What Now?

Thursday, September 24, 2009

So what now?

Last night's Fed statement was, to Macro Man's eye (and, he suspects, those of most macro guys) about as dovish as it could have been. And for the first hour of trade, the asset market reaction was predictable...short end screams higher, equities rally, and the dollar takes it on the chin.

But at some point, some time around 7.30 pm London time, it all sort of ran out of steam. First EUR/USD ran into corporate offers in the mid 1.48's, which then chased it lower, settting off stops. Then equities started trickling lower, which eventually morphed into a mini-torrent.

What happened? It's hard to suggest that the market had taken the adjustement to the MBS purchase schedule as a sign of imminent tightening when the short end a) flattened on the day, and b) closed pretty much on its highs.

Could it be- and Macro Man is ashamed to admit that this never occurred to him- that equity guys actually thought that there was a chance that the Fed would announce more QE? The very suggestion seems ludicrous to a macro observer, which is why your author never contemplated it. But it would certainly serve as the simplest explanation for the generally disappointing performance of stocks in the wake of seemed to be a very benign, reflationary statement.

Regardless, the stars may be aligning towards a somewhat less favourable environment for risk assets. Oil was a notable laggard in the entire orgy of reflation that's dominated the past few months, and in the wake of a huge composite inventory build crashed below the support level highlighted in this space the other day.

Sterling, meanwhile, has come under the cosh this morning after Merve the Swerve noted that a) it's a bit silly to get excited about a little growth after a huge recession, b) a year ago, a couple of UK banks were within hours of going bust, and c) that sterling weakness is welcome, in that it helps rebalance the UK economy.

The last comment in particular helped propel EUR/GBP to new highs for the move, putting the kibosh on a recent high-profile "buy sterling" call from a well-connected institution. Perhaps they need to get Merve on the payroll....
In any event, the issue of rebelancing is of particular relevance, particularly with the Pittsburgh G20 meeting rapidly approaching. One would like to think that global imbalances would be up for discussion; as Macro Man has said on numerous occasions, if China et. al. want a seat at the big boys' table, they need to bring something to the table, other than a set of demands. Y'know, like currency flexibility and/or convertibility, an issue which not only the US but also, increasingly, Europe are likely to highlight.

It's a particularly relevant time to address the global imbalances issue, as the beanstalk-like proliferation of green shoots may be about to slow. Economic surprise indices in both the G10 and Asia have quit going up and, if anything, look like rolling over. It's interesting to note that a number of leading indicator data points have disappointed consensus recently.
So if the second derivative/green shoot trend encounters a drought, 'twill be somewhat more challenging to avoid the siren song of protectionist, beggar-thy-neighbour policies that are already emerging in the dark corners of the global economy.

And if protectionism is allowed to flourish, green shoots-style, it won't just be Macro Man and other punters asking "what now?"

Posted by Macro Man at 9:48 AM  


Just an FYI for those with access to GLG, a lot of these trade consultants will straight up tell you what industries are going to the Department of Commerce etc. That or find a friendly union official. This isn't rocket science people.

Next up: More steel products, more aluminum, etc. Find a Chinese product that they produce a whopping surplus of, find a producer and short it. QED.

Nemo Incognito said...
10:33 AM  

Not trying to be a smartass but is there any reason why you look at the dec oil contract instead of nov? The front month is Nov and has more OI than dec?

Anonymous said...
11:24 AM  

Whatever the future may be it will certainly not be more of the same when it comes to global imbalances.
Chinese may not care to hear that and major exporters like Japan and Germany won't be too pleased either.
However ,when you look where the trade imbalances exist and consider the surpluses and deficits underlying that then frankly you'd have to be pretty silly to think that was sustainable.
The only question remains how they will resolve it.Like grownups amicably and in an orderly fashion ,or through an ongoing trade war utilising protectionism.
It's either give up the rather silly games with currency pegging ,or face the worse alternative of shrinking trade capped by protectionism.

