from institutional investors in the Ucits fund will be €500,000, whereas there is no hard-and-fast minimum for managed accounts, Schneider said.


Thomas Morrow's establishing of Aquantum after leaving Winton will, in one sense, continue a trend set in motion by his former employer and the founder of Winton CM, David Harding.


He was the one of three mathematicians, who had sold their AHL strategy to Man Group, who then established his own boutique. Winton now runs nearly $29bn, making it Europe's fourth largest hedge fund.


Much of the success of Europe's largest hedge fund manager - Man Group - is thanks to its AHL computer-driven strategy, to which Harding contributed not only his knowledge and insight, but also the first letter of his surname.

Calm Before the Storm: Key Dates to Prepare For

August has been a slow month across financial markets as many traders have been enjoying a break before autumn begins.  News flows are expected to increase dramatically in the coming weeks, and markets will be faced with many key decision points very shortly. Below are some key dates to watch for.


Friday, August 31: Fed Chairman Ben Bernanke delivers a key speech from a symposium in Jackson Hole, Wyoming.  Markets expect to gain clues on whether the Fed will initiate another Large Asset Purchases Program (LSAP) in the near term to stimulate the economy.  However, with the recent run of better-than-expected US data, Bernanke may not show his hand, and instead merely reiterate his current stance that the Fed remains ready to act should the economy materially worsen.


Thursday, September 6: The ECB interest rate policy announcement.  The market is widely expecting the ECB to elaborate on any planned asset purchases aimed at reducing the debt burden of periphery euro zone countries.  The main question is whether they will introduce unlimited asset purchases aimed at capping the yield on government bonds at sustainable levels.


Wednesday, September 12: German Constitutional Court ruling on the European Stability Mechanism (ESM).  The ruling with decide whether the proposed ESM structure (the euro zone’s longer term bailout fund) is in line with German sovereignty.  A ruling against the ESM’s establishment would certainly be a negative for the euro and bring into question the future path of the euro zone’s debt crisis, while a ruling in favour of its establishment would be in line with expectations.



Thursday, September  13: Fed policy decision and press conference.  The market's expectations of further easing will likely be informed by Bernanke’s speech from Jackson Hole and the jobs report released September 7th.  However, with the US presidential election coming in November, the possibility of a significant change in policy before then is reduced significantly and a new round of LSAP may be put off until early 2013.

August 28, 2012: Overview

The USD is relatively flat this morning on the back of mixed news flows and economic data.  The Canadian dollar is outperforming today, which is strange given the flat equity and commodity markets; nonetheless, the Loonie remains within its recent 1% trading range against the USD, having hit a low of 0.9850.  Huge capital inflows have helped the unit recently, though most of them have been into very liquid investments, meaning they can easily be reversed, providing significant scope for a quick turnaround in the Loonie's valuation. 


But markets are unlikely to engage in large moves until later this week, when Ben Bernanke delivers a key speech on monetary policy.  That kicks off the data-heavy month of September, which has plenty of juicy headline risk in it -- some key dates are highlighted below.  The commodity complex is flat today, with oil in New York hovering around the 96.00 mark and gold steady at 1664.00 an ounce.




 



Great Expectations

The euro has staged an impressive recovery over the past few weeks, driven upward by the cautiously optimistic belief that policymakers are finally preparing to row the rescue boat in a coordinated way.

In early August, Mario Draghi suggested that the European Central Bank was preparing to begin purchasing sovereign bonds in the peripheral markets. Two weeks later, Germany's Chancellor Merkel indicated that her government was in full support of this policy shift.

Since then, investors have waited for the ECB to dip its oars in the water -- and many expect to see Mr. Draghi announce his purchase plan at the Bank's September 6th meeting.

However, it is important to remember that this particular rescue vessel remains firmly tethered to the dock.

On September 12th, Germany's Constitutional Court is due to hand down its verdict on the legal validity of the previously-agreed-to European Stability Mechanism. If this ruling is negative, there is a risk that a more ambitious ECB programme would also be considered illegal under German law.

