Tuesday, July 15, 2008

Sell everything except....

Freddie Krueger came back to haunt the market again yesterday, as the market adopted the Rod Tidwell approach to the government's plan for the GSEs: show me the money! Today feels like sort of a "sell everything" day so far (though on recent form, that means you should buy everything for a squeeze into the US close.)

Consider:

1) Sell stocks, particularly financials. US banks had their worst day since 1989, and the SPX is threatening the last bastion of support. European indices have already cratered through theirs.
2. Sell the dollar. We're seeing something of a dollar de-rating here. EUR/USD is back at 1.60, knocking on the door of its all-time highs.
USD/JPY has also rolled over; a break below the recent 104.99 low could get a bit ugly.
Heck, even NZD/USD has gone uber-bid, despite the release of slightly lower than expected non-tradable CPI in New Zealand last night (Admittedly, headline was higher than expected.) The joys of the NZD trade are amply demonstrated by last night's headlines immediately after the CPI release; what's a rational trader to make of that?
3. If equities vome back, then presumably bonds will sell off. UK CPI came in above expectations, and RPIX printed its highest level since June 1992.

The one oasis of stability in all of this has been, perversely enough, FX carry, which is defying all logic. (Literally) unbelievably, GBP/JPY has closed NY on a 211 handle every day since June 26, according to Bloomberg data. The chart looks more like USD/CNY during one of SAFE's periodic hissy fits than one of the ne plus ultra FX carry crosses during a time of heightened financial duress.
The 10 day historical vol of GBP/JPY is currently just over 3%. Thats in the lowest 1% of 2 week vol readings in BP/JPY since 1980. WTF?!?!?!?! Until recently, GBP/JPY vol (and NZD/JPY, etc) has followed the VIX quite closely. This time around, it's been quite the contrary. Given that some of the best performers have been the currencies with the worst fundamentals, this is another 1984-type scenario: call it Revenge of the Turds.
For the remainder of the day, there is very little that would surprise Macro Man. The highlight of the day is Bernanke's Senate testimoney....but what is he supposed to say? "Theeconomy'sOKbutinflation'stoohighbutdon'tworrywe'llsavethebankingsystembutwealsowantthedollartogoup"?

Some variation on that, to be sure. Which aspect of that stream of consciousness he chooses to emphasize should set the tone for this afternoon's trading. At this point, it seems like just about anything could happen....so Macro Man is trying to keep relatively nimble. Some of his best trades of the last week or so have been micro-term in nature. In a world where there is little in the way of price action that can shock, his primary concern is avoiding a (nasty) shock when he looks at his P/L, while still maintian some exposure to favoured themes.

18 comments:

spagetti said...

i think we could see the capitulation / climax in equities in the next few hours/days

i think bonds will break to the upside (price not yield) and i think FX carry will get shaken out.

EURJPY - as u pointed out a few days ago - rarely does whats logical. but maybe finally... it seems to have flipped downwards..

Anonymous said...

USDJPY is really amazing me...

KiwiPunter said...

Hi MM.

Kiwi over 0.7730 looks like a once in a lifetime bargain to me and everyone else who knows how bad things are back home..... Load up the shorts....

And as for Nzd/Jpy well don't get me started!! 70 here we come ....

PS That other turd-on-a-stick gbp/usd is wondering in to the crosshairs too ...

Adrem said...

If you want a currency on a 45 degree downward slope look at $/CNY. It shifts a down notch almost every day.

A Thinker said...

MM - how is traffic on your site evolving (in relation to a peice you did 1-2 months ago)?

Anonymous said...

UK CPI 3.8%, once again sticking its fingers up at consensus, even core edging higher. And the award for the best performing front end goes to.......short sterling. Go figure.

Anonymous said...

Hi Kiwipunter,

I think the whole world (including myself, also a Kiwi) is already short NZD/USD (except for the Japanese housewives, of course). At these levels through, I might add just a little more. :)

The problem is that many of the factors affecting us here in NZ are affecting many other places, as well. I don't see too many currencies to fall in love with right now.

I already have a huge short position in GBP, too, though fortunately hedged with Euros (not that I like the Euro, but hedges exist for days like today when sanity goes out the window).

Macro Man said...

Spagetti- I see from your profile that you're from Israel. Any thoughts on local reaction to the BOI's USD/ILS screw job from last week? Are they gonna keep ramping it?

KP: The problem, of course, is that cable was a sale of the century at 1.97, and NZD/USD at 0.7550. No doubt that's oen of the reasons we're up at these nosebleed levels now...


thinker...adjusting for the occasional link to a high profile site that sends traffic this way, and the gradual uptrend in traffic generally, I don't think we've had the sort of capitulative traffic that one normally sees at bottoms...though yesterday saw a big traffic uptick, even when accounting for a lot of Seeking Alpha traffic. So maybe we're getting close.

spagetti said...

re ILS

local exporters have no hedges and they r raising hell everywhere. so the intervention is a result of lobbying by corporates.

also recent CB staff projections are pointing to a slowdown coming in output and infl.returning to around 1% 1yr ahead

after last week's USDILS spike, lot of the exporters sitting on dollars they accumulated were just too happy to sell. the guy i asked (big local bank) said they had seen yday net 140mio USD selling vs CB buying 100
today he said they seen only 1/3 of that selling.

the C.Bank will keep buying in his opinion. so guess from here we go back up.

the CB governor, S.Fisher is slightly in the doveish / deflationist camp of the world, so I think he is resolute. thats just my take on his comments in recent months.

there is inflation fig this afternoon. keep an eye on that

kiwipunter said...

Well I don't think I can stay up to see the Dow open. I know it's going to be bad...very bad... Logging on to Bberg I see:

Gbp/Jpy with a new big figure! Finally MM!!

And...

Nzd/Jpy still at 81 (ish).... haha oh well go figure....

That party hats will be coming out of storage for the aud/usd parity party one feels....that battler is strooong...

But I agree with you Anon. NZ problems are shared elsewhere, especially across the ditch in the land of Oz. I'm thinking the NZ economy and subsequent central bank response is leading the Aussies by a good 6-9 months... I might not rsvp to the parity party just yet...

CB said...

Spaghetti -

Capitulation one of these days. But the continued orderliness (although Europe has overshot US futures big this morning) of the evacuation makes me believe it's still fire drill.

spagetti said...

cb

im still short eq.indices
but im starting to feel like its time to get out if we get a panic dip.
and i've been short since april, so its not that i flip it around too much

so i reduced 1/3

question: is the BIS allowed to trade in the open market ?

Macro Man said...

Spagetti....the BIS is a broker for the FX hijinks of loads of other CBs, so they are all over the FX market like stink on sh_t.

Anonymous said...

Agree with spagetti that risk of sauce all over our faces has increased and we are at a critical juncture, think another downleg in equities necessary over summer to plumb the depths, agree with fx carry shake out prognosis, but not so convinced about rates given CBs caught between and stag and a flation. Time to keep nimble and make the most of those short term trades, albeit almost anathema to macro players!
Cheers,
JL

Anonymous said...

what color code are we on for us financial security--i know the terriost threat level is still yellow but what is the financial threat level--blood red perhaps

spagetti said...

i think equities will bounce.. it doesnt feel like it can go lower for now
same goes for yields, the yen

only thing that feels like going lower is EURUSD, espec. after what happened to oil.

anyone any thoughts ?

Anonymous said...

spagetti,

FWIW, I've been carrying a pos. in SDS as a hedge....got out, and back in, once in the last 12 months....got out this morning in the early sell-off.....planning to dive back in during the "head fake bounce".

jan

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