gaining the edge - understanding market dislocationsasia)-gai… · pzh consultants © 2020 pzh...
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PZH Consultants © 2020 PZH Consultants Pte. Ltd. All rights reserved.
CME Group (Asia) presents:
Gaining the Edge - Understanding Market Dislocations
Thomas Poh – 4th May 2020 www.pzhconsultants.com
PZH Consultants © 2020 PZH Consultants Pte. Ltd. All rights reserved.
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is
possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And
only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures.
Swaps trading is not suitable for all investors, involves the risk of loss and should only be undertaken by investors who are ECPs within the meaning of section 1(a)12 of the Commodity
Exchange Act. Swaps are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited
for a swaps position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one
trade because they cannot expect to profit on every trade.
Any research or trading views expressed are those of the individual author and do not necessarily represent the views of the PZH Consultants or its affiliates.
PZH Consultants is a trademark of PZH Consultants Pte Ltd. The PZH Seal Logo, PZH, are trademarks of PZH Consultants Pte Ltd.
The information within this presentation has been compiled by PZH Consultants for general purposes only. PZH Consultants assumes no responsibility for any errors or omissions.
Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment or trading advice or the results of
actual market experience.
None of the authors , contributors, administrators or anyone else connected with PZH Consultants in anyway whatsoever can be responsible for any losses and damages in connection your
use of information contained in this presentation
All matters pertaining to rules and specifications herein are made subject to and are superseded by official Exchange rules. Current rules should be consulted in all cases concerning
contract specifications.
CME Group Inc. and PZH Consultants are not affiliated with Interactive Brokers LLC, or any other FINRA broker-dealer.
Copyright © 2020 PZH Consultants Pte. Ltd. All rights reserved.
Disclaimer
2
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Current Market Focus
3
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Financial Market Shock
Demand Shock
Supply Shock
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All Rights Reserved PZH Consultants Pte. Ltd
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CME S&P E-Mini Futures (ES)
Weekly chart
The Longest Equities Bull Run in History is DEAD
23 Mar 2020 -34%
5
As of 17 Apr 2020
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Financial market dislocations are circumstances in
which financial markets, operating under stressful
conditions, cease to price assets correctly on an
absolute and relative basis
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A government will never default sovereign bonds
denominated in its OWN currency
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Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
www.pzhconsultants.com/disclaimer
WTI vs Brent Crude Oil Spread
Shale oil boom in US &
distribution pipeline bottle
necks into Cushing
2011-2012 WTI vs Brent Price Dislocation
9
As of 01 Sep 2019
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Causes of Market
Dislocation
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Assumptions failed:
“A government will never default on
its own local currency bonds”
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Arbitrage forces
failed to work
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Crowded bubbles
burst
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PICTURE
Caused by:
Assumptions breaking down
Inability for arbitrages to function
Bubbles
Small exit window – time & liquidity
Exit window is small
in terms of
time and liquidity
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Causes of market dislocation
15
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Monitor market dislocations to gain the edge
16
• Evidence of market pressure
• Arbitrage forces are being
(temporarily) overwhelmed
• Early warning indicators
• Confirmation indicators
• Both cause and effect of market
volatility
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COVID-19 Crisis:
Market Dislocations
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Bond ETFs’ Discount Against NAV
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
www.pzhconsultants.com/disclaimer
Vanguard Total Return Bond ETF Price vs NAV
Price Discount
against NAV on
12Mar 2020
% premium / discount
Daily net inflow / outflow
As of 3 Apr 2020
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Cash is King… … (and USD is preferred)
The global USD funding liquidity
squeeze caused a jump in the USD
DXY index by almost 9%
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
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USD DXY index
As of 17 Apr 2020
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Funding Stress – Libor vs Overnight Repos
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
www.pzhconsultants.com/disclaimer
CME SOFR Jun 2020 vs ED Jun 2020 Futures
Funding pressures spikes as
expected Libor spread above
overnight repo stays firm
CME SOFR Jun 2020
vs ED Jun 2020 Futures
Spread
As of 08 Apr 2020
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Treasuries sold off together with Equities
CME S&P E-Mini Futures (ES)
10 year US Treasury Yield (inverse of
price)
The usual flight to quality status of US Treasuries
(UST) was temporarily lost as the market sold UST
and UST yields spiked as the stock market continues
to tank
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
www.pzhconsultants.com/disclaimer
21
As of 09 Apr 2020
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Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
www.pzhconsultants.com/disclaimer
Spot Gold vs CME Gold Apr 2020 Futures
Bottlenecks in physical gold bars delivery resulted in
a big short squeeze in the gold futures market
Spot Gold vs Gold Futures Price Dislocation
22
As of 17 Apr 2020
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Why is it so bad this time?
What are the causes
this time?