Of course, this is quite unlikely, given the pains that policymakers have taken to structure the permanent bailout fund, but the uncertainty is quite likely to keep the Bank on hold for a few more weeks.

This implies that few of the large speculative players are likely to heavily short the euro, but also sets the stage for two major volatility catalysts -- potentially on the 6th as well as the 12th.

For hedgers looking for attractive execution points, the coming weeks should provide plenty of opportunities. The key is to prepare for them.





 

 

Core Durable Goods Drop Again

Wrapping up the week in terms of North American economic data, durable goods orders for the month of July were released this morning.  After non-voting St. Louis Fed President Bullard reined-in QE expectations yesterday by commenting that the FOMC minutes on Wednesday were “a bit stale,” and that the economic landscape had changed since the beginning of August, traders were closely watching the Durable Goods report to see if the recent string of better-than-expected data from the US would continue.  The August payrolls number will obviously be an important catalyst in the Fed’s decisionmaking framework before their monetary policy decision in mid-September; however, the numbers today show that the proxy for future business investment is still struggling.
Expectations were for both the core and headline readings to illustrate a pickup from June’s print, with economists forecasting an increase of 2.5% in the headline figure and a slight bump of 0.5% for the reading excluding transportation goods.  The headline reading bested estimates with a 4.2% print, essentially all driven by non-defense aircraft spending as orders for transportation equipment shot up 14.1% in July.  When omitting the volatile orders for aircraft, and the transportation sector as a whole, core durable goods fell 0.4% in July, its second consecutive decrease; adding salt to the wound, June’s prior reading of -1.1% was revised lower to -2.2%.  Worse still, nondefense capital goods excluding aircraft imploded to -3.4%, well short of the -0.2% that was expected.

Regardless of the miss in the core durable goods number this morning, there is no denying that US economic data has remarkably improved relative to expectations since the Fed’s last meeting in August.  Citigroup’s economic surprise index has turned sharply higher in the last four weeks, and while this could very well reflect soft expectations because of a “muddle-along” economy, it still raises that question as to how the FOMC committee members will view the recent string of data, and how it will flow through into their updated economic projections in mid-September. 
Even with the miss below the headlines for durable goods, the USD is finding itself on strong footing against a basket of currencies as QE expectations are still being re-evaluated.  The DXY is past 81.6 this morning, with yields on the benchmark ten-year US treasury falling back below 1.64%.
Make sure to contact your dealing teams to outline strategic hedging strategies moving into the end of the month, as headline risk from QE expectations could accelerate the slight uptick we’ve seen in volatility this past week.

Have a great weekend! 

 

Market Overview

The momentum of investors taking some profits off the table and searching for safe places to park their money has continued this morning.  Major European equities are feeling the sting of overnight developments that have soured sentiment as Merkel refuses to budge on Greece for the time being, and reports suggest the ECB might delay definitive plans for a bond-purchase programme.
North American equity futures have spent most of the early morning in the red, waffling as core durable goods orders continue to show signs of a struggle.  Loonie price action before the bell can be best characterized as choppy, with its well-correlated asset classes pulling it in different directions.  Despite equity markets experiencing a little pullback, WTI is making a comeback from yesterday, changing hands above $96.50/barrel.  The Loonie is slightly stronger from yesterday’s close, but still putting in work above the 0.9900 handle against the USD.  Gold is relatively stable, but finding bids close to the $1,670/ounce mark as the yellow metal contemplates another leg higher.

CTA Interview: Protec Energy Partners, LLC (2)

Protec Energy Parners, LLC is a Commodity Trading Advisor and Investment Management firm which seeks capital appreciation of client accounts through speculative trading in energy commodity futures and options. The firm’s flagship, ET1 Investment program utilizes both fundamental and technical investment strategies in an options intensive portfolio that includes crude oil, heating oil, gasoline and natural gas. Protec executes its strategy on the major exchanges in North America. The program targets superior risk adjusted returns, small drawdowns and low downside deviation through a strong emphasis on portfolio composition, option valuation and risk management.

