20 Questions

While the weekend weather didn't always feel like summer, today's market price action certainly does. What better time, then, to play another round of Macro Man's favourite occasional game, 20 Questions?

1) Should we be using last quarter as a model, wherein the equity market weakness from the end of the previous quarter resolves itself into a painful, vol-crushing seven week drift higher?

2) Or should we be looking at July 2007, when FX carry was remarkably resilient.....until it wasn't?

3) Given the stagflationary dataflow, shouldn't the US yield curve be steeper?

4) After Tiger won the US Open with an bum knee and Padraig Harrington the (British) Open with a dodgy wrist, how many golfers will intentionally injure themselves ahead of next month's PGA Championship?

5) How sad is it that an online poll has Tsar Nicholas II and Stalin running neck and neck for the title of Greatest Russian of All Time? The American equivalent would probably be something like Nixon versus Millard Fillmore.

6) When will EUR/USD break out of this 1.54-1.60 range?

7) What, exactly, was the ECB trying to accomplish by leaking hawkish commentary on a Friday afternoon markets finally showed signs of calming down?

8) Do the folks at Barron's understand the degree to which people view them as a contrary indicator?

9) Will the RBNZ cut rates this week?

10) Does anyone understand what's driving the oil market at the moment?

11) Similarly, can anyone provide a fundamental rationale for the stunning performance of CEE-4 currencies other than "the trend is your friend"?

12) Will Gordon Brown survive until the next election?

13) Are there any macro punters out there who don't love Brazil?

14) What's the next big trade in Asia: long, short, or RV?

15) Did you know that the May-July deterioration in global risk appetite was, according to Macro Man's measure, the largest of the last several years?
16) Will FIFA take the 2010 World Cup away from South Africa? If so, who will get it?

17) Is there a commodity trade to be made around the Beijing Olympics, or is it all a bit of a red herring?

18) Cristiano Ronaldo in 2008-09: Man U or Real Madrid?

19) When will the ECB cut rates?

20) Have you voted in the Banking Dead Pool yet? Lehman currently holds a slim lead over Bradford and Bingley.
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July 21, 2008 at 11:01 AM ×

#5 What's Stalin doing in that poll anyway? He wasn't Russian. Communism really is international, even Stalin´s birthplace travels across borders.

Ape Man
July 21, 2008 at 11:47 AM ×

Leaving aside Bengt's quibble, I think the the poll that has Tsar Nicholas II and Stalin running neck and neck for the title of Greatest Russian of All Time makes perfect sense.

You just have to look at through the prism of who manged to get the most Russians killed. That seems to be how the Russians judge their rulers. If you factor in the Russian deaths that happened during World War I surly Nicholas is the only one who comes close to Stalin.

One might quibble that they should not be running neck and neck, as Stalin manged kill off a lot more Russians then Nicholas. But then, if Nicholas had been more competent, he might have enabled Russia to make the transition to democracy via constitutional monarch. So you could argue he deserves partial credit for all that Stalin archived.

July 21, 2008 at 12:01 PM ×

3). The 'flation part is overhyped. We don't live in times which are ideologically conducive to a repeat of the 70's.

6). Long term, when China, et al, get smart and forgive America's foreign debt.

8). The obvious tactic in a crunch is to head for the lowest common denominator.

10). Related to 3). There is the dawning of an awareness that demand also figures in the price equation.

12). When a proven winner is drummed out mid-term, the successor becomes bag holder rather than heir. Chretien-Martin is the model for this.

17). Short the entire industrial complex as bad press, bad air and bad attendance short circuit the China story.

18). Madrid. Any team willing to pay 27 m for Sergio Ramos will not be stopped - at least at the bargaining table.

July 21, 2008 at 12:52 PM ×

3 Not necessarily as Fed waits to see how things play out, but in that vein think € should be a little steeper.
6 requires a significant catalyst, given disastrous newsflow of past month wonder what it could be though, Butler's answer could be the one.
10 Oil, sense? No
11 CEE4 final push?
14 Would hazard RV, core-periphery
17 Yes, to the extent that it could turn into a PR disaster, will be interesting to see level of control that Beijing can maintain on foreign press.
19 ECB cut? Not for a couple years at least, if ever.
Cheers, JL

July 21, 2008 at 1:10 PM ×

1)thats scenario a./
scenario b./ since the spring episode there might be more downside momentum; withdrawals from funds, poor p&l on equity longs..etc
so only noise now, downtrend resumes

2) see 11)

3) bull steeper
rate hike consensus still leaves no room for W growth pattern
Socialisation of losses should also lead the long end higher

7) a. they dont know themselves
b. do they want to surprise the mkt at some point with a cut ? if slowdown requires it ? and then their move would be more stimulative if it takes the mkt by surprise.
more likely a. though..

