Tuesday, May 15, 2007
It's been a while since the last bullet point post, so without further ado...
* 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.