Wednesday, December 17, 2008

Stepping In Front of the Steamroller

Markets have suddenly become moderately interesting again (though they remain bum-clenchingly illiquid), helped along by yesterday's Fed announcement of quasi-ZIRP and quasi-quantitative easing.

Perhaps Macro Man is alone in this sentiment, but he didn't actually see much new news in yesterday's announcement. Sure, the target Fed funds rate was a bit lower than folks expected, but given that the effective funds rate has closed between 0.10% - 0.20% for the past two weeks, the surprise on the target rate is largely irrelevant.

As for the "bazooka" that the Fed wheeled out yesterday, hasn't all that stuff been announced already? OK, fine, they laid out the commitment to maintain uber-low rates for an extended period for the first time....but anyone who's read the Bernanke papers on Japan and QE knows that that is just part of the playbook.

So it was with bemusement that Macro Man saw a lovely risk rally and the dollar sell off. Equities have frankly been fairly uninteresting for Macro Man recently, and the miniscule trading volumes of the past few days suggest that he isn't alone.

What was curious about yesterday's trading is that it brought Macro Man's risk appetite indicator (proprietary, don't ask) back into positive territory for the first time since the week before Lehman went bust.

So naturally, this morning's been filled with feel-good stories like another Russian devaluation, the Swedish national debt office starting to take currency punts on the krona because they're worried about SEK weakness, and Deutsche Bank failing to call a Tier 2 bond.

The real story of the past 24 hours or so has been the weakness o the US dollar. Macro Man wrote a few days ago that he was getting a bit worried about his dollar bullish stance (and thus brought his exposure back to neutral) but was not yet prepared to jettison it. Clearly someone has had no such reservations, as the EUR has traded up to a high of nearly 1.42 against the buck this morning. It closed November below 1.27.

Tempting as it may be to extrapolate a new trend of dollar weakness on the back of QE, Macro Man remains cautious. The scale of the move has been exacerbated by the abjectly poor market liquidity. What's interesting is that none of the many banks that Macro man speaks to has reported seeing much in terms of broad-based flow.

While Macro Man's old chums Voldemort and co. have evidently been active, in the private sector the real players have been trend followers, a cohort who could not care less about whether the Fed follows a policy of QE or PE.

And small wonder- CTAs are one of the few solid performers in the leveraged fund world.

But here's the thing- what goes around, comes around with the trend-following types. Aggressive buying today could easily be followed by aggressive sellign tomorrow, next week, or next month.

For the moment, Macro Man is happy to step aside and let the models have their fun. If 2008 has taught him anything, it's that stepping in front of a steamroller is not a particularly pleasant experience.


Macro Trading Ideas said...

Yes, it's true that effective funds rate has been lower, but now moving to about 0 can have any better effect? This is the LOWEST rate worldwide, they're printing money, they've lost credibility, what else?
Implication for repo and money market could be worrisome...
What's difference now between paper money and treasury??
What's worrying me now is that a HUGE bond bubble is forming, FED has announced that they will buy long-term treasury: in what amount, until what rate, and in particular HOW can they exit from this???
We've yet lost interbank market, are we going to lose also bonds market?
If saving rate is a big problem for US, is this policy of any help?
Same problems, same errors.. and why, because they can't accept to live with their means, they can't accept a bad times period of time.
However, commodities are lagging this dollar movement (apart gold), i'm becoming bullish, what do you think??

Anonymous said...

Macro Man
Great insights as always. I am thinking very deeply whether all the QE efforts by FED will overpower global credit deflation in short and medium term.
Obviously some punters came to a quick conclusion. I am under impression that European Banks are in worse shape than their US counterparts so i am very reluctant to go long.


Anonymous said...

Macro Trading: "commodities are lagging the dollar". Wouldn't that rather be a sign of commodity weakness?

Macro Trading Ideas said...

@anon: absolutely yes, a real weakness, infact for me euro-based this asset class is becoming "cheaper" everyday. But my idea is that in a reflating world and in a demand/supply restriction at least they would outperform. Obviously in a deleveraging world this has risk!

Anonymous said...

fed's shock and awe has the TY printing 127-15 now, won't some black box systems lock up on a zero interest rate input..
light volume levitation on the nyse yest. below 1.5 bil shares..
hearing euro banks still won't lend with each other(still depositing at ecb window), and that interest rate differentials between sovereign european debt is at it widest level since the inception of the euro..
did the ecb pres really say yest. that there is 'no credit crunch'...
cheers! -deac

Anonymous said...

In a straightforward way, MM you think it is mainly SAFE who drove the USD down in recent weeks?

Macro Man said...

I think it is mostly CTAs and stops, but they and others have evidently been along for the ride.

Anonymous said...

Wow, what a match!! US Treasury and Fed vs. Japanese Ministry of Finance and Bank of Japan, both teams desperately aiming at avoiding their respective economies a sharp disinflation, or worse a deflation. Will MoF/BoJ finally be forced to intervene? And what about Japanese government debt? Or Ms. Watanabe willing to repatriate her savings, given that global yields are set to converge to zero?

As of writing, EURUSD is at 1.4250s, EURGBP at 0.9250s and spot gold is trading a bit north of $867, far away from the October 24th low of some $681… Now, what if deflation should become a real threat in the US and Japan by 2009-H1? (Euroland is obviously facing no such threat, given that Mr. Trichet would effectively solve it by simply naming it disinflation and keeping policy rates in the 1.50% to 2.00% range…).

Gold should therefore retrace, pushing EUR down to 1.30s or even lower… I mean, a huge QE effort by the Fed and BoJ would certainly give rise to an inflationary spike up, but only in the longer term and not while a fierce recession on both sides of the Pacific Ocean is under way.

Read you later, AT

Anonymous said...

USD crushed, bull flattening in the bonds, oil lagging with putin and hugo on the offer (and getting whacked on the EURUSD). Are these just holiday markets or are some new market participants making their presence known in our markets? If the latter, then adjusting tactics and strategy to these types in 2009 will be much more difficult than i anticipated

jonathan said...

The difference is that the Fed has now said monetary policy is no longer the hope. That's like taking your chips and pushing them into the center and that is a big thing.

Second point, this action puts tremendous pressure on the new President and Congress to act boldly, to act in Star Trek terms and to boldly go where no government has gone before. That is also big.

Family Man said...

Thanks to MM and all here...

Maybe that helps:


Family Man said...
This comment has been removed by the author.
Family Man said...

Looking at crncy basket
USDPLN, USDTRY, USDHUF, USDZAR, the strongest is HUF (sic), which makes sense only assuming a short squeeze, I thing (almost) all beeing long USDHUF.


Anonymous said...

would be good to post an update of the US money supply vs EU when you get it.

Anonymous said...

If investors looking for higher yields + price appreciation they buy Bunds and they're sold in EUR.

Thin markets or not if enough stops are triggered on the way up, momentum builds and further up it goes.


fajensen said...

What in the world would stop a US investment bank with access to free FED credit from using that facility to break the USD the way Soros did to the GBP?

It's not like there is any risk - if the trade goes bad, the FED will buy it to "stabilise the financial system"!

Mike Sankowski said...

Didn't Lo model CTA's as long vol, long straddles position?