Traction

Are markets starting to get traction again? The last 24 hours have seen many of January-February's popular trades (which were incidentally among March's worst performers) spring back to life in impressive style. What was the catalyst? It's hard to say. Perhaps it was the revelation that Goldman's level 3 assets surged last quarter, or the rumour that Merrill will go to the writedown well once again, this time to the tune of a fresh $6 billion. Perhaps it was the IMF, in a rare bout of relevance, issued a fairly bearish update to its World Economic Outlook.

Overnight, the catalyst was clear: Singapore's MAS, responding to exuberant Q1 growth and uncomfortably high inflation, unexpectedly tightened monetary policy (which in Singapore entails allowing the currency to strengthen. Unsurprisingly, this prompted an Asian currency love-in, no doubt exacerbated by USD/CNY breaking below 7.00.
But consider the return to prominence/threating the recent trend of other erstwhile sacred cows, such as short equities. The SPX is now threatening its uptrend off the lows (though Macro Man has cunningly omitted the trend line.) In fairness, however, volume was not discernably higher than during the recent sideways drift, so the jury must remain out.
However, USD/JPY is also threatening its uptrend , and indeed as of current writing has broken through the line, while EUR/USD has made a new all-time high this morning. It looks like it's game on again for the dollar down trade- will the ECB do anything about it today? (Probably not.)
Meanwhile, the 2-10 yield curve in the US has begun steepening again (by about a dozen bps yesterday) , reversing the horrible correction of March and breaking the flattening trend line.

And finally, and at the risk of descending into shameless back-patting, US small caps got a roasting yesterday. The OEX/Russell 2000 spread, which Macro Man carried in his old blog portfolio (which is suspended for the time being as he builds out his book in his real job), took a sharp turn higher yesterday. To quote Hannibal from the A-Team, "I love it when a plan comes together."
Of course, this could just be a head fake that suckers poor lambs like Macro Man into the abattoir, where carnage and slaughter awaits. He would really like to see volumes increase sharply to suggest that participation is increasing and risk is being re-allocated. There have been some rumblings about risk being deployed in the option space (buying equity index and USD/JPY puts) , which would suggest that conviction remains relatively low.

Another couple days of these trades getting traction, however, and we could the market get seriously re-risked and macro trading become pleasant once again.
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Anonymous
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April 10, 2008 at 5:48 PM ×

You wrote too soon, Macro Man. USD/JPY down 178 pips from yesterday's close - then it rallied two full points in the next five plus hours.

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Anonymous
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April 10, 2008 at 7:40 PM ×

obama et al say us (et al) should boycott the olympics--maybe we should boycott inexpensive chinese products and stop sellin em our debt and financial institutions as well--that would teach those middle earthers a lesson

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Macro Man
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April 10, 2008 at 7:58 PM ×

Anon #1: Trust me, I know!

Anon #2: Easier said than done, as much of the trade between the US and China is mutually beneficial. And I'm not sure what the problem with selling US financial institutions is; every transaction made with China or other SWF entities over the last year has involved a US bank/fund selling its shares at a price that's considerably higher than that currently prevailing. And if UBS/Leh are anything to go by, there could easily be more share issuance/dilution in the future.

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