Wednesday, October 28, 2009

It's all looking more than a little wobbly this morning. After yesterday's solid 10 year auction helped stem the bloodflow from the execrable consumer confidence figure, equities managed to put in a fairly "blah" close, which suddenly seems like the new "high volume percent and a half melt-up."

The canary in the coal mine for the current market came from, of all places Australia. Quarterly CPI was released a bit highre than expected; given the recent AUD love-fest and the swirling focus on RBA tightening, this surely led to a nice rally in the Oz, right? Not so fast, my friend. Of all the flamingos out there, AUD is surely among the biggest, given that there is apparently nothing wrong with it. Or maybe there is. The Aussie banking sector, which has largely flown under the radar during the entire crisis, apparently has a few skeletons (or at least turds) in its closet, as NAB's earnings report was an absolute shocker. The AUD has been spanked as a result, which surely must tell us something.

Meanwhile, European banks have continued their descent down the liuft shift this morning, with Irish banks grabbing this morning's "limelight." It's been a while since financial stability has been any sort of focus, but it is pretty striking that every mornin this week, Macro Man has beens serendaed with comments like "ING down 20%" or "Bank of Ireland down 15%." The European banking index doesn't look any better than the BKX; given the relative lack of pain taken by European banks, one could easily argue that the downside for the SX7E is greater.
And w(h)ither the euro? It's hard for Macro Man to figure out whether this just a flamingo-y position squeeze, the by now-usual month-end jitters, a reaction to a possible change of Fed language, or a Leftback-style "Big One."

What's interesting to note is that amongst the cosmic background radiation of the DGDF trade has been signs of a vulnerability to a dollar rally. If we overlay EUR/USD with the skew in 1 month 25d risk reversals, we see that for the first half of the year the correlation is quite high. Over the last few months, though, even as the dollar was going down the drain, the riskies came off ; they've actually been bid for euro puts for most of this month. Again, whether that's a canary in the coal mine or prudent hedging remains to be seen, but it is certainly curious.

Overall, Macro Man's expectation of higher volatility trading conditions is looking prescient (or at least more accurate than this week's directional calls). The last several months have seen month-end wobbles, which have swiftly righted themselves once the calendar page flips. With the Fed, NFP, and G20 looming, the jury is still out on the current wobbles. Will markets prove to be Weebles, or Michael Spinks?

Posted by Macro Man at 9:37 AM  



your EUR risk reversal chart looks even more compelling if you update the end date to 28th Oct.


Anonymous said...
10:27 AM  

I wouldn't look too deeply into the NAB results, they still have those turds like Clydesdale in the UK that seem to make up most of the provisioning. Home turf loan books look mostly ok.

Nemo Incognito said...
10:29 AM  

E, dunno what happened there. Updated and fixed.

Macro Man said...
10:40 AM  

If you look at the correlation of the EURUSD with its risk reversal (changing from spread to correlation on 5) you will see that we are on the verge of turning negative...

Tested extensively on all major crosses and has been an excellent (guess what... not perfect)indication of medium-term (>6 months )trend change...


damien.cleusix said...
11:17 AM  

To take or not to take profit, that is the question.

Gregor Samsa said...
11:19 AM  

Gregor, my balls are this ( .. ) big. Lets face it, nothing is cheap, I've been taking profit for 2 days now. And honestly, there is an awful lot out there which cannot be justified that easily - copper, chinese steel and aluminium, many resources companies, etc.

Nemo Incognito said...
12:10 PM  

Backtested the implied skew versus actual skew (lagging the realized skew by a month) this morning, the EURUSD riskie actually looks like a better contrary indicator for what the forward looking distribution looks like, i.e. EURUSD higher from here would be the signal. It looks like it might be more of a false dawn than a crystal ball, but the take-profit camp does seem quite powerful this time around and rules are made to be broken.

TG@SS said...
12:37 PM  

Mm, agreed on potentially higher vol environment. Back in the market with the first couple of posts, and thoughts of being long a little vol in Crude springs to my mind immediately, although it has been trading in a small range.


SFOT said...
12:40 PM  

he was fighting a peak tyson to be fair. nobody would have beaten mike that night, not even the chinese A shares.

Robotic Elder said...
12:57 PM  

The only good thing about observer status is the ability to stand back and guess the length of rope with which some are going to hang themselves.

On a lighter note , nemo are you really that optimistic about those loans (assuming that you're talking about those resulting from the liquidity free for all earlier 09 ) not turning NPL in the near future - the after effects of those stimulus packages may well hit faster than some expect?

Judy said...
1:04 PM  

Yup, which goes to tell you that then you run into the perfect buzz-saw, you're going down. And as Iron Mike himself proved a mere two and a half years later, sometimes even the most impressive performers, seemingly invincible, can get their asses kicked by "nothings".

Macro Man said...
1:05 PM  

Tyson Douglas was more like one year and half later.

Pedantic Twat said...
1:13 PM  

OZ banks are fine until unemployment rises. Thats when it will get interesting (bad debts haven't even begun let alone peak).

NAB is using the climate to clean its balance sheet for political advantage. Tacticly losses are more advantageous than profits right now.

Looks to me like a good opportunity to keep jumping in on that carry trade for a couple more months.

Anonymous said...
1:15 PM  

Viz the loans lets go by category:

Real Estate: Probably ok, no major increase in turds from before just yet. Speculative home buyers getting taken out requires either a rate rise or a drop in wages. Nothing happening there just yet.