Founded on September 9, 2009, Protec Energy Partners, LLC is a Florida limited liability company and is an affiliate fo Protec Energy Fuel Management, LLC, an energy marketing and trading company founded in February 1999. Protec Fuel Management’s principal, Andrew Greenberg and Todd G.Garner, conceived the Advisor business purpose as an investment manager and commodities traders, as an outgrowth of Protec Fuel Management’s main business. Protec Fuel Management markets and trades in physical and financial energy products, including fefined petroleum products, natural gas and ethanol, serving a braod client base throughout the United States, including petroluem refiners and wholesalers, industrial companies, transportation companies, jobbers, convenience store outlets, fleet operators, state, county and municipal governments and the U.S. Military.

“The rate of return shown in the Performance Capsule may vary materially among managed accounts due to multiple factors inherent in the ET1 program. This variance, however, is primarily due to longer-term trend following option positions that existing clients hold in which may take new clients several months to have comparable trading positions.”

Since its inception, the Protec Energy program has significantly outperformed a broad selection of benchmarks/indices in terms of both absolute and risk adjusted returns. The diligent application of Risk Management and successful selection of options strategies has produced a track record with a high ratio of upside to downside volatility allowing for the preservation of capital in adverse periods without sacrificing upside potential.


Disclamer: The risk of loss in trading can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. The high degree of leverage that is often obtainable in commodity trading can work against you as well as for you. The use of leverage can lead to large losses as well aas gains. Managed commodity accounts are subjected to substantial charges for management and advisory fees. It may be necessary for those accounts that are subject to these charges to make substantial trading profits to avoid depletion or exhaustion of their assets. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the commodity trading advisor (CTA).

The Impact of News on Foreign Exchange Markets and its Volume

The impact of news on FX market price movements and volume

Relevant news releases act as salient catalysts for the foreign exchange (also known as forex and FX) market as many event-driven players use them to take positions. No less than seven pieces of relevant data come out on a daily basis from the countries of the eight most commonly traded major currencies.

Unlike the equities or bond markets, the FX market, open 24 hours a day (from 5 pm ET Sunday to 4 pm ET Friday), are trading at the time of most of these news releases.

Numerous empirical studies have helped researchers gain insight into the reaction of the FX market – the price movements and the trading volume – to news releases.

The impact of news on FX price movements

News is the main driver of short-term shifts in the global FX market. Dozens of fundamental announcement come out each weekday in all time zones from many countries.  Most traders, however, need not pay attention to all of them and must differentiate the important ones from the less impactful ones. Since the U.S. dollar (or USD) accounts for 90% of all currency trades, U.S. economic announcements tend to inject the most pronounced effects into the market. Releases of news directly pertinent to the other major globally-traded currencies – the Euro, British pound, Japanese yen, Swiss franc, Canadian dollar, Australian dollar and New Zealand dollar – may also deserve the attention of traders trading those currencies.

Expected announcements from global central banks about interest rates and monetary policies are some of the most watched news items and can create extremely large, quick changes in FX rates. Backward-looking economic data releases such as unemployment rates and industrial production vary in their impacts at different times. For instance, unemployment data is extremely pertinent in times of economic recession.

Analysts produce estimates for these various economic releases. An aggregation of these different estimates, such as the median or the mean, produces a “market view” of the data release. During aggregation, analysts with greater historical success of accuracy may be given a greater weighting. The most well-known analysts may be heeded much more than their peers; sometimes, prominent analysts’ revisions are substantial enough to move FX markets. Shortly before the release of economic reports, the market prices in its expectations for them, which is usually close to the aggregation of analyst expectations.

