Dissonance

If Macro Man scratches his head any harder this morning, his thick mop of (graying) hair may soon develop an unfortunate bald patch. The news is coming thick and fast, and markets don't seem sure of how to react. Consider:

* Ireland guarantees all domestic bank liabilities....

* ...prompting France to propose a Europe-wide bail-out solution (aka "Le Tarp")...

* ...which led the Germans to shout "Das ist nicht gut!!!

* Meanwhile, the world's largest SIV (remember them?) blows up....

* ...but hey, the Senate has passed the TARP!

Different markets seem to be reacting in different ways. While Asia took Spoos lower, European equities have roared higher (again) today. The FTSE future is now up more than 10% since Monday's low. By way of comparison, Spoos are only up about half that much.
Perhaps the FTSE is being supported by rate-cut expectations; sell-side BOE rate forecasts are falling more often than the rain in Britain. Dec short sterling is now back at its recent highs, and is now pricing 3 month LIBOR a whopping 80 bps (!!!) above the expected fixing today. Perhaps the bid is down to expectations that the ECB may turn dovish today (and we all know that Merv takes his orders from Frankfurt these days); then again, if that were the case, why the hell are Schatz down on the day.
But riddle me this, Batman. If the world is such a shiny, happy place, why has EMFX gotten caned this morning? It's been a while since Macro Man can remember USD/TRY and major equity indices both showing up more than a percent on the day.
And insofar as the euro has represented a vote on both risk appetite and European policy, its further collapse today to new yearly lows (and very close to long term support) suggests that all is not right in Paradise. What gives?
So in summary:

a) Equities are having a party....

b) ...perhaps as a result of the prospect of easier ECB policy....

c) ...yet 2 year German govvys are lower on the day....

d) ....and EMFX is trading in a risk averse fashion...

e) ...and the euro is saying everything's a mess.

Macro Man's had to punch shift F9 on his keyboard, because this market truly isn't getting easier. For a guy like Macro Man that likes to construct a portfolio on non- or negatively-correlated assets, this is a very challenging environment indeed. Perhaps today's ECB press conference will clear up this market dissonance...but with US payrolls and the House TARP vote tomorrow, Macro Man ain't holding his breath.
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Sean Maher
admin
October 2, 2008 at 11:17 AM ×

MM Euro/$ may be a bear trap...if we get an upward dynamic later may set up a rally all way back to $1.50, dollar index looks toppy, otherwise large H&S apparent on chart says we're on a one way ticket to $1.30ish...I'm not playing until we see whether the ECB moves. As for equities, your fellow hedgies imploding may scupper this rally...

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normal being
admin
October 2, 2008 at 11:39 AM ×

US$ up and EM down is a quarter end phenomenon.
Big, big outflows from hedgies and the like (especially the ones with Lehman ties) multiplied by lack of funding. And of course cash hoarding in US after failed bailout.

Quarter is finally over and bailout may yet pass. That could mean US$ taking the same elevator down again. Perfect day for the ECB putting on a show...

A great, great article on systems and leverage by the way here:
http://nickgogerty.typepad.com/designing_better_futures/2008/09/on-systemic-collapse.html

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g-whiz
admin
October 2, 2008 at 11:58 AM ×

I am bailing - g-whiz

I am bailing, i am bailing
All bad debt, cross the sea
I am bailing, stormy markets
To be nationalized, to be free

Can you bail me, can you bail me
Thro the writedowns, far away
I am dying, forever lying
To repay you, who can say

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Damcanu
admin
October 2, 2008 at 11:59 AM ×

Ah, the FTSE never ceases to amaze me. Even though I been bearish for what seem's like ages (Spring 07) it's been so tough trying to make money as a bear in this bear mkt.

I guess the trade over the last couple of days was:- long FTSE / short Dax.

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mikarsky
admin
October 2, 2008 at 1:14 PM ×

I anticipated a stronger USD for various reasons. A lower EUR isn't in anyone's interest. So it's again more politics than markets, which are dead more or less. Let's see what JCT has to say...

