The Good, the Bad, and the Ugly

The Good: Good news has been in short supply, at least judging by financial market price action. But under the surface, the authorities are at least taking steps in the right direction. Jean-Claude Trichet has exchanged his hair shirt for a leisure suit; yesterday's announcement that the ECB would relax its collateral guidelines represented an abrupt about-face from the recent tightening of such requirements that encouraged Macro Man to re-short European equities last month. The decision to provide dollar liquidity via FX forwards is significant, as for the first time it allows European banks to borrow dollars without stumping up capital.

Meanwhile, the decision of Dr. Evil and Mini-me (pictured, left) to buy bank shares, rather than turds, with the TARP money should deliver the taxpayer and the authorities much more bang for the buck.

So in terms of markets, the one bid of good news is that money market rates have started to edge lower; both ICAP and LIBOR dollar funding rates (3 month LIBOR is pictured below) have turned down, though they remain at elevated levels.
The Bad: So the funding markets are saying "hey, we think you may have cracked it" and started to normalize a tad. The bond market, however, has chimed in with a rather awkward question: "Errr.....how exactly do you plan to pay for this?"

So we're left with a situation where risk assets and economic data have been horrible....and bonds have sold off on concerns over the supply. Yield curves have steepened dramatically, finally introducing the sort of term premium that Macro Man was musing about a few weeks ago.
And as noted above, beyond all the financial crisis hurly-burly, there is still the small matter of a recession to navigate. As the impact of the US stimulus package wears off, the tone of US data has turned truly execrable. Yesterday's retail sales figures were just the latest in a skein of wretched US economic figures; somewhat frighteningly, the rest of the world is probably lagging the US by a couple of quarters.
The Ugly: There's too many items that fall under this category to provide an exhaustive list, so let's just look at a few:

* Citadel reports its worst monthly return ever. Over the past few years Citadel has been morphing from a pure hedge fund into more of a quasi-bank. The appear to have completed the transformation last month and generated bank-like returns.

Word on the strasse is that yesterday's late session meltdown in the Spoos was Citadel selling; Macro man has no idea if that is true or not, but the price action was certainly ugly.
So much so that we have a new entrant onto the list of worst Dow days ever (logarithmic return version.) U-G-L-Y.
Meanwhile, the drumbeat of political backlash against market risk takers grows ever louder. Italian finance minister Tremonti has called for the "destruction" of "hellish" hedge funds and promises to push that agenda when Italy begins presiding over the G8 in January. Perhaps what really concerns him is the hellish performance of the virtually eponymous hedge fund indices in September?

In any event, market liquidity and risk appetite is best described as "anorexic." USD/ZAR is just another example of a rupture in the liquidity continuum; last night it gapped in New York from 9.80 to 10.50 with a grand total of 5 trades going through. Since this chart snapshot was taken earlier this morning, USD/ZAR has traded as low 9.82, and is now back at 10.10. It's safe to say that we can file this candlestick pattern in the "scowa" (Satan's Can of Whup-Ass) category.

The BOE announces changes to its money market regime this morning, and rumours are swirling of another coordinated rate cut later today. Macro Man really has no idea whether that will happen or not, but is pretty sure that there is more bad and ugly news in the pipeline.