Just When You Thought It Was Safe To Get Back In The Water

Over the weekend Macro Man christened a recently-acquired Blu-Ray player (his home entertainment Luddism is slowly receding) by watching an episode of Planet Earth with the Macro Boys. As they marvelled at the ferocity of the Great White Shark, the eldest asked, in a slightly timorous voice, whether Great Whites attacked humans as they did the seals on the televison screen.

"No," was Macro Man's confident reply, not wishing to scare the boys out of swimming at the beach. "But there was a movie about Great Whites that came out when I was about your age."

So it was with no small sense of surprise that Macro Man logged onto his Bloomberg this morning and almost literally heard the "nuh-NUH, nuh-NUH, nuh-NUH" theme music to Jaws. Just when you thought it was safe to get back into the water, the world's looking like a mess again.

Where to start? The Spanish bank bailout? Geithner suggesting a similar outcome in the US? Obama getting stuck into 2/3 of the Big Three? A limp G20 leak? Take your pick.

But a market that went home fat and happy on Friday is now looking at a rather nasty reversal in a number of asset classes. Take the Nikkei, which shed 4.5%, breaking its post- March 10 uptrend.

Perhaps the economic data had the temerity to intrude upon investors' consciousness? Japan's industrial production fell a gut-wrenching 38.4% y/y in February. While this was only slightly worse than expected, it is still indicative of an unprecedented level of economic stress, at lest during the careers of 99.99% of the investors out there.

Coupled with tomorrow's fiscal year end, the overn ight news has prompted a rather sharp sell-off in all yen crosses. It perhaps shouldn't come as a total surprise; after all, a cross like NZD/JPY had rallied 29% since early February. Yowsah!

Of that, the kiwi leg had done most of the heavy lifting, with NZD/USD up nearly 18% since March 10. Now, on a fundamental basis the kiwi has absolutely no business putting in a rally of that magnitude. So a lot of that upside looks to have been short covering. However, as reality starts to bite again, one wonders if the market won't break out the shotguns and start taking aim at this most defenseless of prey.
Similar reversals have been evident in everything from oil to USD/KRW. Perhaps the market is starting to realize that reality still bites. If Geithner's comments are preparing the market for one or more institutions failing the stress tests next month, Macro Man cannot help but think that the recent love-in of all things risky will be largely unwound.

And while the data has certainly become more balanced, hopes for a US-based re-stocking bounce look misplaced. While Japan's data activity data was execrable, at least it was accompanied by a sharp de-stocking. In the US, there are only the most tenative signs that inventory liquidation has even begun, with the retail inventory to sales ratio starting to turn down slightly. Manufacturers and wholesalers, on the other hand, still have inventory relative to sales at ten year highs. Oof.
So Macro Man is treading gingerly this morning. The next 30 hours or so are likely to be dominated by month- and quarter-end considerations, but it does look this morning like some signal is emerging through the noise. And hey...even the noise is starting to sound a bit ominous.