Transcript What derivatives tell us

Global Markets Analysis for 2010
Panos Dantis
Major Markets
1.
2.
3.
4.
Bonds
Commodities
FX
Stocks
1.Bonds


The majority of analysts expect that
2010 will be a bad year for US
Treasuries
BUT with a 10% unemployment , we
are still almost twice the level
consistent with non – inflationary
growth.
Bonds 2




Unemployment will remain high until
the economy starts creating 150,000
jobs per month
It needs 6 months for that.
Even then, FED will bide its time
Remember 1992 : it raised rates after
14 months the peak of unemployment
(7.8%) and June 2003(6.3%)
Bonds 3
Also deflation still remains a possibility
given the amount of slack in labor and
product markets.
 The withdrawal of unconventional policy
support will no have a negative impact
on government bonds that is widely


SO US TREASURIES ARE NOT A
BUBBLE and expect the 10 year yield to
DROP to 2.3%
2.Commodities



The current pick up in inflation in the
major economies is mainly due to base
effects of energy prices.
These base effects will soon fade out if
oil prices remain around 70 – 75$ pb.
But since we expect $ to recover and
global demand to disappoints, we think
oil will drop back to around $50pb .
Commodities – oil
We see 3 downside risks:
 Financial factors:speculative pressures
drove oil to 147$ pb. In July 2008.
 If oil rises and fears of inflation and
asset bubbles fade , oil prices should
drop back in 2010.
 Fundamental demand of oil is weak.
Global Growth and oil



We expect that growth in key
economies – US and China – to be firm
until the middle of 2010.
But then the stimulus boost will end
and the demand for oil should slow
again.
When economies recover the supply
response to increased demand –if any will recover too.
Oil price and USD/EURO rate
Brent Futures
Crude oil futures chart: 1983 - 2009
What GS says….
Commodities - Gold




Gold is a seasonal asset.
It has increased 11,6% on average
from September to February since the
beginning of its Bull market in 2000.
All time classic asset
Should be included to every portfolio
Gold – Long run facts




Population has increased and more and
more people would like to have gold.
Gold fundamentals remain very bullish
Global mined supply declines
Central banks are looking at Gold after
the crisis and have reduced gold sales.
Gold - history
When gold hit 850& :\
 The average US household income
<18K
 New houses average price = 76k
 New cars average = <6k
 So, 850 in 1980’s is not 850 today
 So 850 translates into 2,358 $ today
Gold – Fed policy


But with the excessive monetary growth
of FED , Money of zero maturity has
increased 11,5 times since 1980.!!
So real Gold price highs is well above
2,358, close to 4,800$ in today's’ dollar
terms
Gold - 2010




However, for the next year there are a
few problems:
China and South Korea central banks
are thinking of selling part of their gold
The ratio of GOLD/OIL = 15.4
The ratio Dow Jones / Gold = 9.2 on 10
average.
GOLD - 2010




But BUY GOLD as a HEDGE against:
Runaway inflation
USD collapse
Any bubble market collapse
A new bear or panic stock market.
Gold Chart : 1833 - 1999
Gold chart: 1975 -2009
Commodities – Silver 1792 - 1999
Silver 1985 - 2009
Platinum: 1992 - 2009
3.Forex – EURO / USD





We often think that Fed’s monetary
expansion will lead to a USD collapse.
The reality is more complicated
The increased in USD supply is offset by
an increase in demand
The additional liquidity has been held
within the banking system .
Same happened in Japan between 2001 - 06
Forex : EURO/USD



Foreign demand for USD and dollar
assets will increase from countries
where policy is less supportive like the
euro –zone.
Fed’s policies have reduced a debt –
deflation spiral, which is also positive
for the currencies involved
So we expect EURO/USD = 1.30
What GS says…
GS:”Eur/USD very seldom moves above or
below 2SD from fair value”
FX : USD/JPY




The % decline from the june high is
very similar of that of the August 98
peak.
At present levels there is good support
Monthly oscillators are attempting to
diverge positively
The downside risk is heavily increasing.
GS says: “the real key remains
US short end yields”
4. Stock markets




US markets
European Markets
Asian
ASE
A. US Markets –major Indexes



Dow Jones
S&P 500
Nasdaq
Dow Jones 10 years weekly
Dow Jones daily
Dow Jones Daily – zoom in
Nasdaq 10 years weekly
Nasdaq daily
S&P 500 weekly – 10 years
B. Europe – DAX
weekly 10 years
Dax Daily
FTSE 20 daily
CAC40 - daily
C. Asia – Nikkei daily
Asia – Hang Seng daily
SSEC ( China) weekly 10 years
D. The Greek Stock Market





