Wednesday, May 27, 2015

The yen breaks out

For the first time in what seems like aeons, there's been some intersting price action in the markets with which Macro Man has been most engaged.   The dollar's been on a rip the last few days, though somewhat surprisingly (given the plethora of yet more Greek worries), the best-looking chart is USD/JPY.

Yesterday the pair broke through the highs of last December and this March, signalling the end of the recent pennant-type formation and arguing (or is that auguring?) for a sharp move higher.  Somewhat to your author's chagrin, he had been running a tiny short against a few of the other positions in his book; however, the market has spoken, and he has listened, stopping out on Tuesday.


The explosion higher was a bit bemusing from his perch, insofar as there was little confirmation from fixed income or equities (with which USD/JPY has traditionally been correlated), and the magnitude of the daily change was substantially higher than  that in the euro, apparently eliminating the Greek nonsense as a raison d'etre for the rally.   Occam's Razor would suggest that there were a load of buy stops/signals from barriers and models that triggered with the break of the previous high, which is as good an explanation as any.

While it is tempting to pull the old "stop and reverse" - and Macro Man may end up doing so eventually- he finds it difficult to envisage building a large structural position at this juncture.  As noted previously, at current levels USD/JPY is quite stretched from its PPP equilibrium, and while there's no guarantee that it will snap back imminently, it's rarely been a wise investment decision to buy USD/JPY 15% over fair value.   To be sure, Japan's current account dynamics are different now from the past several decades; nevertheless, if and when we get a bit of a financial shock, Macro Man would expect USD/JPY to repeat its usual trick of going up the escalator and down the lift shaft.

Of course, it would be easier to take comfort in long USD/JPY if US rates were rising, and to be fair they have a bit at the long end.   But short ends are still stuck hitting the Snooz button repeatedly, and your author would prefer to see them wake up before getting fully engaged with the narrative.

Therefore, alas, he is in watch and wait mode, and and length that he eventually accedes to is likely to be tactical in nature.  For now, he's happy to concede the tub-thumping stage to the macro tourists who've never been involved during a USD/JPY "lift shaft" moment.  For better or for worse, however, they seem to have the firepower to withstand large and lengthy drawdowns of the type required to do "proper" macro, unlike many modern global macro establishments where the mantra is loss avoidance uber alles.  It's a funny old world sometimes...

Thursday, May 21, 2015

Number-crunching the FX fixing fines

Behind the numbers in the FX fixing scandal, which represented a "brazen 'heads I win, tails you lose' scheme", according to New York State superintendent of financial services Benjamin Lawsky.

0   Transaction costs paid by users (e.g., customers) of the fix to ensure getting filled at a rate unknowable in advance on potentially unlimited size

0   Allegations of wrong-doing levied against some senior FX traders at banks not involved in the recent settlement, who have nevertheless been suspended from their jobs for more than a year

0   Charges of currency manipulation against sovereign authorities who, in the not-too-distant past, used to execute orders aggressively in pairs not involving their home currency, in order to move the price

0   Amount of the fine, as far as Macro Man can determine, paid by the Hildebrand family after Mrs. Hildebrand cleared CHF 75,000 on a PA trade when Mr. Hildebrand implemented the 1.20 floor in EUR/CHF

1  Price, in pennies, that some HFT donut sold Accenture at during the Flash Crash

1   Number of electronic trading entities charged with wrongdoing in relation to the Flash Crash

1   Losing days out of 1,238 that HFT firm Virtu Financial admitted to losing money in its IPO prospectus last year

5   Banks fined by US, UK, and Swiss authorities

5,700,000,000   Fine, in dollars, levied against these banks

n + 1  The equilibrium number of regulators to claim jurisdiction and levy a fine, relative to the number who have already done so

countless  The number of entities harmed by the FX fix, according to the US Attorney General.   This is possibly because the authorities have not attempted to count or quantify the actual cost to society, thus rendering the analysis literally count-less

Listen, no one is saying that everyone involved was a white knight, because they weren't.   But amongst industry practitioners, it was understood that the minute or two around the fix was Wild West territory, an understanding that existed years if not decades before the period of wrong-doing covered by the settlement.

Moreover, fixings did not systematically skew exchange rates persistently in one direction or another; rather, the impact, insofar as there was one, was simply to shift a given rate a few basis points from where it otherwise would have been for a few minutes, a shift that was usually driven by underlying fixing flow.  The medium-term, let alone long-term, impact of these activities was negligible.

It is therefore bemusing to see regulators use banks as an ATM (geddit?!?!?!) to withdraw cash for behaviour that may seem unsavoury but was at least partially required to ensure that clients were able to get filled at the fixing rate.   Meanwhile, market behaviour that seems substantially worse, and in regulated markets, continues to go unpunished.

Wednesday, May 20, 2015

A multiple choice question

So the ECB's recent revelation that they will frontload QE purchases ahead of the illiquid summer period represents:

a) A sensible precaution  given the European proclivity to head to the beach en masse in August;

b) A push-back against recent weakness in European govvies;

c) A sign of concern that the euro has recouped a fair slug of this year's losses

d) An easy windfall for anyone fortunate enough to have been present when Benoit Coeure let the cat out of the bag to a private audience on Monday night;

e) An opportunity for regulators to demonstrate that concepts like "privileged information" and "market manipulation" apply equally to policy-makers as they do private participants

Friday, May 15, 2015

Which of these things is not like the others?

1) The quarterly annualized run-rate of retail sales has been at its worst level since the crisis:




2) Forward earnings estimates have stagnated for the last year




3)  The SPX makes a new all-time closing high.

