Thursday, September 04, 2008

A big day (potentially)

It's central bank day in Europe, so there's plenty of potential for fireworks if the cards fall correctly. We've already had something of a surprise, as Sweden's Riksbank hiked rates but then issued a stream of dovish statements, confounding expectations that there might be one more rate hike in this cycle. The central bank governor of Turkey, meanwhile, suggested that the CBT would start discussing rate cuts this month following the decline of oil prices and the subsequent decline in inflation.

The main course(s), of course, are the BOE and ECB, with the press conference of the latter coming under particular scrutiny. An equity manager friend of Macro Man's told him this morning on the train that he expected the BOE to cut rates today. If this forecast (or, perhaps more appropriately, wishcast) fails to materialize, today's early morning rebound in the the FTSE could swiftly reverse.

That's not to suggest that the BOE shouldn't cut rates, of course. Macro Man's favourite BOE indicator, his labour market momentum model, suggests that the BOE should begin easing aggressively. The inflationary fallout from Rip-Off Britain will, of course, preclude rates from going to the levels suggested in the chart below. While a lot of the focus has been on rising prices of necessities (energy and food), Macro Man was stunned to see that the price of his morning Times rose another 10p this week. Since the end of 2003, when your author moved back to the UK, the price of his morning paper has risen from 35p to 80p. Chances are that Merv the Swerve is just as concerned about that as he is the implosion of the housing market.
In Europe, meanwhile, all eyes will be on the smuggest man in finance at 1.30 pm London time. This month's press conference is particularly important, coming as it does after another month of crappy data, a sharp decline in the euro, and a collapse in oil prices. Markets appear to be fearful of Trichet echoing recent hawkish sentiment from sundry governing council members, as European fixed income has traded with a decidedly weak tone today.
Should Trichet fulfill the hawkish expectations, it would beg the question of what the hell he needs to see before adjusting his outlook. The cycle in Germany has ground to a halt, and the country now faces a real prospect of sequential quarters of negative growth. In fairness, labour markets have yet to display much weakness, but forward-looking indicators such as the ifo
or manufacturing orders (pictured above) have absolutely collapsed.

Perhaps M. Trichet is waiting for the lagging data to roll over before changing his stance; if so, Macro Man would suggest that he takes his rearview mirror and go to work at a ratings agency after he leaves his current post.

What might also be interesting for markets is if Trichet announces a change to the ECB collateral guidelines, as the market scuttlebutt is that the ECB feels like banks are abusing the current framework. Should they tighten up the collateral rules, this could put renewed pressure on European banks, which already face substantial debt rollovers for the next eighteen months. It will also be interesting to see if JCT mentions the euro; given the persistent European whingeing this year, anything other than acceptance of the move would be the basest hypocrisy.

Elsewhere, hunting season is picking up steam. The rouble basket is up another half a percent today, breaching yesterday's highs. Ouch! JGBs have collapsed, and another high-profile commodity punter has imploded.

This begs the question of where the remaining pink flamingos reside. So Macro Man puts it to his readers, particularly those with skin in the game: where are the remaining consensus trades that are well-owned, stale, and ripe to get shot down this hunting season?


Anonymous said...


Anonymous said...

Time to reverse EUR/TRY from short to long - how about CBT credibility in setting inflation targets?

Riksbank board members highly undecided, but EUR/SEK and NOK/SEK did already moved higher - too risky?

Very short term, how about buying OTM calls on GBP/USD or EUR/USD expecting a no move by BOE and ECB?

Time to fade RUB downside move? By the way, what's the Russian CB up to right now?

Equity shorts good for CHF or JPY?

Italy losing next match in Cyprus and at home with Georgia?


Anonymous said...

From where I stand, or rather sit (in Stockholm, Sweden), it appears as if most market participants are expecting a final blow-out in equity markets this autumn, coupled with macro weakness in the US and rising financial angst as losses mount from e.g. the property sector.

This blow-out is supposed to be the last, after which we will enjoy a long equity market boom again.

Best regards

Anonymous said...

Chances are that Merv the Swerve is just as concerned about that as he is the implosion of the housing market.


That's the funniest thing I read in ages. Perhaps I should take up the new Sunday Times direct debit / voucher offer and save myself 20p a week.

All the best

Charles Butler said...