This process of pricing the expectations into the FX market is called consolidation. From a technical analysis perspective, consolidation is characterized by a narrowing trading range. Consolidation is a critical requirement for a high reward-to-risk trade because it provides evidence that the market has reached equilibrium in its expectations of the economic news release. Furthermore, consolidation shows that there are no other ongoing news stories that are driving the market. Contrastingly, if a currency has a strong bullish or bearish trend, it is possible that the market will largely ignore the impact of the announced number and continue in the prevailing trend.

After consolidation, if the presented economic number greatly differs from the market’s expectations, FX rates may break out of a trading range. Typically, actions of algorithmic and flash event-driven traders will produce a large move of 10-50 pips that occurs in less than 10 seconds. If the news is significant enough to affect investors’ view of particular economies, this move will be followed by a gradual move of another 50 pips that can last for minutes to hours. Some empirical studies[1] show that the market reacts more sharply to bad news than to good news[2].

In general, the highest frequency of FX trading happens within 10 seconds after news releases. A study by Martin D.D. Evans and Richard K. Lyons, however, show that sometimes, the market could absorb or react to macroeconomic announcements hours, or even days, after they come out based on multiple factors.  The study also found that the impact on returns generally occurs in the first couple of days and then tapers off. The impact on order flow, on the other hand, still keeps very strong and often noticeable on the third and fourth day (Kathy Lien, March 16 2011, How to Trade Forex on News Releases).

Others studies, however, from French and Roll (1986) and Fleming and Remolona (1999), for example, argue publicly available news may be incorporated in prices instantaneously; this view discourages traders from taking positions based on news released hours or days earlier.

Large institutions, which dominate the global FX market, use news events as signals to move their treasury holdings from one currency to another.  These large currency trades are executed incrementally – in order to minimize slippage and market impact and to prevent detection by other market participants – using methods such as Volume Weighted Average Price (VWAP) algorithms, which attempt to track the volume-weighted price during a specified time period to break up the large orders into smaller blocks.

The VWAP algorithms’ tracking of the market tends to push the market price along a linear trend line towards a target. Strong linear trend lines can be quantitatively characterized by high Sharpe ratios (risk-adjusted returns), an indication of the high signal-to-noise ratio present during particular news events. These movements may present favorable reward-to-risk opportunities to traders who can identify them.

When traders learn of new developments, they usually estimate new target rates and trade towards them, attempting to capture the spread between the target rate and the current rate. The gap between the two rates may be closed by market dislocations created by two factors. The first is information leakage, which is information disseminating to different market participant at different times. Well-connected and vigilant traders, for example, may obtain certain information earlier than most other FX market participants. The second factor is the aforementioned gradual VWAPs of the larger institutions.

The impact of news on FX trading volume

Global FX trading activity tends to increase after news releases, even when announcements are in tandem with market expectations.  Additional trading activities may be unleashed if announcements deviate from expectations. However, the FX market may also be in a “wait and see” mode after shocking announcements, sometimes for hours or even days, as traders may be reluctant to make large moves during periods of heightened uncertainty. It will inform traders more of market behaviors based on complicated psychological states that may deterministically influence the trading volume towards news releases.

Studies on FX volume is difficult, however, since the market covers the entire globe, spans various products and microstructure aspects such as multiple trading platforms and different trading venues like brokerage or interdealer market.

Many studies on FX volume have resorted to using settlement information from the Continuous Linked Settlement (CLS) Bank in New York because the CLS data[3] is aggregated at high frequencies and ensures a representative coverage (roughly 55%) of global trading volume in the FX market. CLS currency volumes are denominated in the USD because cross currency activity outside it is limited and USD has the strongest volume response to news releases.

Based on this data, FX trading volume rises about 5% on average in the spot market the day of and the day after relevant macroeconomic news releases.  Studies[4] based on regression models also show that FX volume augments on the day of news releases, keeps the upward movement three or even four days after that and then tapers off. During the 10-day period after the announcement, FX trading activity goes down by a cumulative 20% on average from peak volume.

