Monday, June 09, 2008

Make no mistake

There is something very, very wrong with financial markets at the moment. Cash 2-10 yield curves don't make 18 bp round trips in a single day...but the one in Europe has. The carnage in strips, particularly the reds, is unprecedented. In looking for historical parallels, the market has perhaps erred in gazing at 1987; it seems that 1998 is the more apt comparison (with the small proviso that markets are MUCH more leveraged now.)


Anonymous said...

Don't know how much was driven by people short gamma in Euribor reds, but definitely a factor for Eurodollars. This is a gift. Time to earn that bonus.


Steve said...

It also seems a lot like 1994, when structured products owned famously by Orange County CA started popping. It drove rates up about 200bp over a 7-month period (and ultimately 250bp when the whole thing was over after 13 months total).

The short end had been rising for quite some time (since early '93) and by the time the long end started wreaking havoc, two year yields actually started to decline.

I have heard of large steepeners being unwound in Europe, independent of whatever structured products have wrought. Many traders were waiting for Europe to follow in the US's steepening path.

Timing is everything, that may not be a bad trade now.

Anonymous said...

Hmm, can anyone explain how to trade this? I am not sure what you mean, should we short financials, bonds, EU equities,...

CV said...

@ anon 7:52 ...

Ha, yes indeed, the is the question I guess.

I am not sure that is for sure but I am following a couple of themes.

First of all Macro Man seems to have refound his mojo with the short equity call earlier this week. Indeed, my impression from the comments is that many have been waiting to move in on this trade. Given MM's giveaways on his positions it seems that he was right on the money (for now!).

Personally, I have not added any short continental European indices but it seems as if the time is ripe now. So far I am short FTSE and SP at 5996 and 1390 respectively. I am happy with these of course.

On the EUR/USD I am fairing like the noob I really am. Basically, I went into 2008 with a very clear sense on where this was going and boy oh boy have I been taken for a ride. I am fiddling around with a short position hedged by a long position at considerably higher levels. And since it is now in between the two I am in red on both positions and no clear direction as far as I can see... (yee hah!)

Bernanke is talking back at Trichet on inflation. However, it still remains to be seen whether they are both ready to walk the walk ... I am biased to a short EUR/USD since I think the ECB is way off mark but I gotta tell you that I have been persistently wrong on this one this year.

One thing which also seems to me to be a good play is Eastern Europe. ESPECIALLY, if the ECB really goes ahead my guess is that many of those recent floaters will get squeezed (i.e. the Hryvnia and Forint). I am long EUR/HUF at 247.3

My best position at the moment however is a long USD/CAD which is benefitting from Bernanke's shift towards inflation.