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mikarsky
admin
October 2, 2008 at 1:17 PM ×

sorry a HIGER euro isn't in anyone's interest

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Anonymous
admin
October 2, 2008 at 2:10 PM ×

Hi MM,

how about considering the crack spread to trade your yesterday’s view of the death of US consumer… After all, crude oil might move further south due to the global slowdown but demand for gasoline is supposed to be quite inelastic, at least in the short term… Consumers might be forced to reduce other discretionary spending, but are definitely not going to sell their cars and start commuting by trains all of sudden… Crude oil and reformulated gasoline prices might therefore diverge… Just a rough guess, I know, but outside single stock names and sector ETFs it might be worth a look.

AT

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mikarsky
admin
October 2, 2008 at 2:10 PM ×

Like always, the ECB press conference didn't bring any fresh news for anyone following the market. Looks like they are preparing the market now for the possibility of rate cuts.

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Anonymous
admin
October 2, 2008 at 2:41 PM ×

MM- Continue to hear of HF prob, consistent with the comment from normal beings. Is there likely to be LEH prime broker fallout? The US Senate succeeded in showing the reality of politics-- adding $110 Billion of tax breaks (real costs) to the $700 Billion bailout (possible costs.) Their bill is loaded with so much pork that it shocked even the most hardened cynics. When confronted with a "must sign to save the market" situation, our erstwhile senators reverted to their time-tested, "load on the pork" response.

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Anonymous
admin
October 2, 2008 at 3:19 PM ×

MM - love the blog, thanks.
The stream of negative economic data has become a flood. Jobless claims higher, durables and factory orders way down. Do you think that a good position is to play for a big relief rally in stocks when the House finally passes this bill (which it must do, in some form or another) - and then prepare for the downtrend to continue when people realise that despite the bailout, the "real" economy is in trouble?
Cheers,
CT

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Anonymous
admin
October 2, 2008 at 5:15 PM ×

buy gold? well, why not guns and rifles?

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Anonymous
admin
October 2, 2008 at 6:43 PM ×

Mikarsky
"a higher interest isn't in anyone's interest"
What about
- a strong dollar soothes system-wide credit concerns (it’s still the world’s money)
- a strong dollar makes oil cheaper (less dollar borrowing by countries to buy oil)
- a strong dollar mollifies commodities prices and inflation expectations (allows for rate relief needed in Asia and Europe)
- a strong dollar helps US consumption (imported goods cheaper i.e. increases purchasing power)
- a strong dollar helps periphery exports (liquidity draining from emerging markets, exports required to re-liquefy)
- a strong dollar helps German exports (and European manufacturing)
- a strong dollar combined with rising US yield differential (as ECB and BOE and RBA and SNB…cut rates) might create a self-reinforcing flow of hot money (speculative capital) into the US looking for a home, thus reducing the burden of fiscal policy to stimulate the private sector

Courtesy to Jack Crooks
geert

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mikarsky
admin
October 2, 2008 at 8:15 PM ×

Sorry for the confusion. I meant: a weak USD is in no one's interest. OR a strong EUR is in no one's interest. For all the reasons you cited : )

But consider the Bloomberg headline:
"Trichet Indicates ECB Poised to Cut Rates as Weak Economy Damps Inflation"
Anyone who listened to the press conf knows that Bloomberg GROSSLY misconstrued JCT.

1) He said they were considering a cut or to leave rates. So no rate increase on the agenda, which any literate human being would have expected. But he DID NOT indicate they were "Poised to Cut Rates" - this is plainly wrong.

2) He said a rate cut was considered because commodity prices eased. But he DID NOT indicate that a "Weak Economy Damps Inflation" - again plainly wrong. Indeed, he said that inflationary pressure comes from INSIDE the economy as 2nd-round effects. So basically the opposite of what Bloomberg construed.

