Uh-oh

Friday, August 01, 2008

Uh-oh.

Today is Macro Man's last day in the office before leaving on a two week holiday in the sun with Mrs. Macro and the Macro Boys. Those who know Macro Man will recall that his holidays are often accompanied by financial market fireworks.

In 2005, for example, he took a trip to the US in May and June...and while he was gone, France and the Netherlands voted down the EU Constitution and EUR/USD got taken to the woodshed.

In 2006, he went away in June, and the second leg of a global EM meltdown occurred- USD/TRY from 1.50 to 1.75, USD/MXN from 11.0 to 11.50, etc.

Last year, he went away at the same time as this year- the first two weeks of August. Consider the following changes that happened during his absence:

NZD/JPY was 89.78 when he left and 79.76 when he got back.

The 3 month TED spread was 0.53% when he left and 1.75% when he got back.

Fed statement during his first week of hols:

Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information.

Fed statement during his second week of hols:

Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets.

A cut in the discount rate accompanied that second statement, and markets are obviously still dealing with the issues that intensified this time last year.

So precedent would suggest bracing yourself for some fireworks over the next couple of weeks.

Here's some of the themes that Macro Man will be watching from the Algarve:

1) Another August of pain for Mrs. Watanabe?

Even as the flightless bird has fallen from the sky, Japanese retail investors have built up record longs in NZD. The last couple of sessions suggest that Mrs. Watanabe might be pulling the "eject" handle. The last time that happened was, er, this time last year, as highlighted above. NZD/JPY is at absolutely critical long-term levels, as the chart below illustrates. Macro Man wouldn't be surprised to see a repeat of August 2007.
2) The China trade takes a beating?

The Great Firewall of China is already rousing the ire of Western journalists. By all accounts the air pollution around Beijing remains a real issue, particularly for the endurance events- Macro Man's glad he's not an Olympic marathoner. At the same time, certain datapoints suggest an economy that's juddering to a halt: China's PMI sank below 50 for the first time ever (OK, there is only a 3 year history) overnight.
The Aussie dollar has been one of the popular China proxy trades, and it's started to come under some decent pressure in the last week. While rate-cut rumours seem premature, Canada provides a precedent for a commodity-rich country that's cut rates early when its major trading partner slows down.

3) The equity pain trade

For the third quarter in a row, earnings season has seen equities put in a bounce to temporarily reverse a prior steep decline. While Macro Man's analysis suggests that the fundamental backdrop for stocks is still lousy, there is nothing to say that those fundamentals will drive price in the short term.

Indeed, he's looking for a bit of a repeat of last quarter, which is best represented by the Eurostoxx chart- a sharp pop up (which we've already seen), followed by a few weeks of slow, vol-crushing, soul-destroying grind higher.

While this may seem incompatible with themes 1 and 2, bear in mind that despite the moves described above, last year the SPX actually closed higher on the last day of Macro Man's holiday than it did when he left the office.

Given the backdrop and historical precedent, Macro Man will be watching the market- not as closely as if he were if the office, but probably more closely than Mrs. Macro would like. He'll likely post from time to time, though not with the usual frequency and length.

Readers looking to exchange views with other (largely anonymous) punters should feel free to use the comments section here as something of an open thread. And while Macro Man has already purchased his holiday reading, any readers with high-conviction recommendations for a last-minute purchase are welcome to share them.

Good luck!



Posted by Macro Man at 9:12 AM  

22 comments:

Enjoy your hols MM! Last minute recommendation is Q by Luther Blisset, a fascinating story of papal intrigue as the reformation shakes out peasant revolts in Germany, a nice escape from the markets and a stark reminder that we've never had it so good.
Ciao, JL

Anonymous said...
10:46 AM  

Have a great vacation MM!

Anonymous said...
11:17 AM  

Have a good one MM ...

As per reference to my blog's Amazon recommendation list; did you ever get to read "A Wild People" by Hugh Leonard? It is a fine holiday novel ...

best

Claus

CV said...
12:37 PM  

Have a great holiday! Your faithful readers are prepared for apocolyptic markets during your time away and, forwarned, will, no doubt profit! As for holiday reading, these volumes may not be in many valises anymore, but I suggest you pack Letters from the Chairman by Ace Greenberg. Long before the Bear began its dance towards death, Ace collected his witty, informative writings and came up with several books-- a course of action I hope you consider. Best A reader

Anonymous said...
1:19 PM  

Enjoy the vacation! We'll buy some FX gamma for you... ;)

Anonymous said...
1:25 PM  

Anon, trust me, I've already got some gamma!

Macro Man said...
1:26 PM  

Claus & JL-- I'm going to pick up " Q" and "A Wild People", your picks for MM. Thanks for the ideas!

Anonymous said...
4:20 PM  

Great blog, thank you for posting so frequently and enjoy your holidays!

The best book I've read in a long time is "A Thousand Hills: the rebirth of Rwanda and the man who dreamed it", it gives you very good insights into what's happening in Congo/Uganda/Rwanda these days and what the US and France are up to there. It's inspiring and also quite interesting for a macro perspective.

angie said...
4:21 PM  

firs of all have a great holiday MM !

my fav novels i read the last few years:

1. Sebastian Faulks's Birdsong or you might want to give a try with his new 007 book
2. Edward Whittemore's Jerusalem Poker
3. Jared Diamond's Guns, Germs And Steel or Collapse

the out-of-the-office-market-turns-into-hell
curse might unfortunately work in your case as well, im sure. but also the curse is not really a curse because more than 50% of the time money is made during holidays.
dont you chaps agree ?

with equities i disagree with the low vol scenario, but im also short aud and nzd ag. the yen
and short cee currencies (you might want to take a look at them before you leave)

all in all, take care and have a safe flight

spagetti said...
4:59 PM  

Thanks for the recommendations, all: keep 'em coming.

