All the King's Horses

Now that Macro Man has gotten his sob story out of the way (thanks to all for your kind comments and advice), it's time to get back to focusing on the market. After all, Macro Man may be housebound, but market opportunity doesn't accept sick-notes.

When he left the office on February 6, markets appeared to be starting a romance with recovery. Hopes were high for the Geithner plan and the Obama stimulus, the bounce in the BDIY and Shanghai were fingered as auguring an improvement, and the world generally seemed content to play "Shiny Happy People", perhaps the worst song in the entire R.E.M. ouevre, in a continuous loop.

What a difference a few days makes. The administration announcements were predictably short on detail while the ancillary newsflow has been less than rosy, particularly with regard to the credit quality of peripheral European sovereigns, both inside and outside of the Eurozone.

Indeed, a week and a half after the market wanted to look on the bright side of life, Humpty Dumpty appears to have taken a Macro Man-style tumble, and is struggling to get back together despite the best efforts of all the King's horses and all the King's men.


And with that, a number of financial market prices have reached very interesting junctures indeed. The euro, for example, has borne some of the burden of the unraveling of the European periphery, no doubt helped by the "shocking" admission of the ECB that the situation now merits further serious policy attention. The impulsive sell-off in the dollar last December seems like a long, long time ago, and EUR/USD has now broken decisively back below the 1.27 support level. From here, a re-test of the lows would appear to beckon. Spoos, meanwhile, look perched on the brink of a precipice. Now, we have seen this set-up before, and it hasn't necessarily amounted to anything but a painful squeeze higher. But still, you have to be suspicious that futures keep testing this 800 level; the more visits are made, the more likely it is that the next one will resolve into a (potentially cathartic?) downdraft in stock prices. Like many punters, Macro Man is watching this one closely.
When Macro Man left a week and a half ago, the market was piling back into China. To be sure, the Shanghai composite has put in a decent show, though Macro Man still believes that it is dangerous to draw macroeconomic conclusions from onshore Chinese price action. Perhaps more tellingly, a Chinese offical was quoted as suggesting that USD/RMB could trade back to 7.00 after flatlining around 6.83 for the past seven months. Unsurprisingly, punters have scrambled to get out of the 1y NDFs that they put on a couple of weeks ago; Macro Man wouldn't be surprised to see it squeeze quite a bit more.
Meanwhile, bonds have recovered their sheet, most particularly in Europe. To a degree, this reflects the dovish language from the ECB, singalling further rate cuts ahead. In addition, the rally in German bonds may also reflect intra-European spread trades (Irish CDS now trade above Morgan Stanley!) But surely there must be an element of recognition that the real-economy newsflow is dreadful. Japan's Q4 GDP printed a Depression-style contraction, and data on global trade continues to sink into the abyss.
And with the whiff of financial crisis still floating all around us (you can now by a share of UniCreidito for less than the cost of an espresso in Milan), small wonder that the "return of capital" trades are starting to find favour again.

Eventually, of coourse, things will recover, if perhaps not in the guise with which we are are familiar. But it will take a heck of a lot more than all the King's horses, all the King's men, and all the King's stimulus and rescue packages to effect that recovery. More than anything, it will take time; and that is a commodity that currently seems to be in short supply.