Peter's Perspective
31st May 2016 by Tama Churchouse

June’s a BIG month… consider this short-term trade.

I was talking to a couple of senior investment bank sales guys last Saturday evening. The party was great, but the general mood on financial desks across Hong Kong is sombre to say the least.


Broadly speaking, “nobody is doing anything”. Clients are sitting tight. Traders likewise.

Volumes are down.

For pretty much all markets in Australasia, Middle East, eastern Europe as well as Latin America trading volumes are at least 10% below their three month averages.

Volumes have crashed from their 2015 highs in China and Hong Kong.

It’s a seriously tough environment to make a buck.

If you’re a sales guy or a trader, then you want action. You want your clients to be doing something… anything. It doesn’t really matter if they are buying or selling.

You want clients to have a reason to do business with you. And you want to be able to give clients a reason to trade, to invest, to divest. There’s only so many times you can pick up the phone with nothing to say.

There is a short-term ray of light however, and that is the month of June.

It’s going to be busy…

Getting an early start on June… India, one of the brighter stars in the emerging market universe, is printing their GDP numbers this afternoon.

(See the February edition of The Churchouse LetterThe Last of the Seven-Percenter’s” for our India recommendation… up 7.5%).

Both the ECB and OPEC meet in Vienna on the 2nd. While Draghi has surprised markets before, many are more interested in what lies ahead, depending on the dovishness of his tone.

OPEC looks… turbulent, with a new Saudi oil minister, Venezuela struggling to feed itself and Iran ramping up production to almost pre-sanction levels.

We’ve got U.S. payrolls on the 3rd. Then there is consumer spending, house prices, inflation data.

There’s a Fed meeting and press conference on the 15th. And then the next day the Bank of Japan has theirs.

Prime Minister Abe looks to be on the verge of postponing the proposed boost to sales tax. The Bank of Japan seems against raising it.

Japan is also publishing its industrial output and consumer spending numbers.

Expectations on the Fed have already shifted dramatically. Two weeks ago the implied probability of a June rate hike was just 4%. Today it’s 30%.

We have been surprised by the sudden shift in Fed tone although the impact on markets has been pretty limited thus far… certainly nothing comparable to the ‘Taper Tantrum’ of 2013 when money stampeded out of the bond market.

Now we have the People’s Bank of China quietly shifting the benchmark rate for the Rmb lower.

The initial surprise moves in August last year by the PBOC sent global markets into a tailspin. What will be the reaction nine months on?

As for Brexit? We’ve got the U.K. referendum on Brexit on the 23rd. Mark it on your calendars.

It’s still too close to call and the gap between the leave and remain camps has narrowed to an imperceptible difference.

The Bloomberg Composite EU referendum tracker has the leave vote ahead by 1% (with 12% ‘Don’t Know’).

What to do?

Given how busy the calendar is over the next 30 days, it could be worth looking to take a short-term view on volatility.

The VIX volatility index (shown below) reflects the market’s view on future volatility derived from options traded on the Chicago Board Options Exchange (CBOE).

It doesn’t appear that markets are particularly rattled right now…

Vix Volatility Index 1 year historical compared to average - May 2015-2016.

One way of going long volatility is to buy a tradeable volatility product. The iPath S&P 500 VIX Short-Term Futures ETN (VXX US) is an exchange traded note (ETN) linked to short-term VIX futures contracts.


This can’t be over-emphasised enough.

This ETN is constantly rolling over VIX futures contracts. The problem with this is that the VIX futures curve is upward sloping (or in ‘contango’).

This means the futures prices are higher than the spot price.

The ETN buys futures, holds them, the price of those futures tends towards the spot price (which is lower) upon which they are sold, and new futures contracts (at a higher price) are purchased.

Effectively you are constantly buying high and selling low.

Clearly, this is not a long-term strategy for success.

Having said that, if you’d held this ETN from January to mid-February you’d have seen a 56% return. And last August when China depreciated their currency, you saw a 95% gain in just a couple of weeks.

But remember, this is a short-term trade, not a long-term investment.

Good investing,


P.S. Later this week the next edition of The Churchouse Letter will be taking a look at income… more specifically dividends – we are answering the question of whether or not you can find dividend superstars in Asia for your portfolio.

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