The international FX market is vulnerable to short term shifts ignited by economic announcements. For traders who want to profit from Forex trading, the importance of “following the news” should not be understated; prominent releases pertinent to the prevailing economic reality deserve additional attention. As the FX market is impacted in periods before and after news releases, traders should be aware their lasting effects on returns and order flow. For example, trading volume increases the most 10 seconds after news releases, remains elevated three to five days after that and gradually fades within 10 days. For traders, incorporating knowledge of news releases and their impact on the FX market with technical analysis could prove a successful and profitable combination.

---

[1] Torben G. Andersen, Tim Bollerslev, Francis S.Diebold, April 2002, “Micro Effects of Macro Announcements: Real-time Price Discovery in Foreign Exchange”

[2] One of the examples of sign effects, which refer to the fact that market reacts to news in an asymmetric fashion.

[3] The main advantage of CLS volume data is that decentralized FX trades are centrally settled in New York. The data’s breadth captures volume activity in the spot, swap, and forward market. Average daily values for Dec 2007 were USD 611 billion for the spot market, USD 710 billion for the FX swap market, and USD 139 billion for the forward market. After Dec 2007, CLS also covers options exercises, non-deliverable forwards, and credit derivatives. Since its introduction in Sep 2002, CLS Bank captures more than half of the FX volume across major currencies at high frequencies.
[4] Andreas M. Fischer, Angelo Ranaldo, March 19^th, 2011, “Does FOMC news increase global FX trading?”

CTA Interview: Protec Energy Partners, LLC

Name of Program
Protec Energy Partners LLC

Name of Principals
Todd Garner, Andy Greenberg

Name of Principal With Trading Authority
Todd Garner, Andy Greenberg

Q1: As an excellent fund manager in the industry, what special trading style do you use in this program?

Our style of trading is commonly referred to as “discretionary trading”. We use our 25 plus years of experience in the physical petroleum and natural gas markets to implement a “hands on” approach to managing each position. This discretionary style gives us the ability to move quickly and the opportunity to “stay the course” when further study of the market is necessary.

Q2: What is the average holding period for each trade?

Our portfolio is comprised of approximately 50% medium-term trades and 50% longer-term trades. We design the medium-term trades to be held for 30 days. The longer-term trades or seasonal trades do not exceed 120 days. We do not “day trade”.

Q3: How do you manage risk/reward and what metrics are employed, that is, what make your sharp (2.58) consistently compelling?

We use several techniques to manage risk/reward.

1. Prior to execution, risk and reward parameters are defined and options are structured around those parameters.
2. We use APO (Asian) Options which help reduce volatility
3. Stop loss limits are set based on projected intra-month drawdowns.

Q4: In the ET1 program, you mentioned the focuses are the “medium term” strategies, can you briefly describe what they are?

Our medium-term strategies consist of option spread structures, strangles and straddles. Most of the option strategies are comprised of Asian options, which align perfectly with our 30-day structures. We have also used futures to offset an open option position when necessary.

Q5: As to the specific stop loss you mentioned in the “program description”, how to target this “predetermined acceptable loss”?

The “predetermined acceptable loss” is determined by projecting an “acceptable” drawdown in the overall portfolio. That “acceptable drawdown” is calculated on a month-to-month basis using the program’s year-to-date ROR along with other considerations. Once the trades are executed, it is a simple arithmetic calculation to determine any targeted stops.

Q6: If possible, can you give a brief example of your trades using the technical analysis to help make more precisely time entry and exit strategies?

Given that each program trade employs different strategies every month, it is easier to briefly explain one of our longer-term trades that is based on seasonal pattern recognition. This strategy is based on RBOB pattern recognition. Our chart observations have helped us to recognize that RBOB makes it lows each year in the November/December time period. We use options to take advantage of the upward movement. Option strikes are determined by the calculation of Fibonacci retracement numbers, watching converging moving averages, and being alert to certain candlestick patterns.

Q7: The managed futures industry in the last year struggled in general, however, Protec Energy Partners surprisingly generated an annual rate of return of 56.31%. How did you make it?