Currently Is depending on
The Hellenic government fiscal policy
The effectiveness of the Hellenic
government
The support of foreign investors
The support of EU officials
The US stock markets
and mainly on

The bond market situation
We should not forget that


While “ Emerging markets have been
viewed in the past as a source of
systematic risk , they are now viewed
as a source of stability and indeed a
crucial driver of the global recovery”
according to Capital Economics
International Forum
That’s why our esoteric economic
problem is taken so seriously globally.
Latin America Short term external Debt
Hellas vs California
Hellas vs California



According to FT: “Why is Greece such a
big problem for Eurozone since ..the far
-worse California is not raising similar
concerns about the US or USD?”
Greek economy is only 3% of eurozone
California economy is 13,5% of US GDP
The Paradox


The US economy Allows fiscal transfers
between states to help the…weakest!
The eurozone ?
Actually…





Eurozone is only 11 years old, a child..
Greece is not a big problem to eurozone
But EU officials over – reacted and confused
markets
Financial markets are biased against euro and
will grab any chance to talk about the
prospect of EMU breaking up
Eurozone politicians have much greater
freedom to act because there is no single
government.
ADEX


The OPEN INTEREST of FTASE20
Futures is crucial..
Generally speaking above 24 – 25,000
futures and certainly close to 30,000
futures means that selling pressure will
increase in the short term at the spot
market.
FTASE 20 weekly -10 years
FTASE 20 daily
What about VIX ?



VIX is the benchmark index for US stock
options
VIX = Chicago Board Options Exchange
Volatility Index
Measures the cost of using options as
insurance against declines in the
S&P500
VIX




All time high : 80,86 in November 2008,
2 months after the bankruptcy of Lehman
Brothers
Has now dropped 72% for its historic high
Is now 9% higher from its 15 - month low
on Nov 24th, 2009
The average price of VIX is 20,29 during
the last 20 years.
VIX




December 2010 puts @55 48,577
volume, of which 76% traded at ask
price.
So buyers initiated the majority of
transactions…
PUT 55 open Interest = 120,000
Why 55 strike? Is about half the price of
SPY = 111, the ETF of S&P500.
One year implied volatility


On the S&P500 is 24,80 , that is 5,5
points higher than 30-day contracts,
while the gap widened to 6,84 on
November the 24th which as the
HIGHEST in the LAST % YEARS.
The last time the gap approached
current levels was in August 2008 =
JUST BEFORE LEHMAN’S BANKRUPTCY
Forecasting VIX



Many economists and derivatives
traders
expect a rise in VIX
“ it will be a year of heightened
volatility…north of 30 …close to
40..because inventors underestimate
risks of the Global economy”
Actually the cost of hedging is currently
very low
Forecasting





Most of the times VIX dropped to 20 22 it signalled an uptrend wave.
Also S&P has advanced 63% since
March
Profit Growth are projected to rise 25%
in 2010.
Average P/E of S&P500 : 13,9%
So: the odds are increased that S&P will
fall
IF S&P 500 falls



Under 1070 then a move towards
Simple Moving Average 200 is possible
(960)
Global indexes will turn down to their
SMO200.
In that case GD will not be able to
move above 2401.
S&P500 warning signals




CBOE put/call ratio < 80 for a couple
of weeks ( today @0.90)
Mini S&P futures > 3,5 m. for a couple
of weeks or > 5 m. for a couple of days
VIX <20 for a couple of weeks
([email protected])
Remember : big call volume trades at
tops while big put volume trades at
bottoms
VIX daily
VIX weekly
S&P 500 Weekly zoom in
S&P 500 daily
Is there a correlation?


GS supports “that an extended topping
process makes sense”
An up trend in the USD means that
either yields break higher(2-year yields
> 1.10 ) or S&P 500 < 1029.
GS says : S&P 500 might topping..
IF S&P 500 turns down, then



Under 1070 then a move towards
Simple Moving Average 200 is possible
(960)
Global indexes will turn down to their
SMO200.
In that case GD will not be able to
move above 2401.
GD weekly –10 years
GD - daily
GD – Hourly
ETE - daily