What you can't have is a huge trade imbalance /deficit underpinned by an increasing inability to produce the revenue capable of meeting the deficit bill.

Anonymous said...
11:27 AM  

LOL..and i see Mss Merkel doesn't wish to see global imbalances front and centre with the G2. Well she wouldn't would she.

Anonymous said...
11:30 AM  

This could be a real mess if Germany and China go into denial here. On a more practical note, aside from micro trades how would the chips likely fall here? This qn is directed at the more macro folks, I am too young and stupid to have seen a trade war before.

Nemo Incognito said...
11:57 AM  

Anon 11:24
the dec contract (as well as the jun) are a bit of 'anchor' contracts in which non-oil people put a lot of money, ie position taking. No other reason ,me think, than it's easy to trade with a dec and jun cntrct

Anonymous said...
12:00 PM  

Nemo & Anon: With trade already fallen off a cliff, and the US consumer broke, I suppose Germany and China need not bother too much. It can't get much worse anyway.

At some point Europe & Brics will trade among themselves. Punters used to call this "decoupling" last year. It was a bit presumptuous maybe to say it would happen soon, but I see it coming nonetheless.

Gregor Samsa said...
12:25 PM  

What makes you think Europe and Brics (china) works particularly well ..one very low growth and one very high growth. One very skewed to high age range population and Brics towards a younger age grouping ...one leaning towards consumption and high social costs the other towards saving and low social costs ,the two tend to be connected.When you have no social safety net you make your own by saving more.Probably why the different behavioural trends have evolved as they have.

Far as I can see the only way forward is to tilt growth to some extent back towards mature economies so they can discharge their current debt levels to something sustainable and adjust their costs over time towards their social obligations that have built up over better part of half a century.

Politically those mature economies probably won't allow any other solution anyway as the voting electorate are skewed in age towards voting for that kind of future. Certainly in Europe/UK ,not so sure about the US who don't have quite the same social system ,but do have excess debt.

All conjecture ,but in any case you simply can't walk around the issue of personal and public debt levels in US,UK and indeed in a lot of Europe and expect that to be absorbed seamlessly with no impact on global trade imbalances.

Anonymous said...
1:19 PM  

@11.24 hits part of it, which is that Dec is an easy 'benchmark' contract for a guy like me throyughout the year. Moreoever, I never trade front crude; not only is the price impacted by stuff like the state of the Cushing depot, over which I will hardly be the best-informed, but I also have zero interest in receiving a demand for or the arrival of a tanker full o crude if I forget to roll....

Re: Germany and imbalances. Tey've been fighting a rearguard action ever sicne the last recession; as a dominant exporter of manufactured goods, they've obviously been impacted by both the strength of the euro and fact that Asian exporters have mvoed up the value chain. As a result, German workers have seen essentially zero real wage growth in a decade. How long can that continue, one wonders, before they've had enough?

Macro Man said...
1:23 PM  


Ithought the NY Fed's announcement to slow the pace of MBS purchase in order to extend the QE from end of 4Q to end of 1Q10 may have been the cause. This immediately reduces the liquidity supply, though just a small amount. But it raises the issue what happens in 6 months when the FED stops buying MBS...who will pick up the slack and how much higher yield would they demand. Don't know when to start factoring in this risk 6 months out. Welcome any feedback. Thanks.


Anonymous said...
1:27 PM  

MM - hearing the sell off late yesterday in equities was caused by a large buyer of the Jan SPX 1075p 25k traded...big chunky delta to hedge.

Anonymous said...
1:36 PM  

Decision Economics has an interesting take on the Fed's pronouncements that explains the market reaction. When I read it, I didn't see any material changes from the previous one. But these guys broke it down and showed that there is more recovery language, from "stable" to "growing." They point out that there are "higher levels of resource utilization," etc. No warnings but maybe a shot across the bow.

