Shellshocked

Somewhat contrary to Macro Man's expectations, yesterday proved to be more of a low-volume consolidation day than anything else. Sure, there was still some action in fixed income (though the magnitude of price changes paled in comparison to Friday, and most flow seemed to be in option space), but FX action was fairly listless and SPX cash equity volume was the third-lowest of the year.

Oh sure, we still had the virtually-obligatory futures ramp into the close, courtesy of whatever sinister force you choose to believe in. Perhaps the strangely quiet day was a function of indecision, with punters unwilling to buy the risk asset dip in light of the fixed income price action, and unwilling to sell with the SPX and SX5E perched just above their 200d moving averages.

Or perhaps the market was just shell-shocked; by all accounts Friday was not a particularly enjoyable one for many punters. Although the HFR macro index probably understates the returns that the industry generates (superstar funds have little incentive to share their performance data), the returns from last Friday look rather ugly.
While EUR/USD has put in a bit of a recovery this morning, in line with the equity bounce and a stabilization in rate markets, headwinds appear to be forming against the single currency. The last 24 hours has seen a renewed focus on the European banking sector, which to date seems to have adopted a strategy of "if you lie with enough confidence, you can brazen your way through this."

Macro Man knows from the comments on this site, offline correspondence with readers, and discussion with market contacts, that there is a fair amount of head-scratching going on. Not necessarily about the state of European banks, as there seems to be a reasonable consensus that they are impaired; rather, people are wondering what it will take to get them to 'fess up.

* In that vein, yesterday's revelation that WestLB almost went belly-up over the weekend was curious, to say the least. Man.....50 bp moves in the reds, banks going bust over the weekend....Macro Man's getting deja vu...it's almost like last year again!

* Apparently, the Yanks are after the Europeans to prosecute a strict series of stress tests (presumably something more stringent than the Americans' stage-managed three ring circus affair!) One can imagine Europe responding with a two-word reply (the second word of which is "off.")

*And of course, the always-understated Torygraph suggests that the IMF wants European banks to quit lying as well.

Throw in the ongoing Latvian saga and yesterday's downgrade of Ireland, and you'd have to say that after such a sharp rally, the chances of a sell-off in European banks must be increasing.

After outperforming the Eurostoxx index by nearly 40% from early March to early May, European banks have had essentially flat-line relative performance against the headline index. It certainly looks like the short-covering in European banks has largely run its course, and given the recent newsflow Macro Man is wondering if there isn't a bet to be made on the relative underperformance of European banks moving forwards.
Finally, it's not all bad news for Gordon Brown. Sure, his Cabinet reshuffle was a disaster (so much so that he's tapped Apprentice star Alan Sugar to execute his personnel decisions moving forwards) and Labour's performance in the European elections wasn't quite good enough to be labeled "dismal."

Still, the housing market is clearly showing at least a few signs of life. The RICS survey has shown definite signs of life, and anecdotally a house on Macro Man's road (a cul de sac of five houses) sold within two weeks of listing.
Crazy as it seems, if this continues we might actually have to start thinking about the timing of rate hikes, as surely Merv will want to extricate himself from these extraordinarily low rates with alacrity once things turn....