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Trade war détente optimism
the crowded trade just got
more crowded
Source : Bloomberg
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Source CNN
Funded by cheap credit,
world debt has ballooned
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17Sep19 – US Overnight Repo Funding Squeeze
26
17 Sep 2019 - Overnight USD
repo rates spiked to 8.75%
Source : Bloomberg
Repo Market’s Clogged Pipes
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As of 01 Dec 2019
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Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
www.pzhconsultants.com/disclaimer
CME 30- Day Fed Funds vs 1-Month SOFR
Sep 2020 Futures
The repo market funding squeeze was reflected in the spike
between in CME 1-month SOFR and Fed Fund Sep futures
spread prices hitting a high of 23 bps
Funding Squeeze felt in the SOFR Futures
27
As of 01 Nov 2019
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Risk parity strategy
assumptions failed
Equities Bonds
Bonds
Bonds
Risk Neutral
Financial Times 20 Mar 2020
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Market Stampede
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Financial Markets
on Ventilator
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Fed Marched to Rescue
Sources :
US Federal Reserve
12 Mar
- Extended
maturity and
scope of UST
purchases
- Term repo
increased by
$1 Tril
9 Mar
- Increased repo
offerings by $75bio
15 Mar (Sun)
- FF 100 bps cut to zero (unscheduled)
- $500 bio increase in long term UST
purchase
- $200 bio increase in agency MBS
purchase
- Provision of USD liquidity swap lines
among the 6 large global central banks
(Fed, BOC, BOE, BOJ & ECB) to
enhance the provision of global liquidity
CME S&P Micro E-Mini Futures
(MES)
17 Mar
- Established CP funding facility (CPFF)
- Established Primary Dealer Credit facility (PDCF)
18 Mar
- Established Money Market Fund Liquidity Facility (MMFL)
19 Mar
- Established swap lines with more foreign central banks
3 Mar
- FF 50bps cut (unscheduled)
23 Mar
- “QE infinity” day
- Unlimited purchase of UST and
agency MBS as required
- $30 bio Exchange Stabilization
fund (ESF) tapped
- Established Primary & Secondary
Market Corporate Credit Facilities
(PMCCF & SMCCF)
- Established Term Asset-Back
Securities Loan Facility (TALF)
- Expanded Money Market Mutual
Fund Liquidity Facility (MMLF)
- Expanded CP funding facility
(CPFF)
31 Mar
- Established UST repo
facilities for foreign and
international monetary
authorities (FIMA)
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31
9 Apr
- Further 2.3 Tril to
help payroll
protection,
municipals, SMEs
and junk bonds
purchases
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Source :Statista
Value of COVID-19 fiscal stimulus packages in G20 countries as percentage of GDP
32
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6Apr 2020 –
CME Group Launched New Gold Futures Contract (4GC) with
Expanded Flexible Delivery in 100-ounce, 400-ounce or 1-kilo Bars
Alleviated the physical settlement issues that was caused by to the
shortage of 100-ouch gold bars
4GC Enhanced
Delivery Gold
Futures Contract
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Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
www.pzhconsultants.com/disclaimer
1 Year EUR USD quarterly basis
swap
EUR USD basis swaps serves as an indicator of USD funding pressure
Its move back to near parity indicates that USD funding pressures has
subsided and the Fed’s measures are taking effect
USD Funding Pressures Subsides
34
As of 17 Apr 2020
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Treasuries is a Safe Haven Asset (Again) CME S&P E-Mini Futures
(ES)
10 year US Treasury Yield
(inverse of price)
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
www.pzhconsultants.com/disclaimer
The flight to quality status of US
Treasuries (UST) has returned
after the Fed’s aggressive
measures to restore market
liquidity
UST Yields now slides (price rally)
when the stock market sells off
As of 09 Apr 2020
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Equities Consolidated
CME S&P E-Mini
Futures (ES)
After the announcement of QE
Infinity on the 23 Mar 2020 by the
Fed, the equities market finally
entered a phase of consolidation
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This is confirmed by the
normalization of the safe
haven status of UST from
its earlier dislocation
As of 17 Apr 2020
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Signs of the Next
Dislocation?
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WTI Crude Oil Futures Price Crashes to Negative $40
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
www.pzhconsultants.com/disclaimer
As of 21 Apr 2020
CME WTI May vs Jun
2020 Futures
Note: May contract is NO longer the
active contract on 21 Apr 2020
Jun contract +$21
May contract ($40)
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Open Interest & Volume of WTI May 2020 Contract
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
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As of 21 Apr 2020
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Source: Visual Capitalist
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World Economy on
Central Banks’ Life Support
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Source : Visual Capitalist
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US Employment Figures Plummets
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
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3.3m
-701k
43
?
As of 17 Apr 2020
2008 Global Financial Crisis
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Source : IMF
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Signs of the Next Dislocation?
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
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As of 17 Apr 2020
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P/E Ratios Back to Pre-COVID Crisis Levels or Higher!
Source :Bloomberg All Rights Reserved PZH Consultants Pte. Ltd
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S&P 500 Index
Current P/E
Est Forward P/E
Est Forward P/E next 12 months
As of 17 Apr 2020
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Leveraging off this
understanding
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Fully understand your
product specifications
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Know the
market players
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Remember that
markets are
interconnected
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CME S&P E-Mini Futures (ES)
Weekly chart
Let the Market Come to You
Pick your levels and
stagger your entries
As of 17 Apr 2020
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Equities Volatility Index - VIX
Utilise Volatility to Your Advantage
The market chaos has driven
equities volatility to historical highs
This is an opportunity
As of 01 Apr 2020
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Selling S&P Puts to Go Long S&P Futures
The high volatility translates into
attractive put options premiums which
can improve the break-even costs for
your long S&P position’s upon exercise
Source : CME
As of 01 Apr 2020
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The Market is always right…
and it is
always telling us something,
so we should listen!
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www.linkedin.com/in/thomaspoh