Tuesday, September 02, 2008
And so it begins. With staffing levels returning to normal, today marks a fresh beginning on a whole host of levels. Consider that today marks:
....the beginning of the late year performance drive for funds and banks, though employees of the latter are more concerned with keeping their jobs than getting paid this year.
...the beginning of a month of critical central bank announcements; the RBA cut rates for the first time since 2001, and the ECB and BOE announce policy decisions on Thursday.
...the beginning of the death throes for the current UK government as they hit the panic button on the housing market.
...the beginning of a new school year for some kids in the UK, though the Macro Boys have another two days of freedom.)
...the beginning of the cold and rainy season in the UK, which will last for another nine months (until we return to the cool and rainy season.)
...the beginning of Macro Man's campaign to return to peak physical condition after a gym-less month of coughing and nose-blowing.
The story of the day so far is oil, which has traded limit-down after Hurricane Gustav failed to decimate the Gulf coast infrastructure. The price action isn't exactly constructive, and the perceived $100/bbl "new floor" for oil looks set to be tested in the very near future.
Oil has taken the dollar with it, and unbelievably EUR/USD is now down on the year. Higher beta currencies like AUD and NZD have also been badly punished, with each down nearly 2% on the day against the dollar at the time of writing. While it is certainly possible that a USD resurgence could be a key theme for Q4, at this point Macro Man is a tad leery of getting sucked in; after all, if the rest of the world is slowing sharply, it will be a touch more difficult for US net exports to be as positive moving forwards as they were in Q2.
While equities are bouncing this morning on the back of the oil collapse, the support could prove ephemeral. Lower oil does little to improve the fortunes of the financial sector, which continues to depress top-line index level earnings, while on the margin it could dampen the prospects of the highest-earning sector, energy.
The top-down model that Macro Man uses suggests that the prospects for equities are very dismal indeed; the chart below illustrates the 12m forward price return forecast for the SPX. It ain't pretty.
That the USD/RMB one year forward has traded up to 6.75 today- pricing in the slowest pace of RMB appreciation since a year before the peg was broken- is as indicative as anything of what is going on. Favoured trades are being flushed, and you'd have to say that markets are starting to flirt with the notion of pricing in global recession.
If this trend continues, you'd have to think that stocks look vulnerable, regardless of what oil does. Macro Man has re-introduced some short equity deltas into his book this morning as a result.