Four points

Four issues on Macro Man's radar on Monday morning:

1) BOE Buzz cut: The Bank of England announced its version of the TSLF this morning, as had been widely leaked over the weekend. Among the key issues with the program is the size of the haircut; for every £100 of bonds that you tender (AAA rated, backed by UK or European mortgages and/or credit card receivables), you only receive £70 to £90 worth of Gilts. Plus, you have to pay a fee to take out the loan. While this program might be better than nothing, Macro Man wouldn't be surprised to see an uptake similar to that of the TSLF: i.e., pretty patchy.

2) Front-end carnage. Last week, Macro Man highlighted the potential volatility that the LIBOR "scandal" might cause. Well, the volatility has come, all right...but by and large, it's been confined to the fixed income, rather than the equity, space. The front end of th US, UK, and European yield curves got pummeled towards the tail end of last week; Dec Eurodollars, for example, tumbled 79 bps peak-to-trough last week. Ouch! At this point, the market is actually pricing in hikes by year-end; Fed funds futures show an 11 bp rise between August and November. How realistic is this?


Not very, historical precedent would suggest. At the end of the last easing cycle, Fed funds remained at 1%, the terminal rate, for a year before rates finally rose. When Greenspan cut 0.75% in the wake of he Russia/LTCM crisis, rates stayed at 4.75% for seven months...and that was with the Nasdaq going crazy, retail sales up 7%-9% y/y, and the unemployment rate falling steadily. And in the early 90's, rates stayed at 3% for seventeen months. So now, in the midst of the Worst Financial Crisis Since The Depression (TM), rates are supposed to be going up five months after the last cut?

Colour Macro Man sceptical: the front end of the US appears to be a buy here.

3) Equity markets at a crucial point. For the last year, 1400 in the SPX has been something of a pivot point, as the chrt below indicates. After Friday's infuriating price action, the index is knocking at the door of that level now. (Macro Man was long a butterfly centered at 1360 expiring last week; he was thrilled that the market decided that lower-than-forecast earnings and $15.2 billion worth of writedowns at Citi were deemed worthy of a 2% rally. Grrrr)

The driver of the recent rally, good international earnings from large cap stocks, plays nicely into another one of Macro Man's favourite themes, the long large cap/short small cap trade.

4) RMB weakness. Per the usual, USD/RMB has stalled immediately after a G7 meeting that called on China to allow further currency strength. Perhaps it was the lack of follow through. Perhaps it was losses by macro funds on other (long front end? short equity?) positions. But what's clear is that there has been a ferocious short-covering rally in the RMB NDF market, as shown by the three month outright below.

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Anonymous
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April 21, 2008 at 11:05 AM ×

GRRRRR! I just bought a large number of November Fed Funds futures at a much worse price than the present one.

I agree with you, Macro Man. I don't see a hike before the election (with an announcement a week before on October 29), especially with the housing problems (FFTR affects LIBOR which affects many adjustable rate mortgages - will the Fed really do something that jacks up payments before some stability arrives in the sector?).

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Macro Man
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April 21, 2008 at 11:09 AM ×

Anon, I feel your pain. One vague hope that I have is that punters start trading FF more actively, since the ED strip is just off hard at the moment, what with th huge swings in basis.

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Ryan Ward
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April 21, 2008 at 11:39 PM ×

Per # 3:

"Given the affection of investors for risk last week, it is natural to ask why we don't take that at face value and immediately accept a speculative exposure to market risk. The reason is that the recent shift toward greater speculation continues to appear very fragile. Trading volume has become dull when it should be expanding, the spread between commercial paper and Treasury bills has widened to the highest spread year-to-date (despite modest improvement in CDS spreads), and unlike robust speculative markets, we continue to observe divergent industry group behavior and selective leadership (still primarily materials and cyclicals)."

From John Hussman

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spagetti
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April 22, 2008 at 9:31 AM ×

im reading the daily from GS
concluding that markets seem to be in decoupling mode (US vs the rest)

and then in another paragraph they mention 'upside recoupling' in terms of the US's growth resilience

and then they say the market probably overestimates the resilience of the rest of the world to the US's woes.

GS switched to recoupling a few months ago from their decoupling call. as far as i understand.

nevertheless i have trouble keeping track of their views where everything is seen through re- and decoupling, with daily alterations and permutations of these themes.

im not saying its wrong to look at the US vs the RoW and how US mkts fare vs the RoW, its just that its utterly confusing sometimes to understand where GS exactly stands..

my feeling is that they not quite sure themselves, which underlines the fact that like 3/4 of sell side reasearch theirs is also 3/4 useles...

im going to ask my GS sales contact everyday from now on

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