Steve said...
1:37 PM  

CMC, I believe they made the announcement so as to lessen the impact of the end of the MBS program...ie, so that there wouldn't be $1 zillion of purchases in Dec and none in January. They of course made a similar announcement on Trasury purchases a couple of months ago with no obvious impact on "risk."

The absence of further stimlus (ie, reserve growth) is not the same as drainig the existing stock of stimulus....to my mind, the latter is the key test for markets and the economy (which, needless to say, I expect 'em to fail with flying colours.)

Macro Man said...
1:38 PM  

The problem I have with the 'closet hawkish' interpretation of the Fed is that the market best qualified to render such a judgement, the short end of the tield curve, rallied like a banshee. I do wonder if he answer is somewhat more prosaic, along the lines of Anon @ 1.36..i.e., someone sold a chunk of equity delta.

Macro Man said...
1:46 PM  

maybe risky assets' performance is dependent on the growth of money supply rather than its level ... just a thought

Anonymous said...
1:46 PM  

Anon 1.46
As in last fool in reaches for the next promised Fed $ and doesn't find it there ?

Anonymous said...
2:24 PM  

Had this earlier this am

Talk of a large SPX trading right into the US close leading to close to $1bio futures being sold Jan 10 atm strike (this may or may not have have a barrier struck in usd/jpy am still trying to find out)
- Crude down almost 5% yesterday on higher than expected distillate builds.
- Huge S&P emini volume during the late downmove. 200k ESZ9's printed in the 10 minutes from 3:50 - 4:00pm. This equals $10.6BN notional and is by far the most volume we've seen in a 10 min span over recent weeks

Anonymous said...
2:27 PM  

Nemo, still shorting the yen? Come on, join the party: long yen, long iTraxx Japan CDS--the Japan pain trade. :)

Re: front month crude, don't forget last summer there was that insane rally of something like $25 in one day on expiry.

Crisis Management said...
2:54 PM  

Existing home sales not "better than expected".

Odd how that happens, after all the $100K bungalows have been sold due to the tax credit.... $1M studios in Tribeca still not catching a bid. Can't move it, Muffy...

leftback said...
3:04 PM  

Crisis Management, I took my P&L and immediately covered when I woke up in Asian time. Sadly, I covered my HSI a bit too soon but got most of the move in it and AUD. I'm just trying to work out what the big picture trades are from here. I don't think people long carry are living in a burning building just yet but the cracks are definitely climbing up the walls.

Nemo Incognito said...
3:05 PM  

I am hearing from mmy finance desk that the Fed has been having discussions with dealers regarding reverse repos. Seems they are not going to move yet but are beginning the prep.

Better get that last glass of punch down quick...

Steve said...
3:43 PM  

Look at all those monkeys trying to get out of the telephone box at the same time...

The dollar has broken a few tackles, MM, and it's into the backfield. If the secondary don't close it down it could .. go .. all .. the .. way. Well, from the charts it's got some room to roam up there and there isn't much support for Spoos until 1030.

Short silver since early yesterday has been... nice.

leftback said...
3:47 PM  

why oh why did I cover. Idiot.

Nemo Incognito said...
4:00 PM  

Come back in Nemo, the water is fine...

Steve said...
4:13 PM  

No helicopter drops, no face-ripping short squeeze.... Wonder how many bears might be out there in the hills, now that the rangers have left the campsite?

leftback said...
4:25 PM  

steve great line lol - that was funny


Anonymous said...
4:32 PM  

Forget it. I always lose money when I blindly chase a move. Still not a fan of JPY so back in there. At least every SOE listed in Hong Kong is going to be beaten with a stick tmr am.

Nemo Incognito said...
4:36 PM  

If you want to catch up, take a look at EUR, if you overlay it against just about anything it seems to be the most out of whack on a relative basis. Against the S&P all things equal it should be trading around 1.425. It's only down about 50 pips from where it was trading towards the end of the day y'day whereas sterling is down 3 full figures. And oil and gold are getting hammered.

