While We Wait: 4 New Trades

At JF we continue to re-fund and restructure our back end.

Whilst we finish this process (and stay flat over both ECB and BoE rate decisions this afternoon) here are 4 possible trades over a number of timeframes that we have been mulling over. Do not trade these, they are simply discussion points.

1. Buy Put on Aus Banks / Long Term / High RR

Whilst much of the impending EZ contagion is now accounted for (particularly optimistic analysts report that all but armageddon is priced in), tail-risk scenarios remain under wraps.

Australian banks are heavily exposed to their European counterparts, 2nd only to Korea outside Europe as a % of GDP, and if spreads widen as per 2007/8 we will see a lagged effect across the pond(s). Puts remain cheap as pricing methods invariably cannot model fat tails.

But while the economic impact from reduction in credit from European banks will hit Eastern Europe first, the contagion arising from a shock to funding costs could spread to the global banking system.

"A contraction in bank credit will likely affect foreign countries where European banks have been active lenders. Foreign lending is likely to retreat first, before domestic loans, as regulators increase their pressures to maintain domestic lending. Eastern European economies, where European banks have been active over the past few years, will likely bear the strongest impact.

Contagion risk would affect those banks which have been lending the most money to Europe and that own European assets. US banks have been under the spotlight for their European exposure, and their credit spreads have been widening as a result of these concerns. However, it is banks in Japan and Australia which have been doing the most lending across Europe, as percentage of GDP, as shown below – and Asian banks currently trade tighter than their peers in US and Europe, unlike during the 2008 crisis. " Alberto Gallo - RBS

2. Sell the NZD/USD up to 0.7840 / Very Short Term / Low RR
A technically motivated trade, we see from the chart below that the market encounters resistance (a wave of sellers) in and around the 0.7840 level.
Crucially, however, we must have in mind the wider risk implications of being Long USD, and we would allow this trade to sit in amongst the others, hedged and watched very closely.

3. Buy the ES-Gold Basis into Widenings / Short Term / Med RR

We mentioned this in an earlier post. The difference in (normalised) price between Gold and the ES (S&P futures) continues to expand and contract fairly rhythmically. Indeed, had an investor taken the trade when we suggested (at considerable divergence) they would have made and instant 2% unleveraged.

The attraction to a long Gold and short Index position is also fundamentally sound. Gold is underpriced, in our view, as a safe asset in the context of a crisis. But the indices has blindly rallied on the faintest whiff of a rumour. Solid conviction on this one.

4. Short the FTSE into Xmas / Med Term / Med RR
Will it won't it? The Santa rally is likely in progress as we speak, widespread optimism and head-sand burying, and this presents and opportunity for the value investor. We remain only slightly more bearish than consensus, expecting a weak January and an awful March/Apr. We will take small positions into the highs, hoping to average over the peak, building up to a sizeable short into the New Year.

Resolution: Stick to one's guns.