Friday, August 01, 2008
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.