Monday, October 01, 2007
Another month has passed the post, and markets are now entering the home stretch of what has proven to be an interesting year, to say the least. August's ruptures in equity and currency markets proved to be surprisingly short-lived; while money markets continued to prove challenging, particularly for the good folks at Northern Rock, a number of risky asset markets reversed prior losses with stunning speed.
Also getting its boogie on was the dollar, as the DXY crashed to all-time lows. While the surge in EUR/USD dealt a crushing blow to Macro Man's powerball strip of downside one-touches (more on this later), he at least had the sense to recognize that a "bubble of dollar weakness" was a logical outcome of Fed reflation. Ben Bernanke decided to have a breakfast party, and (dollar) toast featured prominently on the menu.
Equities, meanwhile, also surged both before and after the Fed easing. It is remarkable to think that a quarter in which the ghosts of 1998 haunted financial markets (Merrill Lynch and UBS both announced 4 billion worth of local-currency losses due to subprime) and non-farm payrolls turned negative, the S&P 500 would generate a positive price return. And yet it did!Macro Man faced an uphill p/l battle for much of September. The powerball strip, which had contributed handsomely to his success in August, performed an about face. A combination of a sharp rise in the 10 year forward and a reasonable decline in implied volatility spelt big losses for the strip, leaving Macro Man peering out from behind the p/l 8-ball for much of the month. However, a strong performance by the beta plus portfolio and a recouping of some of the FX alpha losses propelled him back into the black, and he finished September up just over 1%.