Wednesday, August 19, 2009

Surfin'

It's tempting to slap some old-time Beach Boys on the iPod these days, because Macro Man seems to be spending most of his time surfing the waves of a "risk on/risk off" market. The waves seem to be bigger and more frequent than those on America's south Atlantic coast, if not quite matching up to Hawaii's North Shore yet.

Exhibit A comes from China, which shrugged off its yesterday's 1% rally in the SPX and its own tepid bounce earlier in the day to close down 4.3%, below the 2800 level cited locally as the average entry price for domestic funds. True to the surfin' motif, however, H shares (which remain open 75 minutes later than Shanghai) put in a reasonable bounce into the close.

What's somewhat amusing is that some of the most vociferous proponents of the China bull story (both in terms of local returns and its impact on the world) seem happy to dismiss the 20% pullback with a cavalier wave of the hand. Perhaps this is appropriate...but then again, perhaps not. Macro Man was amused to see that Goldman now forecasts a RRR hike and 3 rate rises next year, but expects this to have no impact on the Chiona bull story.

Hmmm....a market that is floating on a sea of liquidity will receive a policy tightening, and this won't have an impact? OK. What is interesting is that retail interest in Chinese equities seems to be on the wane; the pace of new brokerage account openings has decelerated quite a bit from its late July peak.
Coincidentally or not, that late July peak coincided with the top in Chinese stocks. More ominously, it came quick on the heels of the dreaded "sky dog" eclipse. Macro Man pooh-poohed the ol' extra-terrestrial pooch at the time, but it seems as if he was mistaken in doing so.

Elsewhere, the Bank of England surprised markets (or at least Macro Man) by revealing that it had voted 6-3 to hike QE this month, with Merve the Swerve in the minority. What was shocking was not that there was a split decision (Macro Man expected this, given that he didn't think the Bank would extend QE at all), but that the decision was split in favour of doing more, rather than less, QE.

Zowie! Merve reminds Macro Man of a religious convert, such is his zeal for Gilt-buying these days.

There was no mention in the minutes of taking deposit rates negative or anything like that, rumours of which had fueled a sharp rally in Sep short sterling. Unlike every other front contract out there, Sep sterling is trading 10 bps through the current LIBOR fix...which itself is only 25 bps through the policy rate.
Obviously, LIBOR fixes have been coming down and could well continue to do so...but the same holds true in the US, for example, as well. And with only a 25bp basis to policy, risks must surely arise that the pace of LIBOR reductions slows if not stops...leaving that front contract looking vulnerable, surely?

Just another wave to surf...

17 comments:

Nic said...

Loved the surf tune, thanks!

Anonymous said...

Great to have you back, MM.

Question on USD: Why do you think EU/USD is still hovering around 1.40s when EU's structural problems exist due to high unemployment, exposure to Baltic, Eastern European financing bonanza, etc.

I'm no fan of USD, myself, but still can't see why EU is still around 1.40s instead of 1.20s, imho!?

Thx,

AO

Macro Man said...

My view is that current EUR/USD levels are a function of a) residual of the pro-risk environment, which encourages fundinbg in dollars to buy more interesting things, pushing the $ lower, and b) another residual of the pro-risk environment, namely that EM CBs accumulate $ reserves and then buy euros with some of 'em.

MW said...

I recommend you buy calls on Jim O'Neill's bullishness.

Skippy said...

The propaganda from many of the Investment Banks following China's sell-off on Monday was hilarious - the JPM version was also in the FT for good measure. The key point is how violently the equity market has reacted to any hint of policy tightening. A nice way to express a "short China" view is via the AUD (just add leverage).

leftback said...

Agreed on EUR:USD - also the correlation between EUR:JPY and $wtic has been astonishingly tight. Carry trades are alive and well.

Enjoy the cricket tomorrow, Skippy, - and MM at the Oval. LB will be in an Aussie bar in NY. Painful.

PJ said...

MW - Can I get some calls on Jim Cramer bullishness, hedged by puts on the underlying securities? That seems easier money than the trades I'm actually in.

Anonymous said...

any thoughts on EURSEK? on a long term chart it looks like the mother of all head and shoulders, but recently it seems pretty correlated to risk on trades.
melki

Anonymous said...

The talk of rate hikes seems eerily reminiscent of the rate hike talk last year after the Fed dropped the rate to 2%. Kudlow said a hike to 2.25% would be the "shot heard around the world."

However, looks like others don't see it that way:

1618 GMT [Dow Jones] Brokers report very large put butterfly spread in Eurodollar futures, as a trading firm hopes to profit soon from expectations for lower prices and higher rates in 3Q next year. Brokerage house performed 50,000 so-called mid-curve spreads, simultaneously buying and selling puts at 3 separate strike or underlying futures prices. Objective is for Sep 2010 contract price to fall to 98.00 and anticipated Libor rise to 2%. Options expire next month. Sep '10 recently trading at 98.31, up 2.5 BP, seeing Libor at 1.69%. (HLP)

Macro Man said...

ALthough EUR/SEK has had a decent run down, it seems to me that interest and positioning are both disproportionate to the expected future returns. I contemplated a purchase today before I came to my senses and remembered that I hate trading Scandis (in either direction.)

Remember, betting on Sep 2010 eurodollars going down over the next 3 weeks is not the same as expecting loads of rate hikes next year..far from it. It's largely a bet on sentiment and positioning...and that red Sep contract had a 60+ bp peak-to-trough rally since payrolls.

My understanding is that this fly was actually rolling up a put spread...ie selling the 9800/9775 ps and buying the 9825/9800 ps. Even if it wasn't and is actually a fly trade, I do have some symnpathy for it as a hedge against other stuff...indeed, I did something not dissimilar yesterday.

MMcC said...

While agnostic on which way the Shanghai market jumps next, I feel obliged to point out that drops of 20%+ are usually what defines the left shoulder of a rally here. That said, they also define the peak, which is why I don't recommend hiring me (or anyone else) as a chartist...

Anonymous said...

MMcC,

Heck, and here I thought just about ALL ForEx traders were chartists/TA types.

Old Trader

Professional Gringo said...

Slightly off topic here MM.... but a grown moose can produce 2,100 kilos of carbon dioxide a year -- equivalent to the CO2 output resulting from a 13,000 kilometer car journey. And that doesn't even count methane!

If my math is correct, you can take a private jet to Norway for a hunting trip and, if you kill more than three moose, you’ll have enough carbon credits to open up your own oil refinery.

Just a random problem that I worked through this weekend. Hope it helps.

Also, I'm having nightmares about the dreaded witches hat. Tequila isn't helping anymore.

Nic said...

Have you noticed the retest of the neckline on the other indices? It's looking like maybe more rally to me, 20% more (and I am not agnostic, I'm a disbeliever)

Nemo Incognito said...

Macro Man - quick question: crude. Not sure where we go from here and technically looks like a lot of momentum money is about to pile in. Looks like a good hedge to a short developed market equities bias.

Macro Man said...

Yeah, I've had some longer dated crude calls in the book for several months now, and have traded the delta around base on shorter-term view. Currently have a smallish +ve delta, but given recent rip I certainly have no desire to de-hedge.

Nemo Incognito said...

Nice work. Will send over some stuff on corn. Looking more interesting from the point of view of "seriously it can't get any worse"