Commodities: Check my blog but if they crack down on personal loans (which are really, really badly regulated) then a lot of weird sh!t could go on. Commodity liquidations, A shares liquidations, maybe some real estate, who knows?

Companies: Once again, this bullshit has been going on for a while in China. I think crunch time is when more tariffs hit for all these guys.

Infrastructure: Interest probs prefunded so not screwups until the bridges/roads etc are built. So nothing there yet.

I think this is likely to start to become a problem middle of next year, then the truth will start to come out. In the meantime, I'm out of my A shares and waiting for my trade war.

Nemo Incognito said...
1:19 PM  

PT, you're right. I remembered Tyson-Spinks as being in the summer of '87, but it was '88 instead. I remember where I was when the fights occurred, but two decades after the fact I was out by a year...

Macro Man said...
1:27 PM  

I'll also add a different option to Weebles and Spinks.

The market is currently Stephen Bradbury at the finish line during this race. Victorious for now, but perhaps not at the next meet.


Anonymous said...
1:30 PM  

Not Michael but Leon Spinks. World champion to being arrested with $10 worth of cocaine stuck in his pimp daddy brim in a matter of hours. We have a Leon Spinks equity market.

Anonymous said...
1:45 PM  

Mr Rogers opines that the embryonic dollar rally "may last for a while" and LB is inclined to concur with this view. LB tips his hat to the crowd, will be back later with a song that captures the current mood, with your permission, of course, MM.

leftback said...
2:29 PM  

MM you commented a few days ago that we will soon be entering year-end flows, if we haven't already. This may overwhelm any other considerations, and for my money I am betting markets will reverse--rather than extend--the flows of the past 6 months. Flamingos could have a good run, it won't be risk on/risk off, it'll be bets off from bets on.

Gold is close to taking out the 1030 level, and if so the black boxes will start to squirm. So too with crude below 75.

Steve said...
3:36 PM  

trading your gamma seems easy in theory. but when your sitting at the poker table, its much more difficult. its got to be eating the mkt alive. true players are selling 3mo vol, long ewz, and selling credit against it.
thats the set up. put call parity w yield (via duration spread) capture.


Anonymous said...
4:42 PM  

The games on fella's. Russell and transports have broken down off double tops. If gold breaks below 1020 there's little support till 980-970. I'd just like to see the KRE(living bnks) break down through 20.50 and spx should follow suit.

JohnL said...
5:06 PM  

*DJ NY Fed Adviser Is Michael Woodford; Has No Role On Decision-Making FOMC

*DJ NY Fed Adviser:Good Chance FOMC Could Change Rate Language Next Week

Crisis Management said...
6:23 PM  

More toys out of the pram today. Greenback showing surprising strength, almost Lazarus-like this week. Bond apocalypse seems to have been delayed, and all the guys with the steepener on are getting toasted.

leftback said...
6:32 PM  

I have to say, I thought that I had a fair amount of protection on, but I feel like I've just rubbed an entire tube of Icy-Hot all over my crotch.

Macro Man said...
6:37 PM  

Ouch, MM, sounds like you're feeling a bit of Cold Steel down below today. One of the favorite gags on cricket tours is the application of Deep Heat to the inside of a batsman's box. Hours of amusement - mainly for one's teammates, obviously.

I'd keep your eye on that 1044 level on the SPX from 9/25 and the corresponding levels in EUR:JPY. That would be a logical place for bulls to launch a rally. LB screwed up some trades this week, but at least he wasn't long turds, Aussies or silver.

leftback said...
7:05 PM  
This comment has been removed by the author.
Our Man in NYC said...
7:13 PM  

So thinking aloud, and using my simplistic view of the world
- There's 3 types of investors: Momentum guys, Fundamental guys, Others (ok, I haven't defined them specifically but they're a mixture of I-need-to-keep-my-job people and retail investors)
- Momentum guys have been buyers on the way up, Fundamental guys have been holders on the way up, Others have been neutral to net buyers on the way up.
- Market has now fallen 5% from peak -- will people call it a dip and still be buyers (like every pullback in this rally)?
Or will the plethora of negative data give a pause as people wait to see what happens (hello, to OM's boss, if he's reading!)? If it does give a pause, does that mean Fundamental guys start/continue to bail (they know they're beyond fair value, and were running winners) and do Others (especially the I lost a ton last year, made a good chunk this year and may as well head to cash to protect my year-end number guys) join them getting out? If so, given retail has shown little interest in playing this rally and there's no natural buyers -- does that cause momentum guys to want to move from L to S?

Our Man in NYC said...
7:14 PM  

To all the green shooters out there:

I remember the favorite saying of the head of my trading desk many years ago: it ain't over until a major Italian bank fails

Anonymous said...
7:43 PM  

Serious FTQ day in the credit markets....

leftback said...
8:31 PM  

I dont think the RR have any directional predictive power. But fwiw the explosion in RR for low strikes has been driven by large buyers of low strikes over last few months- trying to put on the 'cheap' risk hedge. If anything I think they're a reverse indicator- everyone's been trying to fade the spot move higher.


Anonymous said...
10:44 PM  

Seriously viz a viz credit markets - I didn't have much on but forgot it was there it had got so goddamn boring. Refi risk on LBOs back again?

Nemo Incognito said...
2:08 AM  

The canary in the coalmine appears to be alive and well as of the last hour....

Nemo Incognito said...
9:30 AM  

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