Thursday, October 29, 2009
"Life all comes down to a few moments. This is one of them."
-Bud Fox, Wall Street
Looking back on his sixteen year career in finance, it's been Macro Man's experience that each year is often defined by a handful of critical days or events. While Bud Fox had the benefit of knowing how important his visit to Gordon Gekko's office would be, it's often not quite as obvious in real time how important an event will be.
When Ralph Cioffi's Bear Stearns hedge funds blwe up in July 2007, for example, it was viewed as in interesting development that might result in an orthodox phase of risk aversion; little did we know that it would usher in a global financial meltdown the likes of which none of us had ever seen. Similarly, when Macro Man took to the slopes on Friday, February 13 this year, he had no clue that it would become the defining day of the year for him (which happened when he blew out his knee in waist-deep powder.)
Today, on the other hand, has all the hallmarks of a potentially defining day for the rest of the year. Yesterday saw the SPX close below its uptrend line from the March lows; while prior trendlines have been violated more often than traffic laws by your average London cyclist, this time may be different. Even as the index was making new highs, the RSI was making lower highs- a classic momentum divergence that signals trend exhaustion and possible reversal.
Moreover, the market has gone down four days in a row. According to Macro Man's mate "Nick the Greek" at Citi NY, this has happened three previous times since the March 9 low: the average return on day 5 has been 1.66%. Adding spice to the chili is the release of Q3 advance GDP; with a forecast range of 2% to 4.8% around a median of 3.2%, the potential for someone to be surprised is rather large. Anyhow, the point is that if (and aat this juncture, it remains a very big if) equities put in another poor day's performance today, it may be a signal that something has changed.
Obviously, next week will also prove critical, with ISM, payrolls, and the Fed. There appears to be something of a divergence in pricing across markets. On the face of it, the dollar and equities look to be pricing in the removal of the "extended period" language, which acccording to the recent Guha article would imply that the Fed could (rather than will) raise rates within six months. But then looking at the strip, where December 2010 eurodollars are more or less at their highs of the entire cucle, it seems likely that such an outcome is not fully priced into fixed income.
As usual, reality is more complicated than it seems at first appearances. The dollar has evidently been buoyed not only by all the mumbling about the Fed, but also by the more prosaic (and powerful) fact that US corporates have been aggressively buying dollars. That positive earnings outcomes have been skewed towards those firms with large international sales is probably not a coincidence; still, the apparent vehemence off the flow is notable.
One other little development has caught Macro Man's eye. It may be nothing but an attractive p.a. investing opportunity, but it may be more, and to Macro Man's mind raises question about LIBORs. NS&I, which administers the UK version of savings bonds, recently icnreased their one year fixed rate interest on offer to 3.95%. To put this rate into contrast, one year Gilts offer a yield of 0.46%, one year swap yields are 0.93%, and the entire LIBOR complex is well, well below that level.
Now, if you are a depositor with excess cash who is willing to forego liquidity for a year, why would you ever leave the money on deposit with the bank, where savings rates are miniscule? Surely these rates are going to vulture deposits away from the banking sector? And if the banking sector loses desposits, shouldn't LIBOR move higher?
There is a hell of a lot of complacency in global front-end trades which, to Macro Man's eye, look close to fully-priced. The risk is surely skewed towards LIBOR-OIS widening, rather than narrowing? And if that happens, it could well be a crucial development for financial markets.