The Oh-No Market Moment - Oil Futures Crash -25%, Stock Futures Halted Overnight at -5%, Fed's Quest For 0% Rates

Futures Magazine Weekly Newsletter

Futures Magazine Weekly Newsletter

TOP THINGS TO WATCH THIS WEEK

The economic calendar:

 

MONDAY
3 and 6 Month Bill Auction

TUESDAY
NFIB Business Optimism Index, Redbook Index (YoY), Redbook Index (MoM), USDA WASDE Report, 3-Year Note Auction, API Weekly Crude Oil Stock 

WEDNESDAY
MBA Mortgage Applications, U.S. Consumer Price Index, Consumer Price Index ex Food & Energy, Consumer Price Index Core, Consumer Price Index (MoM), EIA Crude Oil Stocks Change, 10-Year Note Auction, Monthly Budget Statement 

THURSDAY
ECB Interest Rate Decision, Producer Price Index, Producer Price Index ex Food & Energy, Initial Jobless Claims, Initial Jobless Claims 4-week average, Continuing Jobless Claims, EIA Natural Gas Storage Change, 4-Week Bill Auction, 30-Year Bond Auction, CFTC NC Net Positions

FRIDAY
Import Price Index (MoM), Import Price Index (YoY), Export Price Index (MoM), Export Price Index (YoY), Michigan Consumer Sentiment Index, Baker Hughes US Oil Rig Count
 



Source: Johns Hopkins CSSE

WHAT TO WATCH THIS WEEK

  • S&P 500 futures touched price limit down at 2819 down -148 points (-5%) Sunday evening as of this writing. The markets are spooked by corporate earnings slowing from coronavirus and the new oil trade war clash between prominent OPEC members Russia and Saudi Arabia.  
  • Oil futures prices crashed over -25% to their lowest levels since 2016 after Saudi Arabi said it plans to cut oil prices. The price cut was in response to OPEC members from Russia and Saudi Arabia not agreeing on oil production cuts. The threat is more supply on an oil market that has abundant supply and slowing demand.
  • How do central banks respond? The market is pricing significant interest rate cuts to improve sentiment about the drag on the economy from coronavirus. The Fed Funds futures market is pricing a 45% chance of a 100 basis point rate cut by September. Zero rates here we come.
  • Updates and reports on the spreading coronavirus. Total confirmed cases rise above 109965 vs. 87470  last week, with 3824 vs. 2990 deaths, as reported last week. We continue to monitor the coronavirus situation closely. The number of reported virus cases outside mainland China spooked markets last week, and risk-off continues in Sunday evening trade. 

Equities - A crazy week of rollercoaster action last week continues in Sunday evening trading. The S&P 500 futures are halted at overnight price limit down 2819 (-5%).

The markets are in a state of extreme volatility, given the rapidly progressing coronavirus epidemic, and now the Saudi and Russian oil trade war. Because no one has an information edge, traders are mainly trading on the latest headlines—and taking a "sell now" and "access later" mentality.

 

Many of the defensive sectors have been the bright spot - Utilities, Consumer Staples, Healthcare. See the below table.


Why is the market falling? Well, the coronavirus disruption puts pressure on corporate earnings that were priced for perfection. Remember, stock returns were stellar in 2019, and traders were looking for earnings growth in 2020.  

And now, we can add the Oil Trade War to our list of negative market factors. Many U.S. based oil and gas companies will default on debt payments with oil prices this low. 

SUNDAY EVENING EXTREME RISK OFF  MARKETS 

Source: TradingView

Energy -  We Now Have An Oil Trade War. WTI Oil fell sharply to lowest levels since 2016 when futures trading opened Sunday evening with U.S. crude futures sliding 24% to $31.10 a barrel. This is one of the most significant one-day swings ever in crude oil trading.

The declines came after Saudi Arabia said it was cutting oil prices. It slashed its popular medium crude by $7 a barrel to the U.S. The price cut is directed at taking market share from Russia, but will also have a direct impact on U.S. shale producing companies.

The price cut was in response to OPEC members from Russia and Saudi Arabia not agreeing on oil production cuts. The price cut is directed at taking market share from Russia.

U.S. oil and gas companies are feeling the pain from increased supply and lower prices. The lower prices and new soft oil demand caused by coronavirus delivers another blow to oil and gas companies.

Analysts say "possible dips in prices and oil business operational stress could see oil trading around $20". At a $20 level, we will see significant financial stress and declining production from U.S. shale companies. From a historical perspective, Brent oil traded at an all-time low of $9.55 a barrel in 1998. (Read More)

Source: TradingView


Interest Rates - In a surprising mid-meeting move last week, the U.S. central bank cut interest rates by 0.50% to a Fed Funds Target range of 1.0% to 1.25%. This is the first time the central bank had an emergency mid-meeting move since the 2008 financial crisis. 

And, the market reaction - "We Want More Cowbell." The markets have wiped out any optimism from the rate cut and are pricing in another 0.75% - 1.0% cut in the next six months. 

Many analysts recognize monetary policy cannot shelter markets from coronavirus and global supply chains, but it can shift sentiment. Many traders feel a rate cut will only be a temporary boost to markets. The science and data of coronavirus will be the ultimate driver of the market in the near term.


U.S.Treasuries Yields current to last week:
30-year yield 1.29% vs. 1.679%
10-year yield  0.495% vs. 1.156%
5-year yield 0.39% vs. 0.94% 
2-year yield 0.302% vs. 0.927% 
2-10 yield spread 0.187% vs. 0.229%

March Fed Meeting Rate Cut Probabilities:
The Fed Funds futures market is pricing an 83% chance of a 75 basis point cut, and 17% of rates going tp 0% at the next Fed meeting on March 18.

