Friday, October 31, 2008
The fix is in! No, Macro Man has not ordered a tin-foil hat and isn't quite prepared to believe that the Rosicrucians,et. al are running the show....yet. No, today is all about rebalancing flows for the month-end fixing in currency, bond, and equity markets.
While this is always an issue at month end, the sheer scale of the moves in equity markets this month make this the most widely-anticipated month end fixing that Macro Man can recall in his fifteen-plus year career. Stories are circulating that passive and active global equity funds will need to buy something like $35 - $50 billion USD at the 4 p.m. London fix today, and that pension funds will sell cartloads of government bonds to buy equities, as they are now overweight the former and underweight the latter.
Now, there is almost certainly something to this, because these sorts of flows do exist. So it would appear to be easy money to go long USD now, and lob them out to the poor slobs who will be buying later this afternoon. Call it an early Halloween treat!
Ah, but finance is rarely that straightforward. The DXY has already rallied 1.5% since the New York close, which strongly suggests that some punters are already short. What odds that there is a nasty short squeeze in EUR/USD between now and this afternoon to shake out some of the punters? And when exactly are you supposed to take profit on your dollar longs? EUR/USD sagged into the fix yesterday, but then rallied just before 4 pm, wiping out most of the profits from a fix-related short. While there may well be a treat from playing today's fix, so widely has it been discussed that Macro Man can't help but worry that Dr. Market is preparing a trick for unwary punters.
Ditto the equity/bond rotation, which looked like having legs earlier in the week but has frankly disappointed the last couple of days. As noted yesterday, while it is eminently reasonable to suggest that bear fatigue has set in, we do remain in a secular bear market. Should the expected pile-driver rebalancing not materialize today, what odds of a sharp drop in stocks into today's close? Macro Man has got nothing equities (having taken profits on his tiny tactical long on Wednesday), and remains leery of playing stocks 'til the dust settles on month end and the election.
Elsewhere, the news just gets better in Europe. Yesterday's Eurozone economic confidence indicator recorded its largest drop in the history of the survey (how often have we heard that phrase recently?), and UK flagship retailer John Lewis has seen sales fall 9.8% y/y.
More ominously, there is a serious gap opening up between core and peripheral government bond yields within the Eurozone...which is pricing in a serious chance of either default or a fracturing of the single currency zone. Ten year Italian government bonds now yield 1.25% more than their German counterparts. The 10 year CDS spread between the two is 75 bps.....so at least some of this spread widening appears to be pricing in the chance of the Eurozone not reaching its 20th birthday.
And while that would be a nasty trick for a certain Monsieur Trichet (or his successor), is it churlish to speculate on what a treat that would be for macro punters?