Wednesday, December 17, 2008
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.