Steve said...
4:47 PM  

Nemo, copper broke your 2.70 level, doesn't look pretty.

Crisis Management said...
5:21 PM  

A bit of cheery music for you all


I could think of a few things I'd like to see dig themselves back in their hole (SOEs, spivvy small cap miners, the S&P....)

Nemo Incognito said...
5:22 PM  

Breaking it intraday isn't that big a deal - Voldemort doesn't watch the tape. If it closes below there then we may have something more sinister afoot. I'm watching and waiting. I think a lot of the bearish crowd have had their hearts broken way too many times in the last 2 months.

Nemo Incognito said...
5:30 PM  

What if there was a fire, Nemo? - in a crowded theatre , for example - and when the fire engines arrived and began to pump, nothing much came out of the hoses b/c the reservoir had been emptied?

"The pump don't work 'cause the vandals took the handles"

leftback said...
5:39 PM  

Nice. Yeah, broken handles everywhere - copper, gold, cable, you name it. Decent volume in everything too. Time to get involved....

Nemo Incognito said...
5:45 PM  

The bears are back in town! You guys must be having a field day. Well, looks like it might be time for me to switch to your side of the fence. These are some good moves on decent volume as has been said and it is nice to see the beginnings of what might be an extended move. Of course, as has also been said, bears have got burnt alot lately so keep an eye on the exit just in case, but it looks like the risk off trade might be back in fashion, at least for a while.

Anonymous said...
6:29 PM  

*DJ Fed Lawyer: Broader Audits Could Hurt Monetary Policy

That headline coincided with some new daily lows. LB gets my vote for bear of the week on this silver trade. IMF signals a top once again.

Crisis Management said...
6:48 PM  

The Bears Are Back in Town

[apologies to Phil Lynott and Thin Lizzy]

Guess who just got back today?
Them wild-eyed bears that had been away
Haven't changed, haven't much to say
But man, I still think them cats are crazy

They were asking if you were around
How you was, where you could be found
Told them you were trading downtown
Driving all the old men crazy

Spread the word around
Guess who's back in town
You spread the word around

Friday close, they'll be dressed to kill
Down at Benny's bar and grill
The Spoos will flow and blood will spill
And if the bears want to sell, you'd better let em

That jukebox in the corner blasting out my favorite song,
The nights are getting colder, and it won't be long
Won't be long till October comes
Now that the bears are here again

The bears are back in town
The bears are back in town
Spread the word around
The bears are back, the bears are back

(guitar solo fade....)

leftback said...
7:08 PM  

nice one leftback

Anonymous said...
8:05 PM  

@ Anonymous 1124 ---

never trade the front month or the 1st/2nd calendar. It's a delivery play.

Words of wisdom from a flat price trader in CL and NG. Just look at the price action last Sep/Oct.

Anonymous said...
1:22 AM  

Voldemort's credit just got rejected at the Aussie mining shop.... wonder if more stockpiling is in store?

Nemo Incognito said...
4:28 AM  

Anon @ 1.22am

So you recommend trading three months out on a rolling basis?

To be fair that squeeze that you mention did happen on the last day of trading by which time you probably would have rolled anyway. Plus it seems fairly rare to see that kind of move.

If my memory serves me right, didn't the bobl and schatz used to be subject to those types of crazy moves on expiration day as well?

Anonymous said...
8:17 AM  

so easy... sell


Anonymous said...
8:43 AM  

There was one famous squeeze in the Bobl in 2001. It was covered by the BIS in an old quarterly review if you want to read up on it.

Since then, Eurex changed the rules and Finanzagentur said it could sell deliverable bonds to avoid future squeezes, so it's much less of a risk, now.

Have a great weekend, all...

Anonymous said...
1:58 PM  

Have you got that BIS link? That's a pretty well-known trade, would be interesting to read up on it...

Macro Man said...
2:12 PM  

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