Wednesday, May 23, 2007
Ever so slightly, things are starting to look a bit more interesting. As Macro Man wavers, the US and China chat, and global rates continue to edge higher, signs are emerging that markets may start to jiggle around a bit more. Consider the following:
* The euro has failed for the time being and looks set to trace out a deeper correction. As of last Tuesday, CTAs had record long positions on the IMM. While the positions are likely smaller now, we are starting to approach levels where some of the more medium term sell signals are likely to be triggered.
* At the same time, very long term EUR/USD implied vol seems to have found a bottom. Macro Man didn’t quite bottom tick 10 year vol, but he wasn’t far off (knock on wood.) When his one touches are revalued at month end, they should provide a nice boost to his FX alpha.
* Intriguingly, there has been a surge in the US equity put/call ratio. Macro Man (and a couple of posters) has opined that the SPX/VIX divergence suggests that introducing optionality into the portfolio makes a lot of sense. Apparently, the market agrees with him. What makes this development so curious is that the prior spike in the P/C ratio resembling this one occurred immediately before the February 27 China scare and subsequent risky asset correction.
* Both the ECB and BOE continue to sound hawkish despite the recent rise in official and market rates. Unrelenting Fed hawkishness this time last year kicked risk assets in the head with an iron boot. Could Europe deliver a similar punishment this year?
Macro Man has decided to clean up the alpha portfolio by closing the short end positions in euribor and short sterling. While there may be some upside to holding onto both positions, any significant increase in market volatility could encourage him to do something stupid. Far better, therefore, to clear the decks and watch the market with a clear head. He hangs onto the long TYM7 as a synthetic equity market put but will probably be forced to exit on a break below the year’s lows.