Mr. Powell and the Fed team delivered as we expected yesterday,(without the move in the USD we were looking for).  However he did confirm our thoughts that the Fed is happy with the domestic economy and is focused on raising rates while not being so aggressive as to hurt growth.  The median forecast for the Fed officials is for 2 more hikes this year, making for a total of 4 in 2018.  This was more aggressive than the market had priced in and at the time of writing, the market seems to be handling the new information well with European stock markets down around  .5%.  The other interesting news that came out this morning is that data on the Chinese economy tells a tale of a softening economy.  Chinese retail sales and industrial output were lower than wat the market was looking for. There was a comment on Bloomberg this morning, that the Fed today is different than we have experienced with Ms. Yellen in charge.  Mr. Powell is straight forward and will push toward a normalization of rates, even if it causes a bit of strain for markets. 

Next up is the ECB, we are in the camp that the ECB will need to be patient in adjusting the QE program.  It is interesting that the market is focused on whether the news of a change will come in June or July….  We will lay low on the risk front until we get the meeting today out of the way and see how things look.  As we stated yesterday we like being long volatility( Fed actions should help) we stay with our long gold position.  We were stopped on our long USD position at breakeven, which is a bit frustrating as the call on a more aggressive Fed was correct.  If we are correct about the ECB then we will get a chance to enter the position again.

We are watching closely to see what kind of impact the new Fed approach will have on EM markets as well as the Credit markets.  The stock markets initial reaction was as to be expected, the question will be how will the markets in the  U.S. handle any further bad news given we are near all time highs and there is a new sheriff in town at the Fed.

Worth noting:

There were two very big trades done in the futures markets recently, one was a very large buyer of Call options on the VIX contract.  These low price options would give a very high return should we see a spike in volatility as we did back in February when the VIX traded up to 37% from 13% in one day.

The second big trade that the market is focused on a trade done in the Call options on the 10 year treasury future.  A trader/institution spent 75 million USD to buy almost 200,000 call options.  The trade will make money if we see yields drop dramatically between now and August.

These trades could be a hedge or a speculative punt.  We will never know most likely, but it is interesting to note that with trade wars, central banks raising rates and shrinking balance sheets, inflation showing up, EM markets struggling along with political uncertainty in various spots that someone is putting their money into their view or to manage an expected market event.

September VIX contract, Volatility picking up the past couple of sessions

S&P 500 CFD:  looking toppish.  Strong economy, rates higher…. The tug of war is on

TickerDate OpenedEntry PriceStopTarget PriceCurrent Price
Long XAUUSD(Gold)26/4131712801365 and 14001304.82
Long Brent31/577.5873.00Switch from July to August contract – Target 8076.80

Visit our Position Tracker to look at all of our realized trades:

– Mark W

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