Tuesday, April 24, 2007

Going bananas

Markets feel strangely nervous today, and it's hard to pinpoint why. Sure, Target admitted that they'll miss their April sales forecasts, and of course, S&P noted that the subprime mess hasn't exactly improved recently. But still, those factors don't really explain the jitters being felt across asset markets today.

Take the FX carry trade (no, really- please take it!) The Aussie dollar in particular has been hit hard overnight on the release of much lower than expected CPI (0.1% q/q instead of the expected 0.6%.) This has obliterated any hopes for a near term rate hike, so investors will need to content themselves with the 6.4% they are currently earning on 3 month cash. Clear, a reason to abandon ship!

There's been some suggestion that the low print in Aussie CPI was all down to bananas, and that stripping out the monkey food would yield a quarterly reading more in line with the consensus. Perhaps...but it does appear that Aussie inflation, both with and without food, has peaked and is heading lower. That the AUD has been smashed on this stands in stark contrast with the NZD's reaction to a lowball print in New Zealand inflation last week. That the dip in AUD has not been gratefully scooped up as the dip in kiwi was last week may indicate that the carry trade is overdue for a dip.

In Spain, meanwhile, the IBEX has been pummelled lower, with property company Astroc leabing the charge lower. The shares of the Valencia-based developer have cratered in recent days with little apparent catalyst. Could it be ECB policy tightening is finally starting to bite? Or is it just that balmy weather in the UK has encouraged sun-loving Brits to abandon Spanish property in favour of the North Atlantic Riviera? Perhaps Charles Butler, proprietor of the excellent IBEX Salad, could shed some light on the issue....

Elsewhere, Macro Man has won a beer from a colleague as Abdullah Gul was announced as the AKP presidential candidate in Turkey. The solid performance of the TRY this morning in light of the news offers some suggesiton that today's jitters are just that- jitters.
Should the jitters turn into anything more sinister, Macro Man will hopefully not be hurt too badly. He has quite a sizeable (and underperforming) equity short on in his alpha portfolio, and his Treausury puts expired worthless last week, pinned at strike to the tick. He therefore finds himself quite long of fixed income exposure in the US and, to a lesser degree, the UK. If he could just shed the Brent-WTI albatross at a half decent rate, he'd be doing OK....


Charles Butler said...

A bit odd all this. The presumed reason is spillover from some recently revealed maneuverings to shore up the balance sheet at a 'smaller', non-index, builder named Astroc Mediterraneo. But that stock was off 50% from February before this all came out.

On the other hand, the sacking coincided exactly with CNMV president, Manuel Conthe's, appearance before congress to explain exactly why he was quitting his post - over government interference in his job during the aborted E-On takeover of Endesa. Scheduled up after him is the president of the Banco de EspaƱa to opine about the inaccessibility of housing prices, which can result in anything what with municipal elections next month.

My guess from the cheap seats is that it's a combination of things in an overvalued market that's been hyper-nervous and looking for a reason to sell since the beginning of the month.

On the practical front, aside from anything to do with construction, all the banks got lambasted - even the recently outperforming purely national types. More or less saved have been energy and communications.

No banks, no construction, no Ibex.

When the Eurostoxx reached minus 40 with nary a reaction from the S&P, we shifted the emphasis in the spread to long Europe for the day on the assumption that it's got lots of cushion in the event New York follows suit. So far, so good. The move has recouped 60% of the earlier losses. But the whole thing, although marginally profitable in general, has to be rethought.

Thanks for the compliment. We're flattered.


Macro Man said...

Interesting, thanks Charles. Given that there are multiple television shows in the UK which appear to focus on Spanish property, it's not hard to think that the market there has become bubblicious.

Speaking of which, there is an absolutely classic headline in today's London Evening Standard:


Number of £2 million homes in London hits all time high, and still no sign of a crash.

Paging Dr. Fisher, paging Dr. Irving Fisher...

Charles Butler said...

Very cute, that about Fisher...

Whether there's a housing bubble (with its connotations of imminent ruin) here, or not, is more than debatable - excluding the Mediterranean, that is, where construction is definitely on the wane.

The Spanish have a very distinct relationship to property/money to that of Anglo-saxons. They consider the former far more desirable to own than the latter and, once savings reach a certain point, something tends to be bought. Couple this with truly immense amounts of hoarded, undeclared cash whose lack of laundering gets passed on to the seller who, in turn...

Just goes 'round and 'round.

On the other hand, first-time buyers with little or no help from their families are now stretching their mortgages out to forty years, variable rate, in the larger cities.

Macro Man said...

I'm not sure that Britons are that much different, to be honest (though the grey economy is probably smaller here than in Spain.)

There are at least half-a-dozen TV shows dedicated to property and/or refurbishment and almost as many dedicated to antiques (or, as Mrs. Macro would put it, tat.)

For better or for worse, there's no equivalent of Jim Cramer or Mad Money in Old Blighty...

Anonymous said...


I am getting very nervous. It increasingly appears like ur EUR = 1.4X USD is gonna be true.

What is ur prognosis ?

Macro Man said...

Well, if Voldemort and his buddies keep bidding up the euro, it will keep going higher. If/when 1.37 breaks, 1.40 is pretty much the next obvious target on the radar. I sort of hope 1.3985 trades...at that rate, EUR/USD will be the same level as USD/DEM!