It's now deadly serious and Take the trades... Print
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Sunday, 22 March 2020 10:09

It's now deadly serious


Take the trades...

We are all now feeling the effects of Coronavirus. Lock downs in Italy and Spain have been followed by a voluntary version here in the UK. Like so many, I'm now scrambling to get some boat work finished before it becomes more than voluntary.

It's now deadly serious.

What is worse than the virus is the obvious effects it is having on international and local economies. GDP is set to plummet as hospitality collapses and next, will be dire unemployment numbers

But it's not just the virus.

A big storm is unfolding and the combined effects are highly likely to be much more disruptive to our way of life than 2008 ever was.

The Fed and the US Treasury crisis

Way back in September, the US Federal Reserve were caught up in a repo calamity. The Fed makes cash, in exchange for collateral) available in the interbank market when needed.

In September the Fed under estimated what was required. The banks and funds using the Fed needed double. A bank collapse was averted - just.

The problem is growing as 2020 rolls forward, the numbers are mind boggling.

From where does the cash come? From more and more QE. Where does QE come from? Selling more US Treasury Bonds. Who buys these bonds? We do, all of us, via our savings and pension funds, Central banks, etc., etc.

The US treasury market is huge, dwarfing all other markets. It is (was) one of the most liquid markets in the world. In times of strife money rushes into treasuries as 'safe haven' investments.

Last week was carnage, stock markets and precious metals were collapsing and institutional traders were caught in the headlights and several markets just froze.

One of which was the US treasury market. As these quotes from a sizable London bond fund demonstrates:

analysts and investors say the U.S. government-debt market is still not functioning properly.

"Liquidity is still atrocious," they were unable to take put the trades on as there simply was not enough - or any - liquidity: 

"We were just trying on Monday to trim a long position in the 30-year Treasury because it had moved so far in our favor, and were unable to get bids from several major dealers. We’ve never seen that before."

"But I’ve never seen that before, the inability to trade a U.S. Treasury."

A Perfect Storm

The third ingredient of this mix is the collapse of Opec. The Saudis and most of Opec need high oil prices to meet their expensive needs. Russia didn't want to cut production so the Saudis decided to slash the price to pick up share from the other Opec members.

Oil, now well under $30 a barrel, will kill off US shale producers and explorers which will create bankruptcies and corporate bond defaults. This may help the Saudis but it will take time and time they don't have as world demand for oil craters.

The Saudis are sitting on piles of US Treasuries as are the Chinese. Who are they going to sell to when the going gets tough?

Take the trades...


It's not all doom and gloom. There are some great trading opportunities in currencies as the USDCAD chart shows. Canada is vulnerable to fluctuations in the oil price, and did it fluctuate!

We, Traders Class members, caught the start of this trade before the Saudi oil hissy fit. It will likely become one of the biggest moves in FX this year.

We are also in this one:


Both charts kicked off from a TMEST entry and there are several more classic trade 'setups' as they ran.

More on these next time.

P.S. You can join Traders Class with the course of your choice. Email for details or click this link and get started now.