Tuesday, June 03, 2008
This morning in London is one of those gray, damp affairs where the relative humidity feels like it's 101%. On such a morning, it's a bit unpleasant to be stuck on an unventilated, un-air conditioned train that's slower than usual, as was Macro Man's lot today. Back when he sported a more luxurious barnet than the current "number three all over", today is what would have been called a bad hair day. An early 90's Jaromir Jagr, pictured left, illustrates just how gruesome this can be.
After yesterday's S&P downgrade of the banks and the latest Lehman rumours, Macro Man wonders if risk assets aren't in for a bad hair day as well (if not a bad hair week and/or month.) Now some, including regular reader Mr. Prop, are putting some faith in "turnaround Tuesday." To be sure, yesterday's late session SPX rally took away some of Macro Man's bearish glee, and the relative resilience of European equities in early trading (spurred by TCI/RBS rumours, perhaps?) hardly suggests a further dump in stocks. But still, consider the following items of interest:
* Bonds making a comeback? Just like James Bond always escapes the villain's clutches (except in the book You Only Live Twice), bonds have launched an impressive rally over the past couple of days. Overnight, 5 year JGBs literally put in the rally of the century, registering their biggest trough-to-peak gain since 1999. That's not exactly what you'd expect to see when markets are defensively positioned and/or willing to overlook bad news. Macro Man himself managed to scoop up some JGB futures overnight, as recent data has been poor and 10yr US-Japan yield spreads are near their lowest levels since 1994.
* A double top in key equity indices? The NDX failed on a retest at last month's highs, yet is close enough to those highs to offer a good risk/reward short. The obvious near term target is 1944, a break of which would target a move to 1850 or so, closing the April 17 gap. Equally ominously, the SPX is putting in a very rare and very dangerous formation.....
* Inflation: here, there, and everywhere. Regular readers will know that inflation has been one of Macro Man's key macro themes virtually since the foundation of this space. Inflation is making long-term highs in just about every country that either a) has no 90's record of hyperinflation, and b) doesn't fiddle with its index calculation to systematically reduce the level of inflation. The latest shoe to drop is in Switzerland, where May CPI rose 0.8% m/m and registered its highest yearly increase since 1994. And both history and Macro Man's own research suggest that inflation is not a positive for equities and, by extension, other risk assets.
* Remember when? Remember the carnage of spring 2006, the last time that there was a legitimate inflation threat priced by markets? There was an initial leg lower in May, then a recovery. But in early June, Turkey reported an awful inflation figure, which helped kick off an absolute rout in emerging markets, which in turn helped feed back into lower developed market prices. Well, guess what comes out at 3 pm today? That's right, Turkish inflation figures. EUR/TRY has come quite a bit lower in line with the recent equity rally, and last Thursday/Friday probably squeezed out any remaining longs. Macro Man has been running a short delta position through options, but has hedged it out to be long volatility.
If it really is going to be a bad hair day for risk assets, long vol in an uber-risk asset doesn't seem like a bad position at all.