Wednesday, July 09, 2008
Yesterday was an instructive (and, for equity shorts, expensive) lesson that it's not how you start, it's how you finish. Tuesday might have started ugly early, but provided evidence that the equity market Maginot Line is providing a more effective resistance to the marauding hordes than the real one ever did.
So what now? Macro Man can feel the near-term conviction draining out of him like water out of a bath. That VIX came off so sharply (2.5 points) with yesterday's rally makes him concerned that the real pain trade out there is long equity vol. The same held true in April, and we got a horrible, drawn out squeeze in cash indices as a result.
From a technical perspective, momentum is waning. The Eurostoxx is exhibiting signs of classic bullish divergence, with marginally lower prices accompanied by a rise in momentum oscillators (in the chart below, RSI.) Such conditions are usually followed by a squeeze. Having had a great run shorting European equities (he first sold above 3800), Macro Man is wondering if enough is enough for the time being. With earnings season upon us, perhaps the Keyser Soze equity sellers (i.e, the Usual Suspects, in this case, mutual funds facing redemptions) will hold off for a bit, thereby allowing for a squeeze. Perhaps the best advice here for anyone contemplating a fresh equity short is "patience, young grasshopper....better levels will come."
Someone else saying "enough is enough" is the Bank of Korea, which continued its campaign to strengthen the won. Anecdotal reports suggest that they have sold $5 -$7 bio today, jamming stop losses from momentum models and other punters looking for a higher USD/KRW. BOK is at the vanguard of emerging market central banks, erstwhile currency piss-takers, who've had enough of the collateral (inflationary) damage from years of partially sterilized intervention to weaken the domestic currencies. India, Indonesia, and the Philippines have also been in over the past few weeks, albeit with mixed performance.
Heck, even Macro Man's best mates the Russkies have joined the party, allowing the rouble to appreciate roughly 35 bps against the dollar and euro basket this morning. The move is unusual for two reasons: it's followed swiftly on from the previous revaluation (usually they wait a few months), and comes after persistent central bank promises to screw speculators who buy the rouble. Instead, these dastardly foreigners have been rewarded.
The rouble revaluation comes just a day after President Medvedev suggested that the rouble become a reserve currency alternative to the dollar and euro. Uhhhh...Dmitry....sock puppets don't usually know much about foreign exchange, so you might like to know that turning the rouble into a reserve currency when you have broad capital controls and a central bank that promises to screw anyone who buys it might be a bit of a tough ask. Still, the timing of the revaluation with respect to Medvedev's comments is curious to say the least. Macro Man can only hope that Russia is close to saying "enough is enough" to currency piss-taking.
UPDATE: Psych! Looks like the new kleptocracy is same as the old. The rouble basket is back up close to its previous level, but only after there was some suspicious "private sector" buying of dollars. It now looks like the "revaluation" may only have been a good-old fashioned market manipulation to let an onshore operator buy cheap dollars. Heaven forbid that the CBR fulfill local dollar demand at the market rate from its pile of $534 billion of FX reserves.....