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."
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Anonymous
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June 22, 2009 at 10:27 AM ×

gold and oil both look to be one solid down move away from breaking decent trendline support...copper futs around 220 seems like a bit of a pivot...Caterpillar shares look to have turned lower the last few days...all the talk of China potenitally stepping away from the hoarding of commoditites in the short term seems to be having an effect of things like AUD with it's lower highs...commodity related equities seem to be running out of steam...feels like the catalyst for the next bout of risk aversion may be a decent correction across commodity markets, as opposed to equities directly...the ducks may not be lined up, but they are swimming in the pond...

EJ

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Anonymous
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June 22, 2009 at 10:39 AM ×

macro-man....have you ever been an options trader?

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June 22, 2009 at 10:43 AM ×

Aussie is probably going to test 78 cents again tonight. Held up last week but can't see it holding up for long.

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Macro Man
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June 22, 2009 at 10:48 AM ×

EJ, agreed...I have started to layer a few positions, but holding back until the odds are more firmly in my favour.

Anon, yes, I started my career, many moons ago, in options market-making.

Nemo, yes, the Oz is all part of the same trade at the moment. If gold holds this trendline break, for example, you'd have to think AUD would get a kicking.

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sharpend
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June 22, 2009 at 11:02 AM ×

Have you ever owned a Ferrari?

We are all seeing the same thing.

One trade I am eager to own is the audnzd at better levels

Short Asian dry shipping looks good.

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June 22, 2009 at 11:11 AM ×

Macro Man, you should put up the SEAG of copper imports into China. Its the biggest short I've seen in a while.

Aluminium also doesn't look too hot, inventories building not to mention all the fundamental issues I've outlined

http://nemoincognito.blogspot.com/2009/06/going-nowhere-aluminium.html

DB etc are super gunned up on this for some reason, would have to assume they just missed the boat and feel embarassed or are trying to get on the other end of the trade.

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Anonymous
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June 22, 2009 at 11:58 AM ×

AUDUSD potential triangle failure approaching; pretty anemic price action, looks a good short with defined risk.

EDZ9 looks very constructive too, another couple of ticks up and it will be interesting to see if it continues to 99.15-20 or is sold into.

Bunds, T-bonds, maybe trend is changing, last week or two constructive for bond bulls.

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Blue
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June 22, 2009 at 12:16 PM ×

Pardon what may be an obvious comment, but looking at your graph it sure looks like expectations leads headline, which leads current. I'm not clear, though, where the actual data comes from. Would you mind posting the source.

Thanks.

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Macro Man
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June 22, 2009 at 12:53 PM ×

sharpend, No, I've never owned a Fezza. AUDNZD is a trade that promises much but is very frustrating. I have done OK out of it over the years but know a lot of guys with bruised foreheads (received from banging their heads against a table.)

Blue, while it is true that expectations tend to lead, it is also the case that they present the occasional 'false dawn', viz. early 2002. I believe we are at a similar juncture.

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Boat52
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June 22, 2009 at 1:38 PM ×

Catalyst for next move?

Chess board is set, your move:
http://turnerradionetwork.com/index.php?option=com_content&view=article&id=70:us-deploys-battle-group-near-north-korea&catid=1:latest-news&Itemid=50

Turner maybe is not the best source, but if correct.....

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Macro Man
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June 22, 2009 at 1:42 PM ×

Given that donut's track record (the "Amero", the stress tests), |I think it's more likely that the US has deployed a battle group near Fiji than North Korea....

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Anonymous
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June 22, 2009 at 2:08 PM ×

Haha, "I only told you to blow the bloody doors off"! Classic.
Choice of quote implying the whole caboodle could go up in smoke?
Andy Xie seems to think so, maybe a bit more med term tho:
http://english.caijing.com.cn/2009-06-09/110180019.html
Ta, JL

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Anonymous
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June 22, 2009 at 2:27 PM ×

"if so, what will be the catalyst?"

A week ago, I would have said "Latvia," but it looks like they found some more good money to throw after the bad.

"For it's important to keep plenty of powder dry until one's preferred theme is in play."

I am getting my poweder plenty wet already here. :) Several of the commodities have declined quite a bit already, German bond yields are heading lower, and stocks (I hope) will follow soon.

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LIQUID MAN
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June 22, 2009 at 2:33 PM ×

I think the Fed will back off QE or at least spread the remaining 150 billion in committed purchases out another 6 months... b/c they can't allow yields to stay above 4% for too long (look at refi eligibility charts and it will blow your mind away).
I have followed the liquidity picture closely and it has simply seeped into commodities, foreign currencies, and helped support equities at the expense of inflation expectations. The economy can't recover quickly with yields above 4% or oil at 70 bucks so the Fed must let the markets take some pain now to allow yields to decline.

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Macro Man
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June 22, 2009 at 2:44 PM ×

Anon @ 2.27, yes I am finding more and more interesting trades, and I am having to restrain myself from piling in too quickly. My style is very much one of scaling in, and adding as the initial trades go onside; I've had a bit of jopy, but not enough to merit really piling in at this juncture.

Liquid Man, yes, I think it's fair to say that higher bond yields, rather than lower equity prices, are now public enemy #1 in terms of engineering a recovery...so 'twill be interesting to see how the Fed plays this.

