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Comments of the Day
05 February 2021
Video Commentary for February 4th 2021
Eoin Treacy's view
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: Wall Street firm with small caps leading, gold and precious metals weak, emerging markets steady, investors giving the benefit of the doubt to countries that are likely to come out of the pandemic quickest, bond yields continue to rise for these countries with Gilts breaking on the upside and the Dollar strengthening.
Email of the day - on the impact of currencies on investment returns
I'm a new subscriber and am massively enjoying the content, in particular your video commentary, thank you. Perhaps it just hasn't been touched on in the last few weeks since I joined but I wanted to ask about your views on Sterling, from the point of view of a UK based investor. I used to be 50/50 allocated, GBP/USD. A few months after Brexit with cable close to 1.20 I figured it was potentially the opportunity of a lifetime to get longer Sterling (in particular given I'm UK based). I changed my balance to 80/20 in favour of Sterling. It took a few years for this to feel like the right decision, but I'm happy I did it. Given my reporting ccy is GBP I don't see a lot of that gain unless I dollarize my returns.
Specifically, I would appreciate your views on: 1. What is your outlook for cable heading into 2021? 2. Do you think that a large part of this trade is potentially continued dollar weakness (USD rarely doing well in risk-on mode)? 3. You mentioned in the 3Feb commentary that most central banks tend to fight appreciation of their own currency. Certainly, that is true for the ECB and the SNB. What about the BOE at present? 4. Given the bulk of my investments are NON-GBP (major US funds, Japan, China, Global) what strategy would you suggest for accessing these sectors if one wanted to keep a sterling bias?
Eoin Treacy's view
Thank you for these questions and I am delighted you are enjoying the service. Since you are a new subscriber you might not be aware, I do a long-term review of assets and themes on the first Friday of every month. My aim is to ensure there is a predictable timetable for when long-term investment themes are covered in the written commentary outside of the weekly Big Picture audios/videos.
Here is a link to the last one and the next one will be tomorrow.
Reddit's Power to Push Stocks Down Is the Next Worry for Traders
This article by Yakob Peterseil for Bloomberg may be of interest to subscribers. Here is a section:
“Put buying en masse would add to dealers’ short put positioning and could create much more severe structural leverage imbalance to the downside,” said Cem Karsan, founder of Aegea Capital Management LLC and a former options market maker.
Karsan, who has 24,000 Twitter followers, floated the scenario on The Derivative podcast last week.
The Squeeze
Once an obscure dynamic in the market plumbing, gamma squeezes are the talk of both Wall Street and the amateur crowd following the GameStop drama.
It goes like this. When an investor buys a call, the dealer who sold the contract will typically hedge by purchasing the underlying stock. The more the latter rises toward the option’s strike price, the more shares the market maker will theoretically have to buy. That can supercharge stock prices as shares rise and dealers buy more.
And the dynamic works in reverse, too.
Dealers who have sold puts will hedge themselves by selling the underlying shares. As the price drops toward the option’s strike, they will sell more and more.
Eoin Treacy's view
Mobs are emotional, extremely aggressive, thrive on contradiction but they are also fickle. They can look like the strongest army in the world until they lose cohesion. Then they fall apart and turn into the weakest. Mobs thrive as long as they are growing and the reason for that growth is still compelling. As soon as it ends, they dissolve quickly. As GameStop’s mob dissolves it might be some time for a crowd to coalesce around a new idea. There are plenty of candidates from biotech to silver to micro-caps and cryptocurrencies.
Gold Plunges the Most in Four Weeks With Dollar Extending Gains
This article by Yvonne Yue Li for Bloomberg may be of interest to subscribers. Here is a section:
“Looks like there’s some liquidation so far this morning,” said Tai Wong, head of metals derivatives trading at BMO Capital Markets. “The dollar is slowly grinding higher, 10-year Treasury yields are back up. Longs are very disappointed that gold never broke above key resistance at $1,860-70 even as silver soared.”
Bullion for immediate delivery fell 2.4% to $1,789.88 an ounce at 11:16 a.m. in New York. The metal dropped as much as 2.7%, the most since Jan. 8. Spot silver slid 2.7% while platinum and palladium also declined.
The wild ride in silver fueled partly by retail investors is abating for now. Last week, posts on Reddit’s WallStreetBets forum initially called for a “short squeeze” of the metal, and that snowballed into a buying frenzy through exchange-traded funds and physical markets. But sentiment shifted after CME Group raised margins, causing prices to swiftly decline, and the volatility is being scrutinized by U.S. regulators.
Eoin Treacy's view
The demand for gold from those who were buying as a hedge against calamity is abating and that has contributed to the correction which began in August and continues today. Gold dropped below the $1800 level and is now testing the low from back in December. A clear upward dynamic will be required to signal a return to demand dominance.
Eoin's personal portfolio - stop triggered on hedge position
Eoin Treacy's view
One of the most commonly asked questions by subscribers is how to find details of my open traders. In an effort to make it easier I will simply repost the latest summary daily until there is a change.
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