We credit our success to several factors. First, our years of fundamental and trading experience gives us the ability to recognize trends, the courage to follow them and the discipline to exit strategies before sustaining damaging losses. Second, our discretionary trading style affords us consistency, flexibility and maneuverability. System traders are locked into pure numeric trading. Third, the use of APO’s really does help smooth out volatility. We don’t feel the need to be in and out of the market everyday.

Q8: We’ve noticed the performances for the last couple of months were not good, and the biggest drawdown (-3.78%) occurred in May, what happened to that?

In May, we saw a larger than normal decline in the crude market which affected the related product markets. This decline in crude was precipitated by global macro economic issues (prospect of Greece leaving the Euro and Spain defaulting) which forced the energy market into a steeper, faster downward move. Another factor that we continue to see is trader volatility and headline trading. We maintain that our May position was correct with regard to direction, but our calculations did not completely factor the severity of the downward momentum caused by economic fears in Europe.

Q9: What’s your opinion on the current energy commodity (physical petroleum, crude oil, natural gas…) market in a global universe?

Fundamentally we are bullish the energy market in the U.S. and abroad. But we cannot ignore the U.S. and Global economic conditions. If the economy falters, so will the energy market and visa versa.

Q10: How to keep an account’s degree of leverage relatively constant, even in volatile markets?

We adjust the leverage of each account based on the degree of volatility. Meaning, we pay particular attention to the adequate sizing of positions prior to execution. We also assess the current and anticipated liquidity of the segment of any market we enter. A concrete example would be our Q1 2012 gas play. On an investment of $200,000 for which we normally execute 8 program contracts, we executed 6 contracts due to market factors.

Q11: What is your annual objective for the performance?

For 2012, we anticipate 30%.

Q12: What is your piece of advice to investors who are interested in the energy commodity industry?

The complexity of the energy industry dictates that investors should seek the advice of seasoned, disciplined traders with proven track records. One of our favorite economist’s was quoted “the market can remain illogical far longer that I can remain solvent.” We couldn’t agree more.


For more information on Protec Energy or other CTAs, feel free to visit www.ibtrade.com


There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. IBTRADE, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

Asian Option

Of the many types of exotic options that are available for investors, Average Rate Option or as they are also known, Asia Options are some of the most practical.

Asian options are a type of option that does not settle on a specific day, or exercise into a underlying instrument, but instead is settled on a cash basis based on the average rate of the underlying instrument over a specific period.

An Asian option has a strike price, and expiration date, a determination period, and is calculated similarly to a European or American style option. The expiration date, is the last day of the determination period which is used to calculate the value of the underlying instrument of the option. Asian options can be customized for weekly periods, monthly periods, quarterly periods and annual periods. In fact, there is no limitation on how they can be created. Asian options on regulated exchanges, such as the Chicago Mercantile Exchange, Asian options are usually relegated to monthly options.

When pruchasing a call or a put, which is an Asian option, an investor or hedger is speculating on the value of an underlying instrument over a period. For example, a Call option on WTI crude oil for the month of October, with a strike price of $80 per barrel would examine the price of the prompt (first) contract of crude oil during the month of October. Each day during the month, the settlement of the prompt contract would be added to the other prices during the month. The average price at the end of the month is the price that is then used to determine if there is a payout for the option.

If the average price for October were $81 per barrel, then the owner if an Asian style call option would receive $1 per barrel, times the number of options held. If the average price of crude oil during the month of October were $79 a barrel, then the option would expire worthless. For an Asian style put option, with a strike of $80, an average price of $79 would create a payout of $1 per barrel to the buyer of the put option, and if the price averages $81 a barrel, the put option would expire worthless. For quarterly options, the determination period is a three month period, and an annual asian option, the determination period is an entire year.

