Wednesday, July 29, 2009

The Beginning of the End....Or the End of the Beginning?

Man, oh man. Macro Man isn't sure if it's the cold, rainy "barbecue summer" or the unpleasantness of being crammed into a sardine-can train carriage chock full of sweating, flatulent commuters. Or maybe it's the jackhammer-level noise in financial markets. Either way, he's looking forward to his summer holiday, which thankfully begins on Friday. While he'll not be able to fully escape from the tentacular grip of financial markets, at least he can be assured of warm weather and a lack of train journeys.

In any event, the noise level was cranked up as Macro Man made his way from the station to the office this morning, as Chinese equities finally- finally! - cracked lower on stories of a reining in of rampant bank lending in H2. While the Shangai Comp fell as much as 7% over the course of the day, it rallied slightly to close down "just" 5%.
The reaction of other asset markets was all too predictable. FX carry, particularly EM, was hit hard, as were EUR/USD and yen crosses. Western equities also dipped sharply, and fixed income caught a tasty bid.

The panic lasted, oh, a good twenty minutes before markets were distracted by a shiny object lying on the ground nearby and moved on to a new "theme." Indeed, Eurostoxx are up nearly a percent on the day and nearly two from the post-Shanghai lows. Macro Man would be curious to hear if any readers are finding much success trading these "five minute macro" markets of the past few days, because he sure as hell isn't.

He feels like he's in the famous "Far Side" lemming cartoon....and he's not sure, despite his best efforts, that he's the one with the inner tube.
In any event, how significant is this downdraft in Shanghai? It is sorely tempting to point a figure, laugh the Nelson Muntz laugh, and expect a huge puke from here.

Macro Man isn't so sure, however. He vividly recalls a "turning point" 8% sell-off on 27 February 2007 that sent markets into a tizzy (and your author, who was awaiting just such an event, into full-blown "risk-off" mode.) The index proceeded to rip off another 30% rally in the ensuing seven weeks or so.

What's interesting is that someone has already started betting on a China downdraft. The FXP ETF, the double-short China one, has seen an explosion in volume over the last month. Coincientally (or not,as the case may be, given the current state of crony capitalism), FXP had its highest volume ever yesterday.
So is this the beginning of the end for the Great Bubble of China? Or is it merely, to quote Churchill, the end of the beginning? Macro Man has long thought that the authorities would try and keep all of the balls in the air until the 60th anniversary celebration of the PRC on October 1. As of yet, he doesn't see cause to change that view.

One thing's for certain, though: things have just become a bit more interesting.


Nemo Incognito said...

I hate 5 minute macro - as soon as something goes your way you are almost obliged to cover half the position. Hmmm, national day is the next test followed by October. No doubt there is a lot of positioning still going on for the leadership meaning that no one is going to want to burst the bubble yet (and cause a face-losing public disturbance on their watch). The more braindead trade is shorting PBOC bonds: China seems more fond of rationing the quantum of credit than actual pricing, meaning that the 5yr is going one way and one way only.

Anonymous said...

I think one of the problems that you might face MM is that your portfolio is probably of the size where catching one or two week moves is pretty difficult. But if you are small and nimble enough, there is plenty of opportunity on the lower timeframes, in my opinion. You do have to be pretty small and pretty nimble though!

Macro Man said...

Well, my biggest problem is that I'm just not very good at that short-term noise trading, at least in relationship to longer-term horizons.

Nemo Incognito said...

I've never liked trading intraday via rules but it looks like that's where the book is headed aside from a few core positions.

Anonymous said...

wed/thurs/fri....21 of 50 components of eurostoxx 50 reporting. why trade it from a macro perspective? there will be time to get the teeth in when reporting season done.

Anonymous said...

I'm not so sure about intraday but one week/ two week swings are definitely playable

Anonymous said...

There're not many trends, but alot of noise, so trading beyond the short-term is yielding a dismal sharpe ratio...

andriy said...

well, there was a lot of talk about olympics too, but shanghai start to sell off well before olympics

I think today's thing was real, copper is weakening too and bonds sales might give some more insight

BTW: does anyone know why 10y and 30y sold off yesterday around 11am ET?

Macro Man said...

There was a crappy 2y auction result announced at that time.

andriy said...

so basically equities got lifted because the bond auction went crappy?

-> investors fleed from bonds to equities for safety?

bizarro world.

Anonymous said...

Well, it is either an intra trend "bull correction" i.e. the previously mentioned Feb 07, or Aug 07, both followed by ballistic moves; or it marks the end of the counter trend rally in an equity bear market. I would assign a higher probability to the latter, but that is just my own sceptical opinion.

I guess we will know in a few days. Ideally a 3-4 day consolidation will provide a good setup and risk.

Anyone been to/chatted to an estate agent recently? Buyer new enquiries are flying - supposedly the highest ever. Lots of interest - UK market in some spots seems to be turning into a "it wont ever be this cheap again". Two questions: The spreads over the repo rate for variable mortgages is pretty stiff - 250bps - and the min LTV is about 80%. Where on earth do these buyers think they will get 20% deposit from? It is arguably a lot harder to buy now than in 2006/07, and a lot more expensive.

I am confused. Is the UK real estate market full of deluded individuals? I look at the lending secured on dwellings numbers and they are so it a tiny amount of supply due to negative equity and "I want 2007 prices" mentality?

Macro Man said...

Competitively-priced properties, at least round me, are moving very quickly. Bear in mind also that "property shopping" is a lesire pastime for some...if you can't even affford to go to the flicks, go to an estate agent and see a bunch of properties u have no intention of bidding on. You even get free coffee!

