Thursday, October 22, 2009

Oooooffff

If you've ever been punched in the solar plexus or had the wind knocked out of you, then you probably know how risk assets feel right now. When Macro Man threw the steaks on the barbie last night, the SPX was pushing 1100 and oil was nearly $82/bbl. When he checked his screen 40 minutes later, he could almost literally hear the "ooooooooooooof!" being cried by Spoos.

Ex post, a number of reasons were given for the sell-off: Bove downgrading WFC, Obama announcing pay caps on TARP banks, a disappointing Wal-Mart call, etc. The real answer, however, is a bit more prosaic: a couple of huge ($5 billion) sell tickets went through in the last 40 minutes or so of trading, which naturally pushed the price lower. You can see the impact on the intraday volume chart below.Meanwhile, other sacred (risky) cows are being ushered to Dr. Market's abattoir. Over the past few weeks Macro Man has pointed out the apparent distribution trend in Korean equities. Despite this, the won had remained relatively resilient, in conjunction with the splendid performance of broader stock markets. Starting last Friday, however, there has been something of a fire-in-the-theater rush for the exits in KRW, INR, and other Asian currencies. Even USD/RMB forwards have seen some short-overing.

As long as the Fed remains accommodative (and yesterday's Beige Book suggests that it will), this sell-off in stuff like EMFX is probably little more than a bit o' flamingo hunting. (There has been some rumbling that recent FX price action is related to the Galleon closure, but the relatively small AUM of their non-equity books suggets that this is wide of the mark.)

One market clearly seeing pink flamingos being shot down is short sterling. Yesterday's BOE minutes suggested little appetite to expand QE, and even suggested that soem members are getting a trifle concerned about the Bank's relatively sanguine longer term inflation forecast.

Cue the predictable ralling in sterling (the currency) and kiboshing of sterling (the interest rate contract.) While Macro Man does have sympathy with the notion that Merve will wake up one day and Swerve hawkishly (and thus understands the recent carnage in the reds), the recent kiboshing of front Dec looks decidedly flamingo-y, and may have overshot.

As the chart below demonstrates, front Dec is now pricing 3m LIBOR nealr y10 bps higher than the current reading. The would put the spread over the BOE's interest on reserves at 16-17 bps. Compare that with, say, the US, where 3m LIBOR is currently just 3 bps over the 25 that the Fed pays on its reserves.
Ultimatelty, Macro Man suspects that liquidity will remain ample this side of new year, and that front Dec sterling looks like it's starting to offer some value.

Perhaps there is actually a little too much liquidity, at least in the US. news that John Meriwether is going for strike three literally beggars belief. Sadly, it's been Macro Man's experience that European investors don't have nearly as much money to piss away........

19 comments:

Anonymous said...

I can't believe Meriwether is hitting the reset switch again...actually let me rephrase that - I can, what I can't believe is that people will actually give him money to "manage". It seems results aren't that important anymore as long as when you blow up, you blow up HUGE...no point losing 10% for investors when you can lost 90%...you won't be offered another job if you only lose 10%, but if you dust 90% someone will be there to offer you a sweet gig...it's perverse...and fundamentally wrong.

E

Anonymous said...

Think the sterling rally is a bit presumptuous.
Whatever Merv may have said it isn't 5 mins since he made it clear he wanted more QE and indeed only the other day his chort Posen said the same thing.

Either Merv's a schizophrenic ,or he's trying to blag the market from doing what it really wants to do which is value £ where it belongs ...in the toilet.

Indeed in my experience a move as rapid as this one is invariably down to people riding the short term trend with stops up close.

The longer term players can take this action to add to their position.

Nemo Incognito said...

Move out to Asia Macro Man. The taxes are low and the high net worth individuals plentiful.

Nemo Incognito said...

and and on the subject of turds, MBIA is on the hook for Lane Cove tunnel which is doing about 45% less traffic than planned.

1.14bn of bonds
*.45
= $510mm of hole in your pants, or, half your market cap.

Just in case anyone thought that we'd seen the back of the evil provisioning monkey.

KGB said...

Stg price action is more a function of market positioning and lack of pain tolerance than any change in tone from Merv or anyone else. The CTA community will have had another bad week in FX land (throw it on the pile), if you look just about everything they owned has been put out with the trash. I would expect more hormonal price action into year end.

Anonymous said...

I'm 34 offered on front sterling. Feel free to lift it :)

Berwanger said...

Take a look at the UKbase rate against the UK 3M fixing. In the end of 2002 and first part 2006 the fixing can go 30bps wide... Not saying that it's the same scenario though.

Professional Gringo said...

Yes Barry-O is now setting the salaries here in the land of the free. Dick Cheney zinged Barry nicely in a speech last night as well...it's not good to piss off Cheney.

Ever heard the Cheney Tijuana story:

While on a sex-spree in a Tijuana whorehouse, Dick Cheney used a live cougar as a condom.

The bodycount was fourteen Mexican whores and one cougar.

In Tijuana, they refer to this as "The Night of the Sodomizing Cougar-Man."
Dick Cheney refers to it as "last Thursday."

Anonymous said...

INR is getting hit on back of Rallying Crude, as we import most of our crude requirements.

..From India!

leftback said...

Now who would want to dump a couple billion SPOOZ in the middle of a quiet trading afternoon? Maybe someone wanted to raise cash to put into Meriwether's new Black Box stat arb fund?

Macro Man, any thoughts on whether banks and institutional fixed income PMs might want to de-risk a little as EoY approaches? Perhaps they might want to be carrying fewer turds into the end of the year?

Macro Man said...

LB, I dunno, really. Speaking only for myself, I feel like there is still decent money to be made, so still swinging the bat....

Nic said...

It's the "five minute macro" innit.

Crisis Management said...

KRW, INR, RMB sovereigns all openly buy dollars on a regular basis. Why locate capital there when you can buy euros, where it's not clear even who is in charge of the FX rate, let alone predisposed to intervene?

Crisis Management said...

BTW a bit of Kremlinology, Russia central bank gold reserves.

leftback said...

Oooohh. New compensation guidelines, for 28 firms. Next they'll be asking the sell-side to tell the truth. You might see a few more billion SPOOS tossed out of the pram here...

EUR:USD 1.50 was looking sticky today.

CV said...

Will a "leader" from the Economist and a big article be enough here?

http://www.economist.com/opinion/displaystory.cfm?story_id=14699877

This picture has broken the back on many a dollar bull before :) !

Claus

CV said...

typo: dollar bear!

Anonymous said...

What I find amusing about UK economy bulls is they really do not see quite how bad next year is going to be. As the government is such a large part of GDP, the cancellation of major projects and cost cuts in NHS are going to really hit the economy. You are already seeing it in the CE industry - by example in London: Victoria Station, TCR and Bond Street extensions have all been put "on hold". Yesterday, the Land Registry announced plans to reduce staffing by about 20%. NHS for the next 2/3 years will be a net source of job losses as their budget is cut 10%+.

Quite what the market expects from being short SS or long cable at the moment is beyond me.

As for John Meriwether, that is laughable. I thought the world would finally have realised that RV is a BS strategy.

Macro Man said...

38 offer L Z9 for you, baby.....