Over the course of the session the Shangai market fell sharply, taking the rest of regional equities with it. The rationale for the decline was that yet another upside surprise for nominal GDP (real growth and inflation) will force a legitimate policy tightening and send Chinese shares lower. Even in today’s short-attention-span market, many traders seem to vaguely recall that they were Shanghai’ed a couple of months ago. The memories are fuzzy, mind you, but it was enough to take some money off the table.
Macro Man is joking, of course; or is he? The chart below shows the performance of the Shanghai index on a logarithmic scale. While you can just about make out last night’s wobble and February’s jitters, to call them “blips” is almost overemphasizing their importance. While Macro Man would feel queasy about going long at these elevated levels, particularly with Chinese margins on the wane, that’s not to say that yet another round of policy tightening will send shares spiraling lower. The most likely outcome is sideways action such as that observed in January-February. Low delta wingnut downside might make some sense as a punt, but Macro Man needs to dig a little deeper.
Elsewhere, US fixed income has rallied sharply over the last couple of sessions, and Macro Man has frankly screwed the pooch here. His 108 puts expire tomorrow and were almost a point in the money a few days ago; they’re now out of the money. Failing to hedge his deltas has cost him a pretty penny, especially as the collapse in breakeven has meant that TIPS pricing has barely moved. There’s no use crying over spilled milk, however; his plan was to exercise the options and turn the long TIPS into a long breakeven position; that trade has gone against him, so it’s only fitting that he loses money. The rally in the homebuilders seems slightly more perverse, so Macro Man is inclined to add to his short. He will look to sell an additional 100,000 XHB towards resistance at $35.50.