In Shakespeare's tragedy Julius Caesar, the soothsayer warned Caesar that his life was in danger as he may be assassinated by a group of conspirators when March 15, the ides of March, rolled around. I'm not entirely sure if Shakespeare was an investor in the 1600s, but I think he was definitely onto something. He certainly coined a saying that is relevant for investors -- March is always a tricky month to dabble in the markets. And 2018 was a great example of that seasonality. Ironically enough, March is an important month, as Equity and Index Futures and Options expire, an event known as triple-witching, that can cause some violent changes in direction before and after the event.
Adding another layer of irony, March 19 is when the FOMC meeting takes place -- a key meeting where Fed Powell will outline the path for balance sheet normalization. Yesterday on the second day of his semi-annual Humphrey Hawkins Congressional testimony, the Fed suggested that balance sheet runoff program would end by the third quarter 2019. By Q319, Fed's assets will likely be around $3.7-$3.8 trillion with bank reserves $1.3-$1.4 trillion (well above the Fed's soft target of $1 trillion). Needless to say, stay tuned, a lot of action and volatility can occur in March. With the S&P 500 trading 3.5% off all-time highs and Volatility ($VIX) back to all-time lows, it seems the risk-reward is a bit skewed to a negative outcome.
This week U.S. Trade Representative Lighthizer put a dampener on all of President Trump's hard work of tweeting "talks are going very very well" when he implied that a deal was nowhere as close as implied, as both sides still didn't see eye to eye on key issues. It seems he wants to go all the way, whether Trump will or can is another matter.
Given the loss of political capital over the year, Trump is much more desperate to take a win, any win, to get markets higher and further his chances of being re-elected. China knows this, so they are probably just throwing a trillion here and there promising to buy more stuff. After all, all they need to do is print more money. As of now, they are due to meet at the end of March, but no firm date is set.
The PBOC flooded the market with 4.64 trillion yuan in January in front of China's Total Social Financing; a u-turn from the deleveraging of the past year. Despite this record injection, China's Manufacturing index in February fell below 50, dropping to 49.2 vs 49.5 estimate. The new export orders fell to 45.2 from 46.9, indicating a weak external demand picture. Even the non-Manufacturing PMI gauge fell to 54.3 from 54.7 in January. Dare I wonder, what would those numbers be if China had not injected steroids into the markets in January!
To surmise, March will be a tricky month, with a possible selloff on or around the March 15 following expiration. Timing this is hard given the delta and gamma hedging tactics in play. Banks with short options, have to keep buying and selling around key strikes where they hold positions to be risk neutral. Markets can often be pinned around key strikes, revealing the true nature of markets post expiration. Since none of us possess a crystal ball, rather than pin-point an exact date, it is more prudent to decide allocations based on where the market is trading and the risk-reward it presents.
Corporate buybacks have also been a big positive influence on stocks, as companies came back to buy their stock following Q418 earnings. According to Nomura, by middle of March, about 75% of S&P 500 corporate will have entered their black-out period (window where they cannot buy any more stock).
Regrettably, despite the physical tightness in copper and oil, they too will be victim to any global market selloff or "de-risking". Copper is now back up to the top end of its trading range of $5800-$6400/tonne for the past seven months. It is a market to buy on dips, perhaps not to chase today.
The closer oil gets to $70/bbl Brent, the more we can sense the pressure from Trump requesting OPEC to take their foot off the pedal. OPEC is stuck, as some of its key players would be happier with oil around $70-80/bbl, some even needing $90/bbl to justify their budget deficit. Point of political contention no doubt. The market has cleaned up, as about 1.2 million barrels per day has been taken out over the past few months.
The next move from here is more uncertain, with risk to the downside. It is best to be flat and sit on the sidelines than to be invested for the sake of being invested.
