Wednesday, September 02, 2009

Game on? Game on indeed.

The party (for the bears, at least) started in Europe, where some very large (50,000 +), fairly high-delta bearish option strategies printed, sending futures tumbling as the market-maker hedges went through. The size and structure of the trades suggest institutional hedging rather than directional punting. Either way, however, they represented a concern about further upside in the market that has been largely absent over the past several months.

In the US, meanwhile, equity weakness was particularly telling in light of a pretty solid ISM report, which comfortably beat the published consensus (though fell short of the hotly-whispered 55 level.) Failure to rally on good news is clearly a change in tone, and there was a poetic symmetry to yesterday's price action. Futures volume was the highest since March 10, the day after the SPX printed its low close. 'Twill be interesting to see if the follow-through is as pronounced over the coming months....
In any event, the composition of the sell-off was gratifying, as (and there's really no other way to phrase this) the turds got flushed. Low-quality and impaired financials, which as noted yesterday had dominated exchange volume in recent weeks, got their comeuppance, falling very sharply in tandem. Chalk that up as a small victory for rationality.

While it's tempting to go all-in from the short side, the last six months of aborted reversals and repeated bear hunts have left Macro Man remaining cautious. Perhaps that very caution, if broadly shared, will provide the fuel for a deeper downmove. We'll see. At the very least, Macro Man prefers to wait until the August lows are breached before placing all of his chips on "red." As tautologically-inclined technical analysts will tell you, the SPX needs to break those lows around 980 before it can go even lower.

Weakness has carried over this morning, despite Asia not selling off as much as might be feared. While it's tertiary (at best) data, we saw the first dose of Roundup applied to the green shoots this morning as Norway's PMI turned sharply lower.
The NOK has been a darling amongst those punters not totally anesthetized to trading FX and now looks to be putting in a reversal against the EUR and USD. This reminds Macro Man of the rarely-cited Fifth Law of Thermodynamics: the amount of pain in AUD/NZD and the Scandi FX markets is always constant.

Given that the ostensibly positive Aussie GDP number put a bid under AUD/NZD, thereby gratifying a widely-held view, it was inevitable for the smooth functioning of the universe that the wheels come off of the Nokky trade.

Now, if you see them both get flushed at the same time, be afraid. Be very, very afraid.

Posted by Macro Man at 8:45 AM  


Meh. I think Benny continues to make the bad go away. We're a good half year away yet from a taxpayer revolt.

Nemo Incognito said...
10:07 AM  

I don't understand why the kiwi is so resilient. Surely the RBNZ will remain on easing bias even if the rba go next month.

Anonymous said...
10:30 AM  

It looks like NOK fell one-half to one percent from yesterday (depending on what it is measured against). I don't know if I would get too excited about that. I still love it, and have actually made it my "base currency." Why? It has the cheapest CDS of any government in the world (meaning it will be the last paper currency to go to zero :) ).

"I don't understand why the kiwi is so resilient. Surely the RBNZ will remain on easing bias even if the rba go next month."

The markets have a hundred basis points of tightening priced in by June. My biggest position is a bet against that.

Business confidence this month was the highest in more than ten years, but I still don't see that translating to immediate rate hikes.

Anonymous said...
11:26 AM  

Anon, I would have to agree as the PM of NZ is a former FX guy and apparently finds this recovery less than credible. That being said, the RBA and RBNZ are both credibly independent unlike those other two english-speaking democracies in the northern hemisphere.

Nemo Incognito said...
11:40 AM  

Lots of violations of other trendlines in forex yesterday. Maybe they will all be "repaired" after a re-testing but maybe not.

CHF/JPY continues to be a favorite of mine to monitor for dollar direction

Clive Corcoran said...
12:47 PM  

MM, a very good point recent fake reversals. I have been looking to short since April but managed to get out of the train wreck as the market surged every time I looked to short.

Anon 1030, I have been short kiwi for about a month now and getting hurt on it. The explanation I was given for recent strength is that people are expecting NZ to be the first country to hike rates. Not sure about that one.

Anon 1126, what instruments are you trading to bet on NZ rate hikes? And any thought on AU (180bps of hike over next 12 months???)

12:58 PM  

No one has thus far mentioned this abnormal "crisis bid" that's elevating gold and silver especially.

Frankly, I would be a bit concerned if I were short precious metals here. A nasty short squeeze could breach nearby technical levels.

Crisis Management said...
1:32 PM  

Not sure if RBNZ will hike before the RBA. There is some chance that the RBA will hike in October.

