Tuesday, May 26, 2009


Although it's only the last week in May, markets have taken on the distinct flavour of summertime. Perhaps it's because it's the half-term school holiday here in the UK. Perhaps it's because the Premiership football season ended yesterday, and we mentally associate "no football" with "summer." Or perhaps it's because, right on cue, the rains came on yesterday's bank holiday and have persisted into today (and, in all likelihood, the next ten weeks or so.)

Regardless, activity seems light and markets are reacting strongly to every last bit of news. The end of last week saw a lovely stop-loss run in fixed income, which surely took out all but the most deep-pocketed of longs in Treasuries and Bunds.

This week early focus has been on Korea. It's seems quite clear that nobody has realized quite how busy Kim Jong-Il has been, as North Korea has conducted a nuclear explosion and test-fired two short-range missiles over the last 48 hours.

Unsurprisingly, Korean asset markets (among the best performers in the green shoots upswing) have suffered, with the Kospi evidently breaking its uptrend line. Some caution is probably warranted, however, as plenty of other trendlines have broken over the past couple of months without producing a meaningful trend reversal.
Interestingly, however, the weakest of the EM carry currencies is also threatening to break its trendline this morning. USDTRY, which has underperformed its high-yielding brethren like BRL and ZAR, is looking a bit ropy this morning.

And that fact that the euro has sold off on this piece of scare-mongering on German banks is probably all the evidence you need that summer is here. While it is almost certainly true that German banks are carrying loads of dodgy assets at farcically inflated values, to date Macro Man has yet to identify the event that will force them to admit that the emperor's new clothes don't actually exist.

Any readers with a good idea of what would cause them to 'fess up should feel free to share. In the meantime, Macro Man is settling in for what's looking to be a long, wet, summery day.


Anonymous said...

Worst of all, Eastbound trains get suspended this morning. Walking from Euston to Kings Cross in the rain is not my idea of fun before a day on the markets. Smelling weirdly like damp is even less fun.

CV said...

And to add injury to insult ... we Danes will get that same shower this afternoon. Did it come with a lot of flash and thunder? Metereologists here almost narrate it as the coming "perfect storm".

Anyways, back to the market.

Agree on the summer time theme. So far, it is all engines go with the risk trades and the carry trade is flying again. But for how long is the question. The funny thing is that most of the research I am looking at from major IBs and other market savants is very skeptical (and has been for the past weeks), yet the green shoots contintue.

Of course, DB DID suggest that their clients fund purchases in Ruble and Forints with Euro. The mind boogles.


Minty said...

Would you mind telling me when you choose to look at a chart of candles (GPC) and when you just look at lines (GP/GPO)?

Am a bit of an amateur learning markets still! Thanks

hopefully anon said...

what do you expect from ambrose? he sees only grenades when it comes to europe. but the universe ends with a whimper, not with a bang (grenade).

Macro Man said...

Minty, I almost always use candles, but when there has been some wacky intraday price action (small body, huge wick), I sometimes revert to simple line charts to get a sense of the underlying trend, as per the Kospi today.

Straterato said...

Well.. to me Merkel shows pure common sense.
Rating angencies are economic long range weapons of the anglosaxon world. Technically completly useless and extremly biased.
German banks are healthier than british shadow banks. At least there is a reason for them to exist.

fodacadillac said...

Not sure why the euro gets a pass after it was revealed German banks have bad debts roughly twice the reserves they carry that could, according to one German regulator..."go off like a grenade if they don't participate in the the govt' bad bank program".

It's unfortunate Ms. Merckel hasn't been more assertive but presumably a large, divergent coalition govt' makes consensus difficult. Politicking for the upcoming September elections may be distracting her too.

In the months to come we will hear of more euro-zone banks being given finanial life lines to keep going. To the degree the market hasn't priced in the extent to which this will happen...IMO it will weigh on euro over the next couple months.

Contrast this with the very proactive Anglo-Saxon models efforts to clean up their banks and the euro's slide could catch more pace than Cristiano Ronaldo.

Between a stronger social safety net, which saps incentive to work, and the lack of political will to clean up the banks, slow growth appears to be endemic to the Continental model.

Straterato said...

Amazing! Political will to clean up banks...? Are you kidding. You are desincentivising people on the street and incentivising bankers. You think this is a viable model?