Knowing Risks Doesn’t Mean We Know The Downside

We have to circle back to the two major super-themes that are ongoing. Most important is the commodity collapse. Brent broke $30 today for the first time in 12 years after an early rally evaporated in moments after large unexpected builds in US gasoline and distillate supplies. Aussie jobs are due next (more detail below).   There are currently 5 Premium trades crrently in progress. A new Premium video is out, recorded during the release of today's EIA curde inventories, highlighting the one-sided flow in commodities, FX and equities dictated by oil prices. Viewers of the video will detect the first Death Cross of its kind since January 2000 in the chart posted at 26:58 seconds of the 30 mins video.

We have witnessed a 15-year bull market in commodities. It's been 25-years since there was a true bust in resource prices. It's something most market participants have never seen or can't remember. A super-cycle deserves a super-bust and that's the underlying theme that's cutting the legs out of commodity-producing emerging markets and developed markets.

The second theme ties into the first. It's that markets have an overly US-centric view and that includes the Fed. The Fed's models underestimate how intertwined global markets are and the potential for the commodity bust to infect and damage the global economy. They may also underestimate how at risk the bond market is to the double-whammy of higher rates and collapsing resource prices.

One of the events that got almost no attention on Tuesday was a note from Moody's where they forecast the default rate on high yield bonds will rise to 4.4% from 3.2%. Moody's subsequently cut $15B of Duke Energy bonds. It's not only oil as S&P downgraded Tata Steel as well. More downgrades are undoubtedly coming.

The interaction between the commodity collapse, bond market default risk and global central banks is the ultimate theme and right now we're seeing a vote of no confidence. That's why the pain could continue.

The economic data in a situation like that is always the laggard. That will be true in Australia where jobs numbers have continued to show robust hiring. The December report is due at 0030 GMT and expected to show a decline of 10K jobs and unemployment rising to 5.9% from 5.8%. Keep an eye on the full-time/part-time breakdown.

Look for trading opportunities in a downward skew. An strong number will only give the Aussie a small boost while weak data could lead to another harsh decline.