NZ had the dubious honor of being the first economy into recession, perhaps it will be the first out?

If global IP momentum does peak in September or October and US retail sales (final demand) remains weak, neither the RBA or RBNZ will probably hike in the near term. However, the timing is finely balanced.

The RBNZ also appears to be concerned about the strength of the NZD - hiking rates would simply encourage a higher NZD.

Then throw, China and commodity prices into the mix and it is a tough call.

Perhaps the best trade is simply long volatility?

Skippy said...
1:46 PM  

I wonder what the early catalysts for market turning (downward) would be. Slowdown in manufacturing? Sweden and Norway alreay stumbling on PMIs. Poor Q3 earnings? Criappy x-mas shopping season in US?

I think RBA turned slightly more dovish. Can't see how they would hike this year.

2:09 PM  

As Crisis Management above mentioned Gold is acting slightly off given the action in the USD and the risk-off mentality that is now getting stronger and stronger. Anyone got any good explanations? Unless it's just a fakeout, of course.

Besides that 900 on the S&P anyone? Fill in that gap nicely.

Anonymous said...
2:11 PM  

Not sure if any government has the brass to hike rates any time soon.Not even Sarkozy wants to be seen as the leader of the band, one suspects. That gold and silver have been joining in the party might indicate some rational minds looking for a breather from equities. A crappy x'mas shopping season could prove the weedkiller for greenshoot watchers. Any ideas?

Judy said...
2:19 PM  

So equities are toast but metals are going up? Wow, Marc Faber must be happy. Long AK's, gold and Colombia's finest.

Nemo Incognito said...
2:24 PM  

The flushing process for "impaired financials" seems to be continuing today to some degree. Wonder if today we are seeing some redirection of dollar hedges from crude into gold? Added to my gold short position as gold tagged 966.

EUR:JPY still seems to be the FX pair to watch for risk-on v. risk off direction.

leftback said...
3:27 PM  

"Anon 1126, what instruments are you trading to bet on NZ rate hikes? And any thought on AU (180bps of hike over next 12 months???)"

New Zealand Bank Bills (ZBM0 Comdty on Bloomberg). They trade on the SFE, and have decent liquidity (usually a hundred a side maybe two basis points wide) during the normal trading day, especially near the end of the session (about 0300-0500 UTC).

I don't think Australia will tighten as much as the market thinks. A lot there depends on China, though (China can literally make or break Australia's economy depending on their commodity purchases). I do have long positions in short rates there, as well (which have moved against me, but expectations in New Zealand, which has stated a desire to prevent their currency from appreciating, have held more steady).

If I were a central banker, I would want to see evidence of a SUSTAINABLE recovery (meaning without - as much as possible - government stimulus) before raising rates, but what do I know?

Anonymous said...
3:31 PM  

Gold does look like a good short here, it looks like a fake move up, before it craps out like everything else

Anonymous said...
3:33 PM  

or not!

Anonymous said...
3:57 PM  

"Okay Sosa; You wanna fuck with me? You fucking with the best! You wanna fuck with me? Okay. You little cockroaches... come on. You wanna play games? Okay, I play with you; come on. Okay. You wanna play rough? Okay. Say hello to my little friend!" - HGA Cmdty

Nemo Incognito said...
4:00 PM  

Nemo, AKs are looking a bit rich after doubling in price last year.

Crisis Management said...
4:28 PM  

Nemo, perhaps comdty slower to pop than equities? like back in 2008-

I have many thoughts but no actionable plan. Sticking to relative value bets for now. My bets on Mega Millions did not pay off unfortunately.

Anon 331pm, so i reckon you're just rolling forward the long position on the short-dated contract? Was wondering if you're using forward swap or something like that.

I agree on the sustainability argument totally. or at least a sign of steep inflation.

4:30 PM  

AK's doubling? Maybe in the US, but given that most of them are:

a) Chinese
b) Made of steel

I'm assuming producer nations have a raging oversupply problem. Also, Sierra Leone ain't the warzone it used to be. China Northern Industries and China Poly must be doing it tough these days though I hear biz in Pakistan is booming.

Nemo Incognito said...
4:30 PM  

Also: WTF. Bonds still up. Something very weird is going on here. Is all that zerohedge stuff about dealer/fed collusion true? Its too late and I'm too drunk to make much sense of it. Cliff notes please.