Which leaves you to wonder whether Bloomberg don't understand JCT's french-nuanced English OR whether they purposely misconstrue statements. Either way, Bloomberg is unprofessional.

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Macro Man
admin
October 2, 2008 at 8:26 PM ×

Mikarsky, I am sorry but you are flat out wrong. I watched the press conference. He essentially downgraded upside inflation risks, he more or less said the M3 data is uselessly distorted, said the ECB discussed whether to cut rates or leave them and hold, and said that they will act AT ANY TIME...not once, not twice, but three times.

In Trichet-speak, that was an indication of a coming rate cut...one that could come as early as tomorrow should circumstances warrant.

If you don't see a hint of a rate cut in that press conference...well, you must be looking awfully hard in the other direction.

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Anonymous
admin
October 2, 2008 at 8:59 PM ×

what's wrong with being bald?

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Macro Man
admin
October 2, 2008 at 9:04 PM ×

Nothing, just like there's nothing wrong with being gray ;)

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gramps
admin
October 2, 2008 at 9:24 PM ×

No matter what the problem and no matter how indebted everyone already is...


Wall Street "analysts" will always say the cure to every problem is to cut central bank interest rates

That way, "analysts" never have to actually do any thinking

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mikarsky
admin
October 2, 2008 at 9:48 PM ×

MM - JCT is always being asked the same (irrelevant) question whether the ECB would ever consider cutting rates. How do you respond to the rhetorical question? JCT ALWAYS answered that it's part of the toolbox AT ANY TIME should circumstances warrant. ALWAYS the same answer to the same irrelevant question.

There is nothing new about a "hint of a rate cut". But it's quite new were the ECB "Poised to Cut Rates". Every child knows that language matters most. Also Bloomberg cited JCT as saying that the reason for lower inflationary pressure is a slumping economy. That's simply not what he cited as reason. Instead, he cited 2nd-round effects INSIDE the economy.

The last thing Bloomberg can say is: Oh, we didn't know what effects our misrepresentation have. Personally, I love shorting USD/GBP on such occasions because I know the market reactions will be overblown. As I write, USD/GBP just lost almost 0.5% in the last 3 hours. I'm sure the Bloomberg folks did the same. How professional is that??

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mikarsky
admin
October 2, 2008 at 9:53 PM × This comment has been removed by the author.
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mikarsky
admin
October 2, 2008 at 9:55 PM ×

Sorry, shorting USD/GBP means USD or GBP against EUR or CHF

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Martin
admin
October 3, 2008 at 9:26 AM ×

Bloomberg or not, markets are pricing in a November rate cut from ECB, and most economists are looking for a cut in November or December. Some even for a 50bp in Nov.

I think JCT was quite dovish indeed. Just look at these quotes:

On inflation: "upside risks to price stability have diminished somewhat", even though they have not disappeared completely

Not completely gone. Hawkish?

On growth: “fall in oil prices and ongoing growth in emerging market economies mightsupport a gradual recovery in the course of 2009"

Might. Gradual. Dovish!

On financial markets: "there have been enormous consequences, very unfortunate consequences after Lehman.”

Ehm. Dovish!

I'm looking for a Dec rate cut*, even though I'm very nervous about this. If not Dec then Nov.

*IG Metall should have reached a deal by mid-November, suggesting less wage-inflatino fears by December.

*Eurozone Q3 wage growth won't be available until mid-December (could accelerate since HICP inflation peaked in Q3) Will ECB have this statistics when meeting 10 days earlier?

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mikarsky
admin
October 3, 2008 at 10:32 AM ×

What WAS NOT EXPECTED was an IMMEDIATE RATE CUT. Bloomberg misrepresented JCT as saying the ECB is "Poised to Cut Rates" because the "Weak Economy Damps Inflation". THIS IS SIMPLY NOT WHAT HE SAID. In volatile markets WORDING is everything. And Bloomberg was well aware of that.

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