4 charts

Tuesday, November 11, 2008

Well, the joy of the Chinese stimulus package lasted....err......about 12 hours. By the end of the day yesterday, stocks finished solidly in the red and oil had reached a new cyclical low, with front-month WTI trading down onto a 50 (!) handle since Q1 2007.

The fun has continued this morning, with everyone's favourite kleptocrats adjusting the top end of the rouble basket, allowing for a 1% deval from 30.40 to 30.70. Anecdotals suggest plenty more trapped positions.
Another pegged currency that Macro Man is watching is the Hong Kong dollar. Hong Kong faces a) recession brought on by declining trade, b) the popping of a domestic property bubble, and c) the prospect of deflation in 2009. While betting on a HKD revaluation has been a sporadically popular trade for the last few years, the underlying pressure is actually shifting towards Hong Kong requiring a weaker currency. And yet the spot rate is hugging the bottom of the band (you can actually buy USD forward below the 7.75 lower bound.) Therre was a similar episode this time last year, which culminated in a fairly sharp rally back towards the upper half of the 7.75-7.85 band. It looks like a pretty decent risk/reward trade to bet on a similar outcome now.
LIBORs keep tumbling (3 month USD could fix below 2.20% today), but swap spreads remain relatively elevated. The 2 year dollar swap spread, shown in the chart below, seems to have reached a reasonable support level at 100. Lower LIBOR should help pressure these spreads lower; if they cannot break 100, that's probably as good a sign as any that there remains considerable underlying stress in the financial system.
Finally, (and this one is directed towards non-expert users of Bloomberg, most of whom have probably seen this chart before), we can probably all be happy that the rule of law in South America seems to have remained resilient throughout the current financial crisis. At least, that's the most obvious interpretation of the chart below, which shows that monthly kidnappings for the purpose of extortion in Colombia remain on their lows.
So at least that's one reason for optimism....

UPDATE: As a colleague points out, the data in the chart above ends in December . So perhaps the rule of law hasn't been as stable as first hoped......

Posted by Macro Man at 9:49 AM  


HKD trade looks terrible risk reward, ur upside is tiny relative to ur principle at risk.

Anonymous said...
10:59 AM  

Surely the kidnapping chart is yet another sign that the economy is slowing/crashing. What's the point if the potential victim can´t pay up?

Anonymous said...
11:07 AM  

Crime rates are indication of low economic activity. Think of crime as alternative ocupation. High unemployment = high crime rate.

Anonymous said...
11:30 AM  

Gee I was checking the COCKPMON index yesterday afternoon after a couple of years and made the very same comment in my head. Am I scarily synced to MM or is it just a bizarre coincidence?

Gus said...
11:34 AM  

anon 10:59

why is the HKD trade having terrible risk-reward?

Probability wise (and given the world in economic turmoil) the chances of revaluing the HKD are even less than 1 year ago. And yet you have spot trading where it is, and the forwards still quite negative.

True, a sudden reval will wipe you out but the chances of that happening are quite low given how vulnerable the Hong Kong economy is at the moment. Stability is the name of the game at the mom, at least that is what the HKMA has gone for the past decade

Not only that but any surge in demand for HKD cash will likely push the forward points higher.... thus long 1yr USDHKD makes sense

Anonymous said...
12:36 PM  

Hi everybody,

could someone be so kind as to explain absolute beginners like me what "swap spreads" are and what's the "2 year dollar swap spread" supposed to measure (and how it's measured...)? Have "swap spreads" something to do with major corporates' cost of debt?

Thanks in advance, AT

Anonymous said...
12:53 PM  

@anon. 1059 --- You mean "principal at risk", though the markets might put one's principles at risk, too...

Anonymous said...
1:47 PM  

as I recall...the last time someone attempted to take a run at the HK currency peg (summer 98) they got their heads handed to them by the hkma

richie rich said...
2:39 PM  

hkd is a terrible trade because you are targetting so little return on your cash. You are targetting a 0.7% return on principle, why the hell is that enough to even look at the trade? Waste of time in this market.

Anonymous said...
2:47 PM  

in the summer of 98 they didn't target the currency directly... they went for the Hang Seng....and shorted the heck out of it to put pressure on the peg...

then the hkma put 12bil of their currency reserves to work buying HSI and the shorts went home...fast

the same would happen again...this time backed by CIC, SAFE and pboc...therefore...given sacrosanct nature of HK to PRC's future...probably not a good idea to take run at peg

richie rich said...
3:27 PM  

@AT: internet can be useful.. however swap spreads are differences between swap rate and government rates, maturity matched. It can be valued as a credit spreads, considering that swaps are issued by generally AA banks. But at the same time swap spreads are different from bank bonds spread (because swaps are generally collateralized).

3:58 PM  

don't read anonymous posts, can't leave an identifying mark punt 'em, anon can post the exact opposite the next day...niels jensen says adios to euro banks much better than moi here:

Anonymous said...
4:19 PM  

At least the Russians got their priorities straight:

They preferable screw over foreigners, not their own people!

Anonymous said...
4:50 PM  

I think I see some bullish divergence in that last chart...

vandalsstolemyhandle said...
5:19 PM  

I've gotta ask, how did you come across the Columbian kidnapping chart? And, do you have any more gems hidden?

James Cullen said...
8:31 PM  

Gus, yeah, I was on a chat yesterday when someone brought it up. Like you, I hadn't seen it for a while. As noted, a lot of BBG users have seen it...but then a lot (and just about all non-BBG users) haven't. It does say a lot that kidnapping is (or at least was through last year) an official stat in Colombia.

James, this stat is one of many that get circulated in a viral sort of fashion. I got plenty more....which I'm saving for a rainy day.

Macro Man said...
9:15 PM  

i wonder if you can do the columbian kidnap chart thing for prc?....hear it;s happening there alot lately as result of issues in alternative banking sector

richie rich said...
11:50 PM  

I know its late in the day so not sure how many still checking this before bed, but I've just watched another terrible day on Wall St, etc, etc. Bad news flow said to be driving markets, blah, blah.

But question. There are a lot of clever guys on the street, so what do these analysts do all day? I mean look if you're a trader the name of the game is to keep the P&L in the black by making the right call. So what is the deal with analysts? They totally missed the call on financials, oil was another (GS calling $150 I seem to remember). Then we got DBank analysts calling GM going to zero - well yeah a 5 year old can call that once the company themselves says they only have cash to last 6 weeks.

Am I missing something here??

Anonymous said...
9:33 PM  

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