Pricing Asian options requires an additional component that estimates the linear average of the underlying instrument. This is calculated by using the implied volatility of an Asian option. Implied volatility is how much market participants believe the market will move over a period, annualized. For asian options, this is smoothed by the averaging period. One advantage of Asian options is that these reduce the risk of market manipulation of the underlying instrument at maturity.

So if the market is squeeze on a particular day, it should not greatly affect the overall average calculated in the determination period. Another advantage of Asian options involves the relative cost of Asian options compared to European or American options. Because of the averaging feature, Asian options are typically cheaper than European or American options. Averaging is broadly segregated into three categories; arithmetic average Asians, geometric average Asians and both these forms can be averaged on a weighted average basis, whereby a given weight is applied to each stock being averaged. This can be useful for attaining an average on a sample with a highly skewed sample population.

To this date, there are no known closed form analytical solutions arithmetic options, due to the property of these options. Average rate options are priced using a number of methods, which include binomial trees, which is a form of simulation. The additional consideration, which must be made, is that at any point in time on the tree, the value of the option is dependent upon the average of the price that the path has taken.

The greater the averaging period of the Asian option, the more the volatility is smoothed, the therfore the less expensive the volatility will be. This in turn will drive premium prices down. A quarterly average will be less volatile, and therfore the implied volatility will be less than the implied volatility of a monthly Asian option. Additionally, an annual Asian option will have a smoother average, and therefore a lower volatility then a quarterly or monthly option.

Asian options are excellent tools for hedging underlying assets. Crude oil producers or Gold miners' that produce a specific amount of product per day, can use Asian options to mimic there production and hedge their exposure. This style also works very well within the interest rate sector, the currency sector and equity indexes.

For more information on options or managed funds, feel free to visit www.ibtrade.com/

There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. IBTRADE, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

How to design a Managed Futures Portfolio

There are thousands of Managed Futures program, how do you know which one is suitable for you? How do you design a balanced portfolio that can minimize your risk while still have reasonable expected turns? A lot of investors are puzzled when they are faced with such questions.

There are several principles which we believe will be useful to investors:

1.   Assets allocation. Even in the managed futures space, there are different asset classes, such as equity futures, energy, metal, currency, agriculture, options etc. While it is not necessary to have exposure in every asset class, you don’t put all your money in just one or two asset classes.

2.   Compare programs within an asset class. You want to find best 3-5 programs within that asset class as candidates for your portfolio. There are many parameters to rank programs, such as annual return, largest draw down, risk adjust return(Sharpe Ratio, Sortino Ratio), AUM etc. Different investors may have different risk appetites and return expectation. So this is a very personal selection. Moreover, most institutional investors will do much more than this. They will do their own Due Diligence on the portfolio managers regarding their academic & professional background, infrastructure, Accounting, Compliance etc. There is a very time consuming process. Most individual investors probably won’t have the time & energy to conduct such due diligence. They will most likely to rely on their financial advisor to make a recommendation. But it is best to prepare a list of questions (like those parameters we mentioned above) to ask your financial advisor regarding the programs, so you know what you will expect.

3.   Portfolio selection. Now you know asset allocation and best programs in every asset class, how do you make your final selections? Should you choose a big firm or an emerging manager? Should you choose a popular name or find a niche program? There are lots of studies and articles regarding portfolio selections. For institutional investors, they often have some mandates to their investors. For example, they may be required to invest in only invest graded bonds or they can only invest in programs with at least certain AUM. For individual investors, they are more flexible and their top priority usually will be the expected return or risk adjusted return. While popular names in the Managed Futures space such as Winton, AHL, Bluetrend, Transtrend have produced respected returns in the past, the correlations among them are very high. So it means that they tend to make money at the same time and also lose money at the same time. The largest 5 CTA programs have total of about $75B AUM, that is about 30% of total AUM in the managed futures space. They also tend to trade every product except options in the managed futures space. If you want something different and complimentary, you need choose some other programs as well. Since those largest 5 CTA programs are all trend following and usually don’t trade options, a mean reversion, option program could be a perfect diversification for this purpose. By choosing a mean reversion program, when those trend following programs lose money, the mean reversion program will most likely to make money. This negative correlation will help you reduce risk without sacrificing expected returns. Also an option program could be a nice asset diversification. So you want to select top mean reversion, option programs which are also negatively correlated to those trend following programs in order to truly diversify your portfolio. So next time when you talk to your financial advisor, make sure you raise such questions!

