Friday, January 05, 2007

Confusion de confusiones

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.

Good luck!


HFT said...

I think the fast-money types are unloading high-beta worldwide in anticipation of a Japanese rate hike , quite similar to last spring's---- which triggered an unwinding of some of the carry trade

any thoughts ?

Macro Man said...

Well......there was some mumbling about that this morning, but I have to say that I am not convinced. Even if the BOK hikes rates by 25 or even 100 basis points, Japan will still have by far the lowest nominal rate amongst investable countries. As such, it is far from clear to me that this should or would necessitate an unwind of carry trades, simply because the yen will remain the best carry currency out there.

The case of Switzerland is perhaps instructive; when the SNB tightened rates in spring 2004 (from 0.25%, the current level of Japanese rates), the Swissie had a nice little rally, taking EUR/CHF to 1.50. 175 basis points later, EUR/CHF recently reached its highest point since 1999.

It seems to me that the unwinding is primarily a technical phenomenon, insofar as parabolic rises are often swiftly followed by parabolic declines, often without any discernible catalyst.

NZD/JPY rallied from 70 to 84 with virtually no pullback; USD/TRY fell from 1.65 to 1.40 with only very modest pullbacks. Is it any wonder that with the new year beginning, the market complacent (in terms of expecting new flows into EM + carry strategies), and equities suddenly looking jittery, that the parabolic rise in most things risky (commodities obviously rolled over earlier) has left traders quick to take risk off the table?

One thing I will agree with, however: I suspect that most of the sales (in EM,at least) have come from fast-ish money.

HFT said...

Thanks for your thoughts

also , hearing big Boston accounts selling drillers like mad (into tech ).... I think the groups a buy as the selling dries up

Banker said...

I agree with you Macro man, I am very confused. After Friday's employment report, which I read as being very strong, stocks sell off (i guess they were looking for a rate cut) U.S. interest rate futures end the day grinding higher (on the back of stocks?) and EM currencies end the day very weak. I have very little confidence in my views right now.

Macro Man said...

This is starting to remind me a bit of January 2005, when the dollar unexpectedly caught a bid and EM had a nasty wobble in the early to middle parts of the month. In the second half of Jan 05, the dollar kept rallying, but EM reversed course and also rose strongly.

Ultimately, a significant slowdown in US growth can only be bad for EM assets, in my view, as I remain highly sceptical of the global de-coupling argument. As such, Friday's number was (or should have been) a positive for growth-sensitive EM and bearish for overvalued developed market . That stuff like EUR/TRY went up on the day will ultimately prove to be a nice entry point absent a substantial sell-off in equities.

And if we get that, it will be a nice entry point for an aggressive long stock position.

For the time being, however, it's probably best to let the chips fall where they may, then look to pick 'em up at nice levels. Frankly, Macro Man has been so busy with his real portfolio that he hasn't had as much time as he'd like for the blog. Hopefully next week will be slightly less manic, but I'm not counting on it...