I assume that the Luther Blisset who wrote Q is the anarchist group, rather than the striker who delighted the crowds at Vicarage Road and the San Siro.

Funnily, I ,already picked up a book written by someone using another person's actual name as a nom de plume: a volume of gothic tales by the Japanese writer Edogawa Rampo.

Spagetti, what does it say about traders when so many (me included) seem to make a disproportionate amount of money whilst on holiday? The word "overtrading" comes to mind....

Macro Man said...
6:20 PM  

Hello MM,

"At the same time, certain datapoints suggest an economy that's juddering to a halt: China's PMI sank below 50 for the first time ever (OK, there is only a 3 year history) overnight."

Basically I have the same impression. The Chinese economy is certainly slowing, and possibly quite quickly. Unfortunately they don't seem to give q-o-q GDP, which is what we really need.

And the thing is I think it is important to distinguish between those countries like India and Brazil, who are largely importing inflation via fuel and fertiliser costs, and places like China and Russia, where the labour market may be near its structural capacity limit, in which case second round problems etc are going to be much harder to control.

So I would be watching post-Olympic China very closely, I think. Another big breach in what some like to call the BRICs is that both India and Brazil have what the Economist has chosen to call the "democracy put". They also have slighly more market flexible economies, and central banks which do have a certain degree of independence. Mein Gott, the Economist even call Banco Central do Brazil the new Bundesbank - the ECB is, I fear, just about to lose that accolade. In addition they have let their currencies rise to quite a reasonable degree.

Bottom line: Goldman Sachs have it slightly wrong, since they didn't fine tune their underlying idea - which wasn't a bad one - enough.

OK. That's enough bla bla bla from me.

Enjoy your holiday. Personally I am staying put. Like Samuel Jefferson I find I am most lucky when I am sitting here at my desk. Anyway, it is far too hot out there at present.

But I wouldn't miss what is happening in Spain right now for the world. I am absolutely fascinated by how so many people can simply pack their bags and fly away to far places with absolutely no idea what they are going to find when they come back. Barcelona is eerily empty right now - even the numbers of tourists are down. Talk about having a clear conscience!

I have no idea at all how many of the companies who have just closed their doors for the great "cerragosto" will actually be in a position to open them come September. Meantime I watch and wait.

Edward Hugh said...
7:46 AM  

I guess you'll see this after your vacation, but anyway:
Looking at the NZD/JPY graph above, I see that it is touching the line. Don't you think it will bounce back, and not breach the line?

Yohay said...
2:43 PM  

Two books for consideration-
Mountains beyond Mountains by Tracy Kidder- about Dr. Paul Farmer, of Partners in Health (if you want to feel guilty about what one can do in a life)

Death comes for the Archbishop by Willa Cather- clean spare writing, and a good story.

RichL said...
3:08 AM  

TO MM readers-- Any other thoughts about NZD/ JPY? Would be interested to know the dynamcis of this roller coaster relationship. Thanks Anon

Anonymous said...
12:42 PM  

anon 12:42 re NZDJPY

im short myself.

very short term, it seems to move higher as USJPY moves higher, but i think USDJPY will top around 108.20-30

for NZDJPY seems 78.00 is a support lvl, it was the low several times over the last few months. and we bounced off that

longer term, the story is intact and so are the longer term charts in my opinion.

so im not too worried over the last 24 hours of yen weakness. would get more converned if usdjpy breaks 108.50 or if NZDJPY breaks 79.40

spagetti said...
1:26 PM  

Thanks, spagetti. I will watch and learn. Anon

Anonymous said...
8:04 PM  

Edward Hugh's comments about Spanish banks are echoed today in a Morgan Stanley piece. Things look bad. Is the Uh-oh curse at work again?

Anonymous said...
6:03 AM  

Spagetti I guess you're pretty concerned with USDJPY currently at 109.69....

I guess the Jap gov talking about economic deteriorisation not helpful!!!

Anonymous said...
10:13 PM  

Anon 10:13 PM

USDJPY isnt making me particularly happy.

I avoid usdjpy though.

crosses like nzdjpy, audjpy are off their lows but its not dramatic.

eurjpy short is also hurting. maybe trichet will help me out there. eurjpy could recouple with the eur-yen interest rate differentials, which will be in favour of the yen if trichet doesnt sound too hawkish

spagetti said...
9:38 AM  

While I enjoy the blog, the comments section seems to be increasingly noisy, cf. comments on technicals from people who think "Influence and foul play are impossible" in the FX market. What next, hot tips on penny stocks?

Anonymous said...
8:17 PM  

Blimey - you should go on holiday more often (and I'm sure Mrs Macro and the Macro Kids would echo that).

Are we gearing up for another bout of fun and games now? RUB basket calmed down, 1m EUR/USD vol getting sold off from the highs (albeit not hugely), VIX doing nada.......

(panto voice) "Look Behind You!!!!"

Anonymous said...
3:42 PM  
sosoy said...
10:26 AM  

Post a Comment