* It seems quite clear now that China has replaced the US as the global economy's Typhoid Mary. While the rest of the world has famously decoupled from the US slowdown and the March SPX hiccup, the slightest hint of a little trouble in big China seems to send risk trades off the boil. That today's 3.6% decline in Shanghai, a move which literally fails to register on any chart of more than a year, has been used as an excuse for the retreat of risky asset favourites this morning is an ample demonstration of how Sinocentric markets have become.
* That having been said, there is an interesting dynamic developing in US markets. The VIX is famously negatively correlated with stock prices, as equity indices tend to ride the escalator up but take the lift (that's the elevator to you in the US) down. Although the SPX has stalled over the last week or so, the 2 month rate of change remains near its strongest level in at least two and a half years (note the right hand scale of the chart below is inverted.) Yet the VIX is nowhere near recent lows, opening up quite a substantial gap on the overlay. This divergence may suggest that the SPX is about to roll over more aggressively. Alternatively, it could mean that longs are scrambling for hedges, which would then mitigate the extent of any subsequent losses, the dynamic that seemed to play out in March. Either way, it's worth keeping an eye on.
* Yesterday, Macro Man alluded to the poor performance of a notional SAFE reserve basket that would include yen, but didn't include a graphical representation. The chart below demonstrates just how much a reasonably sized yen position would have cost SAFE, which is presumably why they haven't had one.
* The BOJ's lack of urgency in prosectuing the tightening cycle recieved another fillip overnight with the release of weak machinery orders, a series which correlates fairly well with capex. The orders series has now been flat or negative y/y since July of last year; with CPI also negative, Macro Man has a fair amount of sympathy for how the BOJ has conducted policy. Tomorrow's BOJ meeting is unlikely to produce an interesting outcome; Wedneday evening's Q1 GDP figures, on the other hand, could easily generate a surprise in either direction.
* The situation in Europe is really quite interesting. It appears that the Eurzone is beginning to fracture into 'haves' and 'have nots', in terms of capability of living with a strong euro. Romano Prodi hit the tape yesterday having a moan; it should come as little surprise that Italy is among the countries struggling to cope with an overvalued exchange rate, given the historical usage of ITL currency devaluation as a monetary policy tool. But the Q1 national account figures in Europe were quite striking. Germany, which has indicated a capability of living with current levels of the euro, delivered first quarter growth of 0.5%, better than expected and a highly creditable result after the new year's VAT increase. France, on the other hand, also delivered 0.5% growth, lower than the expected 0.7%. Of course, France didn't have the VAT base effect to deal with, so the outturn was actually substantially weaker than the German figure. Macro Man reckons that net exports will end up contributing nicely to German growth and negatively to that in France.
* April inflation in the UK came out in line with expectations at 2.8% y/y. While this was something of a relief, sterling has reacted more than the strip. At this point, the market seems happy with what is priced, and doesn't show an inclination to change things much in either direction. While Macro Man expects the BOE to reiteate its confidence in the 2% inflation forecast tomorrow, he concedes that the market may not care in the short term, particularly if the earnigns data are solid. He therefore trims half his short sterling position at 94.07 to avoid getting blindsided.
* As feared, the attempt to leg out of the crude spread is going badly, and has cost Macro Man all of his month's profits and more. Tolerance for further slippage will be minimal, as risk management dictates not allowing a non-core view to completely overwhelm positions carrying more conviction.