11) see 2)

12) no

13) yes, but statistically insign'cnt

15) where would it be on a longer timeframe?

17) have the feeling the whole Games will be the start of the Big China Disillusionment

19) probably never

July 21, 2008 at 2:39 PM ×

Re (9) Yes (10) No (11) No (12)Yes - it is becoming well accepted that Labor has lost all intellectual credibility and nobody will want to take the poisoned chalice of PM (13) Yes - - me. Brazil is too dependedant on strong commodity prices. As these fall, so too will Lat Am equity and debt prices (17) aside from a potential PR disaster (pollution/ political rallies?) shutting factories for several weeks before and during the Olympics will reduce commodity demand. After the Olympics, the slowdown in growth already occurring will become more evident (19) ECB will not cut rates till they are absolutely sure that infaltion is not going to increase (December 2008?). So does this make European bonds a buy?

July 21, 2008 at 4:49 PM ×

1) No, that's what all the CTAs are hoping for
2) Yes, that's where all the CTAs are hiding.
3) No, inflation is not the problem
4) yes
5) long-term (20+ years) bearish on Russia
6) within 1 month
7) confusion
8) yes, they are on someone's payroll
9) no
10)yes, CTA speculation, longer-term players are quiet
11) never underestimate the power of collective stupidity
12) yes
13) yes
14) RV
15) no
16) yes, who knows.
17) short lead
18) ManUre
19) within 6 months
20) Lehman is gonna get bought by year end.

July 21, 2008 at 6:07 PM ×

Re: oil, in my opinion, we really entered a trading range after the big zoom up on June 6. It looks abnormal because there has been a switch in who is shipping supply to whom, and that essentially led to longer supply chains, with supply arriving "late".

The drop since the 15th has to do with 1) normal correction after spec buying finally kicked in, 2) arrival of the "late" supply, and 3) the end of 2009's dinky U.S. summer driving season, to the extent that it even existed.

Also, it has become clear that much of the importing world is essentially resorting to rationing, rather than bid up the price. For example, China decided to live with long lines at diesel pumps and to shut down 10% of aluminum production until after the Olympics and summer harvest.

So, what we've seen since the beginning of June was a weird kind of summer price leg up, with the end of the summer season price drop coming last week, on top of options expiration week and the arrival of late supply.

Now we're probably going to continue to muddle around. We could possibly see the lower 120s again for a very short time (like a couple of weeks), but summer demand is still on in the Middle East, and the decline rate is getting worse, so it can't last.

Everything after that depends on the timing of the year's remaining production and refinery projects.

If every new production and refinery project came online at exactly the scheduled moment, we'd see a stable price until at least January, probably in a price range with the lower $120s as the bottom.

But it's unlikely that everything will come in exactly on time. That could mean another leg up before the end of the year. Too soon to tell.

Moe Gamble

July 21, 2008 at 6:23 PM ×

My question is when will Mr. Magoo at the ECB start monetizing Spanish mortgages and buying yen with the proceeds. That should take a bite or a liver or two out of the carry trade, no?

July 21, 2008 at 9:16 PM ×

Was "Red Herring" in #17 an intended pun on the Chinese, or accidental? Either way, when mentioning any such commodity, be careful to utter it quietly lest Red Herrings get added to the GSCI index, which will be followed by a shortage of said commodity the world over as index specs and trend-followers hoover them all up until they stinkin' rot in their custodians' vaults...

July 22, 2008 at 7:18 AM ×

I'm thinking "long Red/short kippered", myself

old trader

July 22, 2008 at 11:36 AM ×

What goes into your risk index?

Macro Man
July 22, 2008 at 12:40 PM ×

Anon, it's proprietary. It contains a lot of the stuff that you can find in various bank risk indices, but combines them in what I believe to be a more useful way.

July 22, 2008 at 2:41 PM ×

maybe perfect storm about to hit CEE

turkey politics, czech doveish comments..

2) the Wile E Coyote moment for CEE FX is perhaps here ?

also given how heavy EURUSD seems to be, maybe its time to (try) to sell EURJPY (again) ?

July 23, 2008 at 2:56 AM ×

#7 Either it was orchestrated, or it was just inept. Trichet had gone through the trouble of keeping the dogs at bay following the last rate decision. He sent out a clear-cut signal that while they couldn't rule out further hikes, none were planned.

Either the (perhaps well-organized) folks at the ECB decided they needed a tad more tightening without actually tightening, or it was loose lips from a Weberite.

Given the recent data and my own experience within large organizations, I'm going with ineptitude.