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....
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MW
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June 9, 2009 at 1:02 PM ×

"surely Merv will want to extricate himself from these extraordinarily low rates with alacrity once things turn"

Isn't the alacrity already priced? I see Apr-10 MPC SONIA 1.34% mid.

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Macro Man
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June 9, 2009 at 1:30 PM ×

I think it's more priced in rates space than currency space...I tend to think EURGBP goes a lot lower if the BOE begins unwinding ultra-low rates in the next 9 months.

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Anonymous
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June 9, 2009 at 1:30 PM ×

SEK anyone? Punters getting long??

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Professional gringo
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June 9, 2009 at 4:23 PM ×

Well MM, Tyler Durden over at Zero Hedge has a video of a guy talking about "green shoots." This guy would make a great spokesman for any enterprising financial website. Maybe a BBC ad?

Can We Get This Guy on CNBC?
http://zerohedge.blogspot.com/

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Anonymous
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June 9, 2009 at 4:24 PM ×

EURGBP is at an interesting technical juncture as well, it trades heavily and actual vol on the hourly bars is increasing, hard to say whether it stays in the big range 86-96 or breaks lower.

Tech guff aside, it is noticeable that the housing market has hit a layer of liquidity that has been running since February. In London (centre of the universe), it is noticable that family homes are moving very easily at the moment. Perhaps you can argue that for those with equity/LTV of <80%, houses are very cheap.

Although, bars and pubs are very quiet during the week (ex Fri/Sat). And supermarkets are far busier.

It certainly does not feel as bad as I expected it to play out in October, and as a bit of a bear, I am wondering if I have just got it wrong now.

However, unless stock indices can go through the breakdown level from Sep/Oct, this is still a bear market for me...I guess the hard thing to stomach is the gap between the March low and the potential quantum of any retracement....i.e. SP500 from 666 to 1000/1100...anything is possible.

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Tim
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June 9, 2009 at 6:21 PM ×

Idiot punters buying homes while short-term rates are low reminds me of the ARM phenomena in the US, except these deals are probably more ridiculously valued on a times earnings basis and they have more equity. I vote for a (deep) double dip in the market once Merv begins to hike.

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fodacadillac
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June 9, 2009 at 6:38 PM ×

I was wondering this morning if the research department at Goldman Sachs saw last night's read for Germany's April industrial production (even if it is backward looking) read before making a call for EUR/USD rising to $1.45. It's not by mistake Germany is having a more lively discussion lately about the merits and flaws of their export model.

Aside from the fundamental and geo-political reasons (can't help thinking the ECB would blanche seeing euro rise to $1.45) to short the pair, there are some excellent technical levels approaching as well.

May wait to see what London does with it tonight.

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Anonymous
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June 9, 2009 at 7:24 PM ×

yeah government sachs loves to see that euro go up ... funnily enough its impartial strategists come out with well timed tid bits when US conditions tighten, or when its brilliant calls on oil going up (despite a supply glut and and 80% rally), a very V shaped recovery (so folks will buy its stock with a target of $200) or its call on BRICs powering forward (round 2 of decoupling here we go!) start fizzling out.

but even mor annoying is reaction of supposedly educated market professionals who take all the turds from GS at face (or is that butt) value.

IP and orders down, trade down, major retailer declares bankruptcy, landesbanks in deep doodoo ... sure lets buy the currency. its cheap ... duhhh, the mind boggles.

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Anonymous
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June 10, 2009 at 3:32 AM ×

mm
i am w you that something smells fishy.
us financials trade very weird/heavy - ex gs
ill investigate more tomorrow.
back from europe
mpm

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June 10, 2009 at 3:20 PM ×

This rally in aluminum is particularly absurd - that market is toast for the next 5yrs. Not sure who is pushing this one but they are likely to get burned, world is operating at 75% capacity right now and demand isn't coming back fast since 40% of it goes into construction.

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Macro Man
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June 10, 2009 at 3:27 PM ×

Nemo, my understanding is that aluminum has been a spec short-covering phenomenon. Chinese imports of aluminum products have ticked up over the last few months, but are still well below last year's prevailing levels.

I think it's largely a case of shorts getting squeezed and no one having the cojones to take the other side.

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June 10, 2009 at 3:32 PM ×

It does look like it but Chinese Ali imports are a complete furphy - its all driven by stockpiling, China just forgot that as the world's high cost producer some comedian might import some ali and sell it to the State Reserve Board (and they did - thanks Glencore). The response was this, a hilarious turn of events if ever there was one:

http://www.platts.com/Metals/News/8576516.xml

I thought the shorts had covered into Feb/March when it all went to hell. Probably a good thing to load up again here.

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