Would suggest that, at current levels, equity indexes have priced in a 'failure to have crashed', but are nowhere near accounting for a potential prolonged period of economic sluggishness.

Anonymous said...

I would suggest that fx consensus has already cleared out long CNY,GCC and Rub so the p-takers of the world live to fight another day. Now everyone just waiting for that Eur bounce to 1.49 - doh!

Retail still hanging onto their long gold exposure for dear life and we know how that story ends.

Consensus to be very long Euro & UK front-end does remind me somewhat of earlier this year when you HAD to be in steepeners...


Macro Man said...

Anon@ 10.30...I am not sure if Turkey is broadly and deeply held, so much as that there's an absence of a short base, given that they were all carried out (literally) in the summer.

AT, at this juncture I really have no interest in RUB. As I see it, they don't like me and I don't like them. Why should I give them cheap funding via the NDF market? As for football bets....why not a cheeky tenner on Paolo di Canio as West Ham manager?

Pecanpie, I can see that macro HF guys are broadly bearish equities....but I don't know if this view is held amongst the real money guys who ultimately drive the market. Anyhow, I've cast my lot in with the bears, for reasons that CB articulates.

Darren, do it mate. It's a Tesco economy: every little helps.

Anonymous said...

Oh, also any thoughts on the divergence between relatively low cross-asset vol and various credit measures back nr highs - swap spreads etc? Is it too simplistic and consensus to expect another equity/risk sell-off to resolve this?

Macro Man said...

Anon @ 12.10...equity markets are the standout. As credit's gone out, FX carry (G10 and EM) has cratered, commodities have collapsed, and the dollar's had a huge short covering bid.

normal being said...


That's exactly what I'm looking for, too.
I would only exclude equity that is focused on the US market. GM, Ford, US retailers, home construction and many regional banks are definitely not ripe for a bull run.

But this is definitely peak inflation.

Anonymous said...

Agree with Anon 12.04, fixed income longs heavily populated. Let's see what JCT has in store for the Euribor longs today.

Anonymous said...

IMHO, all the absolute return-type strategies will get even more dicey.

The 'historical nonvolatility/noncorrelation v. equities' of the carry trade and buy-write strategies is meaningless in a deleveraging world.

Though we've seen liquidation, we haven't hit the panic stage in commodities, equities, carry trade, REITs, buy-write, etc.

It's the panic stages that are truly scary.

Macro said...
This comment has been removed by the author.
Anonymous said...

MM, "As I see it, they don't like me and I don't like them."

Is it about politics? Just curious, how much politics do you consider in the investment strategy? I do not mean the political situation of the target region, but your own political like/dislike.

Macro Man said...

Anon, broadly speaking, I ignore politics, aside from the odd bit of sniping (eg, Chekist Republic).

My comments w/r/t Russia reflect prior public statements from CBR that they want to punish speculators in their currency, despite the fact that a) the policy requires the CBR to act suboptimally w/r/t their inflation target, and b) Russian banks, including those which are state-owned, are very heavy specs in the G10 currency space.

If I were to not invest in any region where I didn't like the policymakers< I would have a very small investment universe indeed, given my disdain for most public servants these days.

Anonymous said...

Short Financials
Short Credit
Long govies

SwissBoy said...

Given that every bank is limiting access and use of Blackberrys, I'm short RIMM.

Anonymous said...

Think there are flamingos amongst real estate bottom pickers, esp re PIMCOs shameless front running US govt policy, and still some in the equity space (esp commodity co's, GS today still o/w miners/resource vs u/w financials). (As an aside on the LT front interesting to see the virtual disappearance of household equity ownership). Will be interesting to see what happens with FI curvature/longs with the equity mkt shakeout, and the deflation/stagflation story playing out, but agree that there's some different flamingos there too. Cheers, JL

Anonymous said...

30y US Bond when foreign CBs finally get tired of buying USD, not a new idea but maybe getting closer?

Anantha said...

what about the U.S. dollar? over-owned and consensus long now

Anonymous said...

Without any doubt, the most overpopulated trade is long government bonds - especially USD.

Historically, weak economic conditions pointed toward lower rates, but this credit disaster is very different from the career experience of most bond traders.