Nemo Incognito said...
4:34 PM  

Wonder when the commodity take-down is going to start? Gold bugs seem irrationally exuberant today.

leftback said...
4:55 PM  

Bonds and gold bid because we are deflating

Gold broken correlation with DXY since Friday, it goes much higher now. Gold stocks looking great.

Anonymous said...
4:56 PM  

Anybody had time to read Wegelin & Co's latest investment commentary?

Professional Gringo said...
5:11 PM  

Nope - please link if you have it?

L/S Equity Guy said...
5:13 PM  

Nevermind, I found it. http://www.wegelin.ch/download/medien/presse/kom_265en.pdf

L/S Equity Guy said...
5:15 PM  

Can't paste here to save my life...


L/S Equity Guy said...
5:17 PM  

What are your guys' view on playing short term Treasuries long here? I read an interesting academic piece that seemed to claim the uniformly higher savings rate among American consumers has not fully been translated into funds inflow into govt debt and money mkt funds. This also goes along with the deleveraging theme which has not fully played out yet.

Any opinion on corporate bonds index?

Mike said...
5:20 PM  

"The explanation I was given for recent strength is that people are expecting NZ to be the first country to hike rates. Not sure about that one."

Heard the same explanation yesterday and the guy said he got if from GS. 'NZ to hike first' is certainly not reflected in rates mkts.

MW said...
5:33 PM  


"Higher savings" in the US doesn't necessarily mean more cash available to invest.

With mmkt paying 0% and debt costing 6% (mtge) or 20% (credit cards) -- the highest return "savings" vehicle is to pay down debt

Anonymous said...
5:33 PM  

You know it's still silly season when I get sent this story as the reason for golds move


Anonymous said...
6:14 PM  

All the chicanery and central bank interference in the gold market certainly could end in tears for the short sellers, as they are left holding the bag.

Hulk Hogan accurately captures the sentiment of gold owners around 0:40 of this interview.

Crisis Management said...
6:17 PM  

This is borne out in the data points


similar picture across the board unless I'm mistaken.

Anonymous said...
6:24 PM  

Macro Man, is there some bank solvency chatter today? Could it be someone in Europe? The problem banks in the US we already know about. Maybe a Swiss bank, might explain why the Swiss were selling CHF and buying USD, related to dollar-denominated debt?

leftback said...
6:30 PM  

There is definitely a collusion going on between the fed and the dealers. that's how all those fixed income desks are minting money this year. The Fed tells the dealers what they're buying, how much volume and what price they would pay. The dealers front run.

Not sure if that would necessarily push up treasuries. I am completely out of rates/YC in US, UK and EUzone because it's all driven by whatever the central banks feel like doing. i have no skill in reading their motive (also debateable i have any skill at all on reading markets in general)

7:37 PM  

Grrr... In the money stops on Aussie hit. I was wandering what was the reason to break SP correlation so violently, and then I see gold silently moving 23$... Aussie rather hedge, huh?

Stefan said...
9:00 PM  

leftback, there was some solvency chatter yesterday but whoever started the rumour couldn't seem to make up if it was European or US...anyway, CDS prices all but unchanged this week on both US and Euro banks, a smidge wider generally but nothing dramatic, still damn close to the tight end of the range this year.

the cds trader said...
9:41 PM  

WFC was the rumour in LDN yesterday....hence the 5 pm dump in the whites yesterday. Seems like bollocks (unless they're ALL going to start telling the truth), but what else is new....

Macro Man (Bbry) said...
9:49 PM  

A lot of my US gold stocks were up 5-10% today. This hasn't happened for ages. A lot of money seems to be anticipating an imminent plus $1000 break out, and a decisive push tomorrow above $980 should see $1000 taken out this week.

John East said...
11:14 PM  

"Anon 331pm, so i reckon you're just rolling forward the long position on the short-dated contract? Was wondering if you're using forward swap or something like that."

No, just bought June 2010 futures and sitting on them (still good liquidity there, and not so far out that my crystal ball is completely opaque).

"The explanation I was given for recent strength is that people are expecting NZ to be the first country to hike rates."

That seems completely divorced from reality. From a July 30th story:

"[Alan] Bollard reiterated he 'expects to keep the cash rate at or below the current level through until the latter part of 2010.' By contrast, traders expected 86 basis points of increase within a year, according to a Credit Suisse index."


Obviously, conditions can change, but he seems in no hurry to increase rates.

Anonymous said...
11:43 PM  

WFC? what does that mean?

Anonymous said...
6:56 AM  

China up, copper up, let the bubble roll on folks......

Nemo Incognito said...
7:49 AM  

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