Monday, July 23, 2007
Oh, dipbuyers of the world
Unite and take over
Dipbuyers of the world
The sell-off's over
- The Smiths (alternative universe version)
Although a few more cracks are appearing in the risky-asset space, the dipbuyers of the world continue to selectively exercise their mojo to keep various risk trades alive. While Friday's price action in equities, credit, and the yen was somewhat gut-wrenching, collateral damage this morning has been relatively minimal. Stock markets in Asia and Europe aren't showing much signs of distress, and risky currencies like the Aussie and Kiwi dollars are making new highs (against the greenback, at least.)
Turkey is more popular today than during Thanksgiving and Christmas combined, judging by early market reactions. The favourable result from the weekend's elections has produced a strong rally in Turkish equities, bonds, and the lira, which has helped assuage any fears of a spillover from Friday's ugliness. Naturally, Macro Man was triggered out of his FX carry basket, which was executed before the DOTW really got stuck in this morning. C'est la vie....
Of course, it's not all sweetness and light. Credit is still looking ropy, with the Euro crossover spread index punching up towards 350 bps this morning. However, the market's attitude towards the impact of credit distress is somewhat curious. Despite the fact that S&P downgraded some European credits on Friday (the alarm must have gone off!) , markets were happy to sell the dollar pretty aggressively.
It seems to Macro Man that selling dollars may work during mini-periods of risk aversion, or when concerns are not too deeply entrenched. If it really hits the fan, however, Macro Man would expect the dollar to rally as USD-funded trades (long €, long EM, etc.) are closed. One exception, of course, could be USD/JPY, where most participants with a position are long. It's amusing that whenever the yen starts to boogie, London brokers begin sending out ichimoku charts to anticipate how Japanese accounts will react.