September Fed Meeting Rate Cut Probabilities:
The Fed Funds futures market is pricing a 45% chance of a 75 basis point cut, at the next Fed meeting on September 16, and a 54% chance of rates going to 0%.

The current  Fed Fund Target Rate is 1.0 - 1.25%.


Source: CME Group Fed Watch Tool


Agriculture Markets -  Focus will be on outside markets this week. Renewed fears of a slowdown in global trade due to coronavirus pressuring markets. The stock market sell-off and oil price collapse are factors pressuring grain and oilseed markets. Grain prices are fragile in Sunday evening trade( see below).


Source CME Group

An important headline a few weeks ago that did not get much attention is the White House administration renewed its jawboning that China must honor its 'phase 1' trade obligations. Some analysts are worried that the trade deal terms will not be fulfilled or renegotiated because of China's virus issues.   Read More

 

Volatility Index - CBOE Volatility Index or VIX closed at 41.94 Friday. Most of this reflects the scale and speed of the sell-off. Expect a push above 50 as the S&P 500 futures are locked limit down in Sunday night trade.

We are flat tail volatility trades at the moment but will be stalking for trade opportunities.
 

 
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TRADES WE'RE MONITORING

Top 6:

#1 Long 10-year U.S. Treasury futures (ZNM0) 
#2 Stalking Long Select Commodity Index Futures and Short US Dollar Index
#3 Eurodollar Options Tail Risk - EDM0 99.50/99.625 call spread, EDH0 99.00 calls (More)
#4 Long midstream Natural Gas and LNG names - Buying select names on pullbacks (1-2yr hold)
#5 Stalking Long VIX Futures and Index Options Volatility 
#6 Long Gold Futures and GLD ETF (GCH0) 

Liquidated at Profit Target Or Stopped Out Since the Last Update:
No Trades


This is not investment advice. Do Your Own Research.

 
TREND FOLLOWING PORTFOLIO

Transparent Index Trend Portfolio

There are 7 Long Positions and 15 Short Positions currently:

Current Long Positions:
US | TY | FV | TU | EU | JY | GC |

Current Short Positions:
ES | YM | CD | AD | SI | HG | CL | HO | RB | W | BO | SB | CT | LC | LH |


See Daily Trend Following Portfolio snapshot at www.futuresmag.com 


Subscribe to Transparent Index real-time signals. Indicators designed to have a strong relationship with the returns of a classic trend trading strategy. Featuring 5+ years of documented trading signals assessed every 1 minute of every trading day. Learn More 

 
ALGO TRADE EXECUTION

How Do Trade Execution Algorithms Add Value

Over the past decade, trading execution algorithms (aka “trade algos”) have become increasingly essential for traders of all shapes and sizes. And now, the key is not just the use of algorithms in trading but choosing the best ones to use.  Read More

 
RATES

Interest Rate Traders Forecasting 0% Rates 

As has been the case all week, futures driven higher on virus fears. Focus continues to be calls and call structures. Risk-off trade continues and our march to a zero-interest rate trade.

Definitely seeing a lot of trades that are taking profits off the table and staying in the game. The one straight up liquidation was the April call spreads. Paper paid 2.75 for that call spread LAST WEEK! Selling it out at 11 nets out a cool $20.6M profit. Not bad for a few day's work! Read More

 
TOP PROP TRADING COMPANIES

Top 40 Proprietary Trading Firms

Proprietary trading firms invest directly on behalf of the financial firm's trading account. Firms engage in proprietary trading because they have an "edge" or competitive advantage to produce returns that exceed traditional investment strategies.  Read More
 
WHAT WE'RE READING 

Saudi Arabia slashes April crude oil prices after OPEC’s supply pact collapsed (Reuters)
How Companies Are Quantifying the Impact of the Coronavirus (Barrons)
Autonomous Tractor is the Farm’s New Overlord (ManofMany)
Robinhood Goes Down On Historic Day For Stock Market (Morning Brew)
Fed Ready to Cut Rates Despite Doubt They Can Fix Virus Fallout (Bloomberg)
Bill Gates: Coronavirus may be ‘once-in-a-century pathogen we’ve been worried about’ (CNBC)
Did The Fed Just Reveal Its Plans For A Digital Dollar Replacement? (Zero Hedge)
Coronavirus Delivers Another Blow to Embattled Shale Drillers (WSJ)
What to expect from markets in 2020 (Bloomberg)
What VC Whales Are Doing In 2020 (Pitchbook)
The Bitcoin “halving” is coming in 2020; what does it mean? (Decrypt)
"Knowing When To Sell": Insights From Steve Cohen (Zero Hedge)
How to Meditate at Your Desk With Deepak Chopra (WSJ)

 
BREAKROOM

The 1918 flu and the lessons learned — or maybe not — for coronavirus

A history lesson and a great article from The Colorado Sun on what worked in the flu of 1918.

In Colorado, an estimated 7,500 “excess deaths,” or those beyond what a normal flu season might bring, occurred roughly from September of 1918 to January of 1919. 

One notable exception: the town of Gunnison. Authorities there almost entirely shut themselves off from the outside world, even though trains stopped there regularly. Not only did the town impose rules that helped it largely dodge the disease that ravaged other nearby rural areas, but it also became a case study for researchers.

“They allowed the trains to go through Gunnison, but nobody could get off. If you did get off, they put you in jail.”

About the Author

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