Donlast said...

If the S&P does fall back to around 900 and treads water throughout August then we are again set up with that nice head & shoulder formation going into September.

Post-Labour Day is always hairy, and thereafter the notoriously fickle October is on the horizon.

Just a thought.

Anonymous said...

PBOC made some noise yesterday did not bother anyone think you could still get some good perforance vs other EM before China tires out the CMD shorts may have to wait

Donlast said...

Re: property. One must remember that there are many retirees around who have good pensions and plenty of spare cash. Buying a property to rent out may look a good deal - a secure income source and a good asset to pass on to the kids 10/20 years down the road. It would not take much buying interest AT THE MARGIN to give the market a seemingly healthy look. But a cyclical upturn. Impossible. Jobless rising with heavy public sector cuts still to come and possibly higher taxes. Plus higher rates down the road when QE is over.

Macroboy said...

MM - isn't thyat what people said about China before the Olympics last year?...and then what happenned..

Macro Man said...

The difference between China now and China before the Olympics is, of course, that last year the central authorities were actively trying to slow things down, whereas now they're actively trying to pump things up. That the recent Politburo meeting ended with a renewed commitment to uber-easy policies is, I think, telling.

Anonymous said...

Re: property. Good point about the greying population of the UK...I get the impression that a lot of them are imprinted with the "bricks and mortar always goes up" mentality. Certainly I have never met anyone over the age of 35 with a negative view of property in the UK....not that I go out of my way to speak to them!

Ya cyclical upturn is highly doubtful. The current conditions and expected future conditions simply do not lend themselves to a highly geared asset class working well.

jbr said...

Interesting post on Minyanville about China's growth numbers:

Simple Math Disproves China's Staggering Growth

There's also an interesting comment on that post from a Chinese guy who often posts on Minyanville about how China is going to take over the world.

The US GDP number on Friday might be interesting.

Macro Man said...

He lost me in the second paragraph when he used gross exports, rather than net exports, in his calculation.

Anonymous said...


Care to share your thoughts on how Libor basis evolves?

To see it blow out again would entail something coming out of leftfield to f*ck the banks and imo would see a rapid policy response, so am assigning a low prob to basis wider and don't see the turn as a major issue.

We are now around 30bps +/- in US and EU, which obviously gives us a potential 15bps to get back to pre-crunch norms but would think that is more likely something that slowly evolves next year if at all.

Consequently 25-30bps seems a reasonable assumption for next 6-9 months?

Macro Man said...

Anon, that seems like a fiar assumption for the US. Obviously in Europe 3m euribor basis to the policy rate is negative thanks to the LTRO and subsequent impact on EONIA. I know some are looking for 'bor to trade down to 70bps or so, though I'm not sure that it will...after all, ront end EONIA is already on a 3 handle; at some point, the risk is that ECB starts draining to bump that up a smidge.

Sterling seems intent on narrowing a bit further, though I imagine the basis will eventually stick at a wider level than $.

But overall, I'd concur; the bulk of the narrowing is behind us, and I don;t really expect much widening prssure; policymakers seem to have cracked that particular nut.

(All that having been said, I wouldn't be *shocked* if things didn't widen out further, given the rollercoaster ride of the last 2 years...)

Anonymous said...

Thanks, yeah was just looking at EUFOSC1 rather than spread to policy rate as generally leave Euribor to Mr. Howard.

Am looking forward to the return of trying to pin the STIR fly.

Enjoy your hols!

Macro Man said...

Red euribor has been trading very oddly recently...something has definitely changed over the past few days in that market. (Hint...this might have something to do with the player recently cut from Team MM earlier this week....)

Anonymous said...

Is anyone seeing the chf vertical takeoff? I don't see any news on it, or is Jean Pierre buying any currency that is not his own?


PJ said...

I've predicted recently that US economic data is about to turn worse ... especially employment data.

Thought I'd leave a more specific forecast for tomorrow's first time unemployment claims. Consensus is 585k, range of Street forecasts is 565k-600k. I predict 610k headline tomorrow, 630k numbers in August. But I wouldn't be surprised to see some 650k prints. That'll squash the Q3 recovery claims very effectively.

Joe Calhoun said...

End of the beginning. It's too easy for it to be the beginning of the end. Expect a good GDP number for US this week. That'll ramp China again.

Anonymous said...

Bloomberg: U.S. Durable Goods Orders Rise Excluding Cars, Planes
Reuters: U.S. durable goods fell more than expected in June

All this talk of HFT shenanigans gaining traction, combined with pre interpreted news flow, its no wonder the market is still so schizo.
Good chatter and posts this month, enjoy your hols MM.

PragmaticIdealist said...

"Thought I'd leave a more specific forecast for tomorrow's first time unemployment claims. Consensus is 585k, range of Street forecasts is 565k-600k. I predict 610k headline tomorrow, 630k numbers in August. But I wouldn't be surprised to see some 650k prints. That'll squash the Q3 recovery claims very effectively."

2 words: Seasonal Adjustment

Anonymous said...

Oh and love those Far Side cartoons, suitably surreal. I feel like I'm trying to get into the Midvale School for the gifted.

Professional Gringo said...

Yes I've been on the 5 minute charts with success but obviously it's a different mindset...and sometimes I forgot that...and it cost me.

As the other guy above said..very few or no trends so it's the only game afoot. Bugger, bugger and bugger.

.......on the other foot, I haven't seen any comments here about the cap and tax and diluted takeover of the health care sector failure by team Obambi pumping up the market? Anybody like that theory?