Friday, January 05, 2007
Confused yet? Join the club. Risky assets are struggling to decide whether they want to sell off or stabilize, other than commodities, which just look horrible.
Following Wednesday's price action, it looked for all the world like stocks, EM, and high yielding currencies would all get whacked. While the latter two have suffered corrections, US and European equities have put in quite a decent show.
S&P futures, which have a 100% record of getting the market wrong this week (pre-open trading versus the eventual close), are currently lower, perhaps suggesting a surprising rally in stocks is in the offing?
Macro Man must admit to having a relatively low degree of confidence at the moment. The yen is finally correcting, though at this point it is unclear whether this is yet another temporary dip in JPY crosses or something more meaningful.
Certainly the price action in commodities is disturbing- oil just looks horrible. The decision to jettison the OIH position was the correct one and has left the portfolio with a (small) negative oil beta via the June Brent puts. Another couple of bucks lower in crude, and those may start to get interesting.
To top it all off, today sees the release of nonfarm payrolls in the US. The ADP figure suggests that a weak number is in the offing. Ancillary indicators (consumer confidence, ISM, etc.), on the other hand, predict a solid figure. Frankly, Macro Man has no strong feel for today's data. Moreover, he is having difficulty deciding what the market reaction would be.
Bonds traded horribly on Tuesday and Wednesday but than put in an extremely strong rally yesterday- the signals there are just too inconsistent to believe. Macro Man has a sneaky suspicion that the market is hoping for a weak number, which is troubling given that the currency positions need one, too. 2007 has started inauspiciously in macro-land, as December's darlings have turned in January's ugly stepsisters. Many funds are already starting at pretty nasty month-to-date p/l's given the moves in EM, commodities, and FX carry.
Confidence in the short dollar trade is waning rapidly, and Macro Man prefers to lighten up exposure on dollar weakness. He therefore will sell out his long euro cash position at 1.3190, which we could just about get to in the event of a weak NFP. He retains the downside stop at 1.2970 as well.