Tuesday, July 15, 2008
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.)
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.