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Charles
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June 22, 2009 at 3:01 PM ×

The situation is firmly in the hands of politician operators now, not in market's hand, bond vigilante notwithstanding. (By politician operator, I mean people that are more interested at their power position than at the bottom line,because the bottom line in belongs to other people's money !)
Catalysts for a step down are operators that either WANT a step down and/or don't know what they are doing. (for instance the Fed/Treasury letting Lehman go belly up belongs to both categories).
Fed and Treasury learned their lesson now, so I doubt they will be the next catalyst. Congress refusal to bail-out states like California could be a trigger, but it is likely they will find an astute guarantee scheme to keep the ball rolling. I also think China is too conservative to rock the boat and has the most ability to hide the junk below the carpet.

Despite the false start in Latvia, a crack in the European deficit countries (Pick your choice : Baltics, Ukraine, Greece, Bulgaria,etc...) coupled with election-linked German intransigence still seems the likeliest candidate this summer.
Beyond German elections, trade restrictions triggered by too much capacity chasing too little demand is an all-time favourite.
Wild card is crazy stuff in Middle east or Korea, but I wouldn't bet the house on it.

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Hubert
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June 22, 2009 at 3:15 PM ×

Reg Stock / Bonds
I do not see the problem in a stock/bond dichotomy. More QE might help the bonds as much as the stock market.
I see it more in FOREX. But if Japan and China play along they can hold up this game for some time still.

Reg Wildcards
Who remembers the Russian Crisis in 2008 when suddenly it turned out the Russian foreign debt outstanding was three times the amount that Wall Strteet though it was? Turned out bad for LTCM amnd others.

Couldn´t some funny bookkeeping in souvereign debt show up again in Asia or Eastern Europe or Greece or Spain ?

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Anonymous
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June 22, 2009 at 3:30 PM ×

MM--don't be stupid--its june there will be no catlysts in the summer--go to the beach and or do your knee rehab---only possible catlyst are bolts from the blue which by there defination are unpredictable so forget part 2 and focus on puting your ideas to work for sept-nov of 2009

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Henry F.
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June 22, 2009 at 3:32 PM ×

rbc fx has a note out saying they expect jpy crosses to remain well supported due to record $10 billion in toshin launches,
I am bit of an amateur in the fx world, and not as familiar with the various flows, what is toshin?

Gittens out in the Sydney Herald saying rate cuts probably more likely than market anticipates. Is he of the vaunted Journo Mafia?

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Anonymous
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June 22, 2009 at 4:41 PM ×

"My style is very much one of scaling in, and adding as the initial trades go onside"

I agree with that. I don't hold too many "full" positions, but I already have a lot of small ones. :)

"Gittens out in the Sydney Herald saying rate cuts probably more likely than market anticipates"

I hope so. I have a decent position there in short term interest rates, and can't understand why the market is pricing in rate HIKES.

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Macro Man
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June 22, 2009 at 5:06 PM ×

Anon, I seem to recall that last July saw the first real hint that Fannie and Freddie were going bust, and there was also a delicious little bounty to be made in Turkey as well. That some might assume there can be no catalyst makes one more likely to emerge, if anything.

Henry, toshin are Japanese investment trusts, typically investing in foreign markets (which therefore imply a sale of yen.)

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June 22, 2009 at 5:11 PM ×

Copper get down you dirty, dirty girl. Wow, month end is looking better and better after having bought some puts a little too early.

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Anonymous
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June 22, 2009 at 6:14 PM ×

And so it begins!... How nice and pleasing to the eye to see Ms. Market behaving

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Macro Man
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June 22, 2009 at 6:34 PM ×

Indeed, though not before she extracted her pound(s) of flesh on Friday, taking me out of a futures short.....but yes, it's all looking quite ugly all of a sudden.

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Boat52
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June 22, 2009 at 8:06 PM ×

I agree Macro Man that Turner climbs out on limbs and is at the extreme most of the time. Not that all this has any direct impact on the capital markets yet.

So take a look at this:
http://www.navy.mil/search/display.asp?story_id=46112

So the Washington is officially deployed and it doesn't take much to figure where it might be headed. But Turner did get all the strike group info correct, someone probably told him something.

When Tom Clancy wrote the Hunt for Red October, the detailed info on the inside of the U.S. nuclear sub was so accurate that Clancy had to have had a mole tell him about it. Turner's extreme posturing could be like a magnet and someone wants to be another Deep Throat.

I thought, given the diverse subjects you have commented upon in the past, you might find it interesting. Certainly did't want to appear I was giving publicity to Turner. Really like you blog.

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Cornelius
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June 22, 2009 at 8:10 PM ×

I've got to think in this case that Mr. Occam has got it.

Earnings season is going to be a bloodbath - between Dick Bove out there yelling for C to go to 12 and the green shoots brigade pumping up the blue chips, the consensus numbers just do not tally up with the aggregate demand picture. Another salvo of disappointing earnings should finally sink the USS Second Derivative.

I also don't see commodities tugging on the equities market... the China story is compelling (and to my chagrin, I was about 2 months too early on that mini-bubble) but ultimately the pain is unlikely to be transferred - most of the equity money is/are a far shot from being Macro (Wo)men.

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Anonymous
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June 22, 2009 at 9:22 PM ×

ah...a nice day for those of deflationary disposition. let's see if the trend has turned. hopefully I won;t have to do any mroe trades this week...

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