Yeah, yeah, the Fed's on hold, ECB QE, blah blah blah.  But unless one literally believes that a zero discount rate renders the equilibrium price of financial assets to be infinity, it is reasonable to ask at what point will equity investors quit letting Janet Yellen do all their thinking for them?

Wednesday, May 13, 2015

20 Questions

1) How high will Bund yields go in this rout?

2) Will Schatz yields go positive again this year?

3) The Shanghai Comp is currently 4400.  Which comes first:  3000 or 6000?

4) Does anyone really think the Fed would execute the first rate hike in a "broken" (e.g., non-quarterly) month?

5) Does Ben Bernanke really think he's fooling anyone by claiming he went to Citadel to avoid the appearance of impropriety that might go along with working for a Fed-regulated institution?

6)  If Tom Brady gets suspended 4 games for Deflategate, how many FOMC meetings will Janet Yellen be suspended for when it turns out she's been feeding leaks to Jon Hilsenrath?

7) How did FX go from so interesting to so brutal so quickly?

8)  What comes first: BOE rate hike or a Tory Cabinet reshuffle?

9) If you had to buy and hold any asset for the next three years, what would it be?

10) Which comes first in prompt crude:  $40 or $85?

11) Is there any prospect of macro becoming interesting to investors until equities dump?

12) Which comes first: SPX 1800 or 2500?

13) What does it say about the future of society when retirees spend an average of an hour per day on the weekends reading and teenagers spend 4 minutes (versus 56 minutes playing computer games?)

14) Will the long-awaited pickup in US activity emerge in the data over the next several weeks?

15) Will Greece be part of the Eurozone by the end of 2016?

16)  Can America really do no better than the Bush-Clinton Industrial Complex in trawling for 2016 Presidential candidates?

17) What's the scariest thing out there that no one is talking about?

18) Barca, Juve, or Real?

19) Which comes first: DAX 13,000 or IBEX 8000?  (Both currently ~11,400)

20) Why do American school concerts require a 30 minute coda where a gaggle of a certain type of kid delivers Shakespeare-length soliloquies?

Friday, May 08, 2015

Spring has sprung

Suddenly, the long cold winter appears to be but a distant memory.   Spring is in the air- and not just because of the warm sunny weather we're getting in the northeastern United States. 

The Tories' shock election win in the UK will allow us to finally determine whether David Cameron is a "true" Conservative or merely a wet blanket with or without a strange-bedfellow coalition partner.  Certainly the FTSE and sterling (as measured by EUR/GBP) are rejoicing.  It's important to remember, though, that spring also brings hay fever to unlucky allergy sufferers.   We now face the prospect of one, or perhaps two vital referenda in the next few years- in the UK on EU membership, and potentially in Scotland (again) on independence.   Still, it's too early to begin pricing that stuff into UK assets, so British readers are invited to knock back a glass or two of Pimm's and lemonade as they brace for their first Tory government in 18 years.

Spring, too, has arrived in the US payroll data, which rebounded smartly to an in-line 223k.   To be sure, the revisions for March were poor (down to 85k), but Macro Man isn't sure that matters too much- a poor Q1 has now been solidly baked in the cake, as it were.  The significant thing is that the first hard data of Q2 has brought about the long-awaited rebound....the key now, of course, is for other data to follow suit.

As for markets, there are at least some signs that we will revert back to "as you were."   Yesterday's price action in Bunds, which has been the nexus of CTA pain, carried more than a faint whiff of capitulation, as depicted by the "hammer" formation on the candle chart:



Your author is still treading fairly gingerly, while considering a career switch to a UK political pollster.  Any job where you can be that wrong and remain employed amounts to little more than a sinecure...

Thursday, May 07, 2015

Unappetizing options

Hard as it is to believe, election day in the UK is finally here.  The timing is particularly poignant for Macro Man, as it was on the heels of the last one that he boarded a plane for the USA, bidding a fond adieu to both the UK and financial blogging.  Suffice to say that the past five years haven't gone quite as smoothly as either David Cameron or many macro men would have liked; while naive (or cynical?) buyers of risky assets regardless of price have fared well, one does wonder if they, too, will face their comeuppance one day.

Contrary to Macro Man's expectation of a few weeks ago, the race now looks too close to call.  Small wonder, given the unappetizing fare on offer; given the choice between a turd sandwich, ceviche of industrial waste, or plutonium sushi, what would YOU order off the menu?  It seems fair to assume, however, that between a choice of the status quo and "Red Ed" Millbean, sterling markets would plump for the former every time.

An equally unpalatable choice can be found in which formerly profitable position you'd like to be holding.  The clear winner of the current market election is the pink flamingo, which has sent a cascade of red ink across holders of bonds, European equities, euro and oil shorts, etc.  Although Yellen's equity comments yesterday could have had a bigger impact, it's also probably worth noting that Spooz have legged other indices this year, reflecting to some degree at least relative positioning.

Macro Man has been intrigued to observe, however, that despite all of this kerfuffle the front end of the curve has been relatively well behaved.   Although one might expect the whites in particular to drill down to the data and be relatively immune to the slings and arrows of outrageous fortune, ongoing data disappointments from the US have been unable to propel EDZ5 beyond where it was at half a second past 8.30 am on the last payroll day.   Further out, things are rolling over just a bit...Macro Man's EDZ5/M6 steepener has come back from the dead:




Of course, all of this could simply be a "sell in May"/pre payroll adjustment/CTA beatdown that will be swiftly forgotten come payrolls or the next dodgy Greek development or some other shiny headline to distract the market magpies.   Then again, the punishment of apparently clear themes and back 'n' fill price action has been a regular feature of macro markets for the vast majority of David Cameron's five years in Downing Street.   Macro Man could almost (but not quite) countenance voting Gordon Brown back in if it meant an end to ZIRP world and a return to normal markets!