The Catalyst

It's a big, big week. Now that option expiry has come and gone (bringing with it the requisite squeezy screw job), markets can focus on Wednesday, which sees the results of the ECB's one year "wheelbarrow" tender and the Fed announcement, where we'll get their reaction to the recent carnage in fixed income markets.

Beyond that, of course, lays earnings season- a period for which markets have received relatively little guidance. Any or all of these things could prove to be The Catalyst for the next big macro directional moves.

The Catalyst is an important part of any investment thesis, unless one is a pure momentum follower. One might might believe that something should happen, or indeed that it will happen....but for a profitable trade to materialize, it usually requires a catalyst to lurch markets in your direction and allow the trade to get traction.

In March, for example, the combination of Geithner's PPIF and QE from the Fed and others proved to be sufficient to engineer a fearsome squeeze in equities and other risk assets, to the extent that many real money punters appear to believe that the bull is back, baby.

So two important questions that Macro Man is wrestling with are a) is a lurch lower in risk assets the "next trade", and b) if so, what will be the catalyst? For it's important to keep plenty of powder dry until one's preferred theme is in play.

Regular readers of this space will know your author's answer to question a): he believes the answer is "yes." So the question then becomes "what will be The Catalyst?" On the face of it, there would appear to be little prospect of The Catalyst emerging on Wednesday. After all, a huge ECB tender would keep markets awash with liquidity (if not solvency!), and it's hard to see a Fed promise of "lower for longer" rocking the risk asset-boat too much.

Then again, you never know. It seems clear that optimism has risen sharply over the apst few months. Macro Man referenced the Merrill Lynch survey last week, and today's ifo provided another example. The headline print ticked higher, fueled by another rise in expectations. The current conditions component, however, plumbed fresh depths. The event or datapoint that "convinces" one of those two that the other is "correct" will be a powerful catalyst. The longer and larger the divergence between the two, in all likelihood the more powerful the resultant reconnection move will be.

One left-field candidate for The Catalyst could come from a realm that Macro Man explored earlier this month: the commodity space. There's an AFP story circulating this morning suggesting that China's stock-piling appetite has almost run its course; given the leadership that commodities have played in both the equity rally and the green shoots movement, a sharp retrenchment would, it seems, be taken rather poorly.

While the CRB index is hardly the be-all and end-all of commodities, its chart bears an uncanny resemablance to those of your favourite industrial input. Put into context, the bounce of the past few months certainly appears to be of the "deceased feline" variety, and it would hardly surprise to see a substantial lurch lower if/when China pulls the bid.

It's far from a dead cert that commodities will lurch lower, of course; the funny thing about The Catalyst is that it often comes from an unexpected source. Regardless, given recent range trading and the apparent divergence between investor optimism and reality, it feels as if the spring has been wound very tightly indeed, and Macro Man is on high alert in search of a potential catalyst that could, to quote Michael Caine, "blow the bloody doors off."