Wednesday, July 02, 2008

Defending the Maginot Line

Well, we're 24 hours before the most important market day of the year (tm), and stuff frankly feels a bit nervous. Liquidity seems to resemble most of the participants in financial markets these days: poorer than it used to be. Another chapter was written in the story that Macro Man began yesterday, as the Bank of Korea responded to the economy's inflationary impulses by intervening heavily to strengthen the won near the close of the domestic FX session.

Macro Man's heard varying reports, but consensus seems to be that BOK sold $3 bio or so against the KRW, which helped to push USD/KRW nearly 2% lower. BOK has plenty of ammunition- $258 bio in FX reserves as of th end of May- and it's frankly refreshing to see them being deployed in such a manner. (Macro Man has no exposure in KRW, and hence no axe to grind here.) Quite a contrast to our friends round Moscow way!
Elsewhere, it was pretty interesting intraday price action in US equities yesterday. Who knew that the news that GM auto sales were crap, rather than really crap, would be good for a 24-point rally in the SPX? All Macro Man can say is that any market dependent on General Motors for upside leadership is in pretty serious trouble.

In any event, the rally was not altogether unsurprising. Many market punters are fond of military analogies, which perhaps draw their inspiration from the volumes of Clausewitz and Sun-Tzu that grace many a bookshelf (though how many of those books have been read is another question altogether.) In that vein, once 1300 gave way in the SPX, it seemed likely that the bulls would withdraw to the 1255-65 region and shore up their defenses at this critical level.

Sure enough, 1260 (plus or minus) has withstood the bears' initial assault. Macro Man cannot help but think, though, that this last line of bullish defense is little more than a market Maginot Line- an area designed to repel the hardiest of adversaries but which is ultimately (and comprehensively) overrun.

The FTSE in the UK (where Macro Man retains some short exposure) has a similar type formation. The FTSE's up today, but the underlying sentiment in the UK is dreadful- Marks and Spencer guided lower this morning while the construction PMI was an absolute shocker. It appears as if the "special relationship" between the UK and the US is about to get taken to a whole new level.
Finally, it's perhaps worth looking at continental Europe, home of the original Maginot Line. The Eurostoxx has plummeted through the early year lows, as well as the well-flagged longer term head and shoulders neckline. The next couple of days are likely to be very noisy indeed, and there's nothing to say that stocks won't end the week higher.
High frequency traders may be able to make some money from the long side. But for a guy like Macro Man, the money is still to be made betting on an ultimate (and ugly) breach of the market Maginot Line.

12 comments:

Anonymous said...

MM, do you know where to ge t quotes for currency NDFs?I dont have a bloomberg terminal

bengt said...

I am currently in Morocco seeking the advice of the local markets expert, the fortune teller. She told me that it's going to be alright, or rather that i am going to be rich which i think you'll agree is pretty much the same thing. So there you go; one bullish signal at least.

Anonymous said...

The Maginot Line wasn't overrun. It was outflanked.

Macro Man said...

Technically, yes, though I thought that the Germans penetrated the Franco-Belgian border at a fortified point. As always, I may be wrong....

Anonymous said...

I’m a proud owner of a pocket edition of “THE ART OF WAR” by Sun-Tzu and never got to read it (but a friend of mine must have a copy with notes by someone who actually read it).

Anyway, my wife is a sort of ZENTAOSHIATSUYOGAJAPANESECHINESEINDIANSTUFF kind of addict (she actually adores my Japanese candlestick charts, not to mention when she first saw Ichimoku clouds) and the Zen saying “the less you do the more is going to happen” sounds perfect for option writers – don’t you think?

Sayonara, AT

cowlanga said...

Forgive the ignorance MM - why is Thursday such an important day?

Anonymous said...

cowlanga,

Tom. we have ECB rate decision as well as the all important (at least for the markets) US non-farm payroll numbers; not to mention a three day weekend in the Us- such that if the news was bad tom for the US equities and USD, Monday morning sets up for a 200-300point down morning on the Dow Futures-

cowlanga said...

ah, that would do it. thx

D said...

The art of war is great, I have a pocket edition in my laptop case. Another interesting read that I recently acquired was "Power." I forget the author, but the book is orange and blue. Leadership skills and how to manage relationships are priceless qualities a person can have.

Macro Man said...

Well, whether the market Maginot line is going to be overrun, outflanked, or effective, the marauding hordes are back already. Tomorrow could be ugly.

I, too, have the Art of War, purchased and read in the early 90's while I was at university. Given the hegemonic role of China in certain markets, perhaps it is worth a re-read.

Meanwhile, I've just seen a rumour that BOK was selling $/KRW NDFs thru agent banks in late NY. Can't fault their diligence....

Anonymous said...

The Art of War is sublime but is only one of several important political-millitary texts from Chinese history.

Actually to obtain a greater perspective on "the hegemonic role of China in certain markets"(tongue-in-cheek), the writings of Wu Tzu will probably offer greater color as it deals in a more tactile manner the managing of not just the millitary but of the people and state in war.

spagetti said...

Trichet will be interesting...
read somewhere that Paulson went to meet him this week.. perhaps something in store ?