Monday, March 19, 2007
Have you ever had one of those days where nothing seems to work? Macro Man has seen an irritating drawdown over the past 24 trading hours as his risky asset longs have gone down and his risky asset shorts have rallied strongly. What gives?
The A-B-C correction in US equities appears to be proceeding in line with expectations. The low to date has been above the ideal target range, and as recently as, uh, the last trading day, price action was looking ropy.
Where Macro Man has come-a-cropper is the short risky asset overlay. The currency trades have performed abysmally, thanks in part to the gap in CEE-4 caused by the Slovak reval. Yet the Aussie dollar is near decade highs again, having gone up 3c in (literally) a straight line.
Similarly, the Nikkei could have posted some devastating price action last night. Instead, it rebounded strongly, adding fuel to the "carry is back, baby!" fire. Macro Man had thought that the combination of SPX price action and another China rate hike might have been sufficient to send Japanese stocks lower, but clearly this has not been the case.
Is Macro Man missing something? Can risk-asset underperformance really be ringfenced to only impact the US? Clearly the recent price action is suggesting that this is a possibility. However, given the very strong correlation of risk asset returns over the past several years, Macro Man remains wary.
He'll leave a stop loss in AUD/CHF at 0.9760 for risk management purposes, but he still thinks that the expected further weakness in US equities should reverberate cross other asset classes. If tonight's NAHB release doesn't do the trick, perhaps a hawkish Fed tomorrow will get the job done.