If the housing market is anywhere near as bad as the market suggests, and if the two US presidential candidates fail to even mention run-a-way spending -- it is hard to conclude the US will keep a AAA rating. Long bonds (and even 10yrs) are trading in complete defiance of history.

Similar to the housing market, everyone thinks they can sell their bonds to a bigger sucker before the music stops.

Anonymous said...


Anonymous said...

Ditto-- BRL and US govt long bonds. Great post, as always, MM.

Macro Man said...

Well, what's interesting is that of the two consensus consensus trades- long BRL and long govvys- one is getting absolutely smoked and the other is bid only, thanks to equities' refreshingly shocking price action.

As someone who's only traded US govvys from the short side this year (VERY selectively, mind), I'd be curious if this would-be flamingo is thought to be held primarily by real money guys, or whether it's leveraged types who can't get enough of Uncle Sam's finest.

Anonymous said...

I would guess the holders are primarily real money (holding duration to hedge their credit positions) and CTAs. I believe the only way out of this mess will ultimately be through fiscal, not monetary, policy. That means more government debt and, who knows, even the unthinkable downgrade of the US. I don't fancy seeing where bond yields go if real money comes to a similar conclusion, and the CTAs follow them 50 ticks later. As anyone who trades fixed income markets knows all too well that timing is everything, but as US 30 year yields nudge ever closer to this centuries floor in yields, I for one will be initiating shorts.

Anonymous said...

Not a pink flamingo, but have been watching LEH tank agian today amid rumors and generally horrible equity market. Is equity market the tail or the dog for your currency trades, MM?

Macro Man said...

Neither. This week, the equity market has been the "pooper scooper" for my currency trades, cleaning up the shite that my FX trading has created.

As for CTAs, as far as I can make out they haven't got much in either 10's or 30's, at least by my reading of the CFTC data. Am I missing something?

Anonymous said...

My view especially on MCX is that the much of the rally can be traced to the optimistic comments coming from PSN. That led to some short covering I'd say.

Then at 9600 with shorts covered and down we go.

LEH - you get to a point where you take a view but when its at $13-14 going short means you think it is going pop...


Anonymous said...


Mike said...

Em... "ripe to get shot" down unless central bank intervention:

3. USD/anything

I would even give GBP a chance because, IF IF IF the BOE is smart enough to withstand, it won't lower rates any time soon. Some ppl start crying but we just had the first loop of the roller coaster.. expect a few more ; ))


D said...


mikarsky said...

Follow up:

Eurozone growth is lower but that's not really a surprise after the ECB announcing just that 3 months ago. Afterall, Europe’s biggest and most innovative economies live from exports - directly into the US or indirectly by supplying industrial goods to Asia for exporting consumer goods to the US. Spending power in the US zeroed, because asset prices fell while commodity costs rose. In other words, the world’s largest consumer is unable to buy our goods. It’s no surprise that Europe’s economy feels the gap that lacking US demand creates.

But let's keep perspective. The housing bubble created the spending power that is now fading away. The European economy as a whole is adjusting to reduced demand. But let’s not forget that *substantial* differences remain between those countries that experienced a housing bubble and those that did not. There is a fundamental difference if consumers are debt-ridden (as in the former countries) or simply a little bit nervous (as in the latter). For the former, the substance for a quick recovery is simply not there, while in the latter there’s just an adjustment down from high levels.

There will be negative growth for a longer time than expected in housing-busted and just lower growth in other countries. Demand in these countries is supported because there is money left to spend. Because we’re still in the early phase, the last thing a central banker would do now is lower rates only to have no tools left for what is yet to come. Reduced growth is the consequence of an asset boom and nothing to be hyper about. But by getting hyper now, hyperinflation becomes a possibility. Inflation destroys value - reduced growth does not!


PS: But the major players have an interest in a strong USD so fundamentals aside, the game is still on.

D said...

Macro my man,

I know the RUT2K is probably an ugly thought for you these days, but you can jump on the bandwagon now.

Disclosure: Heavily shorted in my book on 8/28 9/2.

Anonymous said...

"JGBs have collapsed"

HUH??? JGB futures poked their head above 139 today for the first time in months. Further, they have risen a whopping seven points in the past twelve weeks. That hardly sounds like a collapse to me.

Macro Man said...

They were down a point yesterday while other fixed income was bid.