Manager Bio: Dr Rao started his professional financial career as a quantitative analyst at Ellington Management Group in early 2005. In June 2006, he joined SAC Capital as a global macor trader, where he managed more than $100M capital and traded all kinds of markets such as Currency, Rates, Commodity, Equity ETF/Index/Futures, CDS, Bond, High Yield, Credit etc and their options. His main focus is liquidity Equity & Commodity ETF/Index/Futures and their options. In January 2009, Dr.Rao moved to Millennium Partners as a statistical arbitrage trader before starting his own CTA fund in December 2009 to serve outside QEP clients. Dr. Rao received his PhD in 2005 and MS in 1998 both from Harvard University, his BE IN 1997 from Tsinghua University.

For more information on Dr.Rao and his managed fund/CTA, feel free to visit www.ibtrade.com

There is a substantial risk of loss in trading futures and options. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed and the giving of the same is not to be deemed as an offer or solicitation on our part with respect to the sale or purchase of any securities or commodities. IBTRADE, its officers and directors may in the normal course of business have positions, which may or may not agree with the opinions expressed in this report. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction.

Personal Investment in Alternatives---Portfolio Diversification

With so many global financial risks building, equity markets continue to be in danger of the next big bear trend. Treasuries provide an attractive alternative during these times but there is a product I'd like to talk about that has asimilar low risk and substantially higher returns. This product is managed futures, which are funds managed by commodities trading advisors (CTAs). These products have performed well in every bear market for the last thirty years. Even in bull markets managed futures are a great way to increase risk-adjusted returns by adding diversification to your portfolio due to their low correlation to equities.


Here are ten compelling reasons to consider adding managed futures to your portfolio according to the educational material from CMEGroup:


1. Diversify beyond the traditional asset classes: Managed Futures are an alternative asset class that has achieved strong performance in both up and down markets, exhibiting low correlation to traditional asset classes, such as stocks, bonds, cash and real estate.


2. Reduce overall portfolio volatility: In general, as one asset class goes up, some other asset class goesdown. Managed Futures invest across a broad spectrum of asset classes with the goal of achieving solid long-term returns.


3. Increase returns and reduce volatility: Managed Futures, as well as commodities, when used in conjunction with traditional asset classes, may reduce risk, while at the same time potentially increasing returns.


4. Returns evident in any kind of economic environment: Managed Futures may generate returns in bull and bear markets, boasting solid long-term track records despite economic downturns.


5. Strong performance during stock market declines: Managed Futures may do well in down markets.


6. Successful institutions use them: Pension Plan Sponsors, Endowments and Foundations have long used Managed Futures to generate returns in excess of the S&P 500.


7. Commodity Trade Advisors (CTAs) and Pool Operators (CPOs) have access to a wide variety of global futures products that are liquid and transparent: There are more than 150 liquid futures products across the globe, including stock indexes, fixed income, energies, metals, and agricultural products.


8. CTA/CPO community is regulated and trades on regulated futures exchanges: Trading in a regulated marketplace builds the credibility and trustworthiness of the CTA/CPO community.


9. Risk Management and Clearing: Futures Clearinghouse institutes some of the most sophisticated risk management practices in the financial world. For more than 100 years, Futures Clearinghouse has provided services that substantially mitigate the risk of clearing member failure. Futures Clearinghouse has provided the resources to ensure the performance of every contract on our exchanges for more than a century.


10. Overall industry growth has been exceptional: In the last 30 years, assets under management for the Managed Futures industry have grown 1000 fold.


For more information on managed funds, feel free to visit: www.ibtrade.com