TRADE IDEA, TEAR IT APART!

IMFUTURE:

I thought when there is an uptick in the mark more risk is taken on and growth is seen to be temporarily driven and as a result copper (a big indicator of growth) and oil surges in a market uptick as there is more risk on. Can you elaborate on AUD/USD long auzzie short US?

Well this depends. If, for example, QE 3 is announced at some point the markets will surge. Not because of growth in a real sense but because suddenly there will be more money pumped into the system which will drive up asset prices. Moreover, asset prices will be pushed up because people are reaching for yield in a world where interest rates are ridiculously low. This should also push down the dollar because of inflationary worries because of the money printing. Gold should move up accordingly because it is seen as a safe haven from inflation which will come at some point assuming all of the liquidity the Fed is providing actually gets into the system (It isn't currently, which is why deflation is actually more of a concern right this moment). Oil surges for a few reason, one is that there will be more demand and more dollars chasing the oil and the hope that the easing will help spur growth which will also lead to an uptick in demand which pushes prices up. Add to that the debauchery of the US dollar and you get inflation which takes place in the form of energy prices, because when the dollar goes down it has less buying power and thus oil prices will increase accordingly.

Macro, do you think that they would actually do it though? I can't imagine the ECB with all the worries over Europe would suddenly raise rates. Unless your arguing a line of thought like the mortgage market in the United Sates where by raising rates you would spur people to actually go out and buy homes hoping that they don't miss out on the low rates. Currently, everyone is waiting and expecting rates to stay low and thus are waiting for prices to come down even further. In that respect, a shock might actually help out.

Addinator37:

IMFUTURE:

Just been asked to come up with a trade idea for my desk that will be hinged upon thursday economic data releases - french bonds sales, spanish bonds sales, EU rate decision and UK rate/QE decision. The strategy has to be very current and I must invest in at least one equity, 1 commodity and one currency.

My thoughts so far:

ECB cut to be 0.25 basis points but no cut in deposit rate UK cuts not going to occur potential quantitate easing strong spanish and french bond sales

All this would point to a rally in equities markets. Thus thinking of going with equities with a higher beta which tend to have higher upside when market is in uptick and simultaneously shorting defensives (hedge) - eliminating most systematic risk

As regards currency I'm thinking long USD as positive bond selling will translate positively in US market and short sterling as QE demonstrates UKs weakness.

Also thinking as my commodity strategy to go long on copper and oil as these tend to do well in market uptick and have higher beta whilst simultaneously shorting gold?

1) My issue is how much of these predictions are already priced in. 2) Is my strategy way to basic? The more in depth and creative the better! 3) Are my assumptions correct

Any feedback, constructive criticism, tearing my idea apart. Adding to the idea. Giving me a completely now outlook on an idea would be very much appreciated!

FYI I am an intern hence the lack of sophistication and knowledge!

Yeah, I agree with the other comment that going long USD and long commodities isn't exactly a good paired trade. Normally, a stronger USD is going to put deflationary pressures on commodities. I'd caution you also against taking any position in gold as part of your strategy. Gold is either a risk on asset or a safe haven depending on the mood of the market. It has seemed to track closely with equities recently and then whenever inflationary fears arise on the back of more stimulus it reverts back to the safe haven status. Just a point to think about.

As far as the rate cut, I think the significance of it is already built it. I think i'd worry more about the other side of your trade and what would happen should they not cut rates, and hedge against that happening. That is probably the more severe reaction IMO. I always spend more time looking at the other side of your trade to see why someone would go against you.

What equities are you looking at? Sectors? Country?

I wouldn't say your strategy is basic at all and as an intern I think you've definitely got a solid gist of how interconnected markets are working together.

Thanks for your reply, very helpful!

As I think stock prices will rise I'm thinking cyclicals. Sectors I would be looking at those with higher betas and those with stock with less exposure to EU so either EU stocks whose operating profits are not entirely generated from EU or that their profits are generated from stronger northern area of europe (German, Scan, Austria) and additionally stocks with high beta (preferably cyclicals) I'm thinking maybe financials (although thinking more swedish banks as safer and have had less of the "upcoming positive news of rates cuts" priced in), Barclays I think still looks cheap, consumers, manufacturing , travel, construction.

Do you think a reasonable hedge for if rates were to rise would be to short the housing market/mortgage market as increased rates = higher mortgage payments= less housing buyer. Any suggestions on a feasible hedge?

mfoste1:

do your own job and come up with a trade

I'm an intern, I'm just trying to ask the opinion of those with more experience than me. How else am I to learn if I do not ask the right questions to the right people. Google is not the answer!

mfoste1:

do your own job and come up with a trade

LOL... Why do you come onto this site? This post was way more relevant and thought provoking than probably 80 percent of the stuff posted here. Do you want to know about what to wear on your first day on the job and have swagon tell you 10 different ways to wear a fucking gucci suit and then some asshole telling you he never spends more than x amount? Or what about our workout habits explained 50 different ways, when there are really only 3 ways, 3 FUCKING WAYS (don't workout, workout, workout a lot).

NYorbust:

Great thread. As a prospective trader, this is very helpful to hear about the correlations, ways to hedge, etc

@Addinator --- Any books you know of that outline these types of correlations across markets/asset classes?

I've picked up a good amount from following the markets daily, but it would be great if there was a book/blog that could serve as a solid outline for this info.

There isn't really one big repository for all of this, but place like Zero Hedge really bring it together. Granted, there have a bearish/realistic bias, but the information there is outstanding. The interesting part about most of the asset classes is everything is so correlated nowadays it is had to find hedges because so many things move in sync. Globalization has really helped to drive markets closer together and make everything so interconnected. The best way to do it is how you are doing it now. Follow the markets, pull of overlay charts of different markets and asset classes. I mean there are obvious finance books, all the classics you hear about (I forget who it is, I think The King has a bunch of awesome reviews on WSO) but also read books like the world is flat, guns germs and steel, history books. Understand how the world has worked and works together and it helps to understand why certain assets will perform against one another. Read EVERYTHING. Read industry reports, if your in school you can probably still get morningstar or something through your library, and just try and absorb everything. I mean you can read the Fabozzi's and technical books to get a solid foundation but really aggregating all the information you can and scanning through it daily is the way to get it.

Sorry, that was a pretty longwinded answer to your books question but I think that you can use the information better if your the one seeing the correlations yourself. One thing I have is a watch list with a couple hundred tickers of all the industries and ETF's that I care about. You watch that day in and day out I guarantee you that you'll be able to write the book soon. Out of curiosity, what are you looking to trade?

bobbyjacob2222:

Hi, why to go for a strong dollar ? the actual stats are quite bad (unemployment, internal consumption, ...) for currency I would go on emerging market, if long (morrocco, algeria)

It's as another poster mentioned, It is basically a flight to safety at this point. I think you have to disconnect yourself from the internals and underpinnings of a normally functioning market and throw a lot of it out the window. The environment we are in is historically an aberration, or at least to what we've known in recent times. As bill gross says, its the cleanest dirty shirt (or something like that haha)