Friday, November 28, 2008

Over Before It's Begun

November has been a very strange month indeed.

For the entirety of the month, Macro Man has been trying to chip away and establish a P/L foothold from which to increase risk and try and put together a half-decent return. Suddenly, however, it's the last day of the month, and Macro Man is still trying to establish that foothold. Come Monday, November will be over, seemingly before it ever really began.

While November started (however briefly) with an Obama rally, it's ending with a rally of another sort- though Macro Man isn't sure exactly what kind of rally this is. Inbetween, of course, there was some truly horrible price action. To put things in perspective, consider this: over the past week, the BKX has rallied 41%....and it's still down more than 20% on the month! Moreover, when looked at on a year-long chart, the recent rally is barely noticeable.
Does this mean that there is scope for substantially more upside? Not necessarily, though it would, of course, be foolhardy to categorically rule out any potential outcome. Still, that the recent uptick in prices (the SPX is up "just" 20% in a week) has been accompanied by falling volume does not exactly engender confidence; it certainly does not suggest that massive buying/rebalancing is taking place.
Indeed, the pattern of 2008 would suggest a real risk that the current rally could end almost before it's begun.

Finally, month end also brings about passive currency rebalancing. While last month's proved to be all bark and no bite, it was widely discussed beforehand and thus perhaps discounted. Perhaps as a result, the month-end fixing has received relatively little attention this time around, despite decent potential for outsized moves, particularly given the thin holiday conditions.

As the table below demonstrates, there has been quite a disparity in monthly equity returns (and thus relative market caps in the MSCI indices), which should generate decent passive hedge flows. Eyeballing the chart, the dollar should be the primary beneficiary of those flows, most particularly against the yen but also against the euro.
Whether such flow pushes the market remains to be seen, but given that it's not being talked bout to nearly the degree as last month would suggest that this time around, there is potential for a decent move....after which it will be December, a new month (and for some, a new year!)

Whether the new month brings about a change in risk appetite remains to be seen....


Anonymous said...

Re today's fix - color has ranged from 'alot was done intra-month, today should be a non-event' to one dealer saying they expect 10bn of $ buying.

So, the quality of information is as good as ever these days.

Boat52 said...

Two questions of the day:

For children under the age of 5:Do you expect Santa Claus this year to bring you a ....?

For U.S. shareholders: Do you believe in the PPT and will they bring you a year-end a rally?

CV said...

And what about the 2.1% inflation print today from europe?

How much are you guys expecting from the ECB come the December meeting?.

The d-word is looming omniously in the background although most of the current reduction in inflation comes from headline prices. It will be VERY interesting to just how sticky core prices will be in the context of this downturn.

re MMs comment on the USD gain it seems plausible not least if you also take the interest rate perspective into account too ...



sig said...

interesting how the (small) rally in credit over the last 5 days has just been erased in the space of a Friday morning...

Macro Trading Ideas said...

I'd like to move attention towards two subject that i've noticed yesterday.
Fisrtly i've seen a lot of money in the primary corporate bonds market, with latest issuance really well received (in particular Basf and BP) and in strong gain this morning. Every issuance now is fixed (not a good sign...)and with a huge spread versus CDS. This is bad indicator at least for CDS levels..
I think that real money have now acknowledged that next year money yields will be worthless, govt yields along the curve are at dismal levels and so everyone's question is: how can I get more than 1% next year???
If i can understand a few years' deflation or at least low inflation, what about a 10-30 years period???
I think that another bubble is happening on govt yields, if adjusted by new credit spread levels, long term yields are the LOWEST ever!!!!
And again: what's the difference about credit risk between US Treasury, GSe bonds and FDIC guaranteed new bank issues? Isn't it a real dangerous convergence trade??

Anonymous said...

This article in Euromoney explains the absolute seriousness of the “failure to deliver” problem, Clearly, Paulson is not doing his job. He has a huge conflict of interest, IMHO.

Anonymous said...

what is the biggest bubble? the dollar or fixed income? discuss......remember, its different this time said...

Hi MM,

Gregor here. It's been a while. If it remains your view that QEasing and now direct monetization have still not yet begun, wrt to the FED, I would very much like to see a post on that as it was my understanding that started about 2+ weeks ago it became more accepted that the FED had indeed begun QE, and of course this week's GSE operations make it a "near certainty" that monetization has indeed begun.


Anonymous said...

Macro Man,

Thanks for your insightful analysis as always. I didn't quite follow the part about the currency flows implied by the WEI chart. Can you explain your thinking?