Tuesday, January 26, 2010

A Convoluted Picture

Man, it was all looking pretty good there for a while. Futures were up (courtesy of the new Monday effect, which funnily enough is the opposite of the old Monday effect), the Greek book-build went well, and AAPL earnings blew expectations out of the water. It was almost enough to make Macro Man forget the torch-and-pitchfork-carrying mob....

Well, not really. The Monday bounce was perhaps inevitable, or at least likely, after two strong down days at the end of last week. The Greek news was positive on the face of it yesterday- demand for the new 5 year issue reached more than €20 billion, with the authorities deciding to raise the issue size from €3 -€5 billion to €8 billion- but perhaps a bit of perspective is warranted.

At mid-swaps plus 350bps, the yield on the new issue will be more than 100bps higher than the yield on the current 5 year (an August 2014 bond) was at the beginning of the month/year. Indeed, it comes at a healthy premium to the yield of that current 08/14 bond. Still, beggars can't be choosers, and €8 billion will put a healthy dent into the chunky refinancing requirements that Greece faces this year, particularly in April-May.

Nevertheless, if this were truly a life-saver, one might have expected a bigger retracement of the recent pop in yields. Meanwhile, rumours that the ECB was (illegally) bidding in the auction did little to engender a sense that the worst is past, and suggestions that the Greek Treasury would deny allocations to short-covering bids from hedge funds will keep the market on its toes when the allocations are announced today.

Still, when Macro Man went to bed, equities/risk assets had just capped off a decent, if uninspiring, day and, if anything, seemed inclined to rally a bit after the Apple figs. So imagine Macro Man's surprise when he woke up this morning and saw new lows for Spoos, H shares (below), Shanghai property, a continued short squeeze in USD/Asia, and more flamingos coming under the cosh.

The catalyst appeared to be that the PBRC was implementing the last weeks's rumoured localized RRR hikes for certain banks today. Not hugely new news, but evidently enough to put the scare into locals; the key onshore 7 day repo soared 31 bps to a "whopping" 1.65%; as you can see below, the reaction in H shares was....not good.
While the near-term real economic consequences of the tightening are modest, it seems evident that one need look past the literal regarding China. Locals are evidently expecting a tightening, so any indications thereof are likely to have a disproportionate impact upon sentiment and, indeed, behaviour.

Most China-linked asset priecs are now comfortably down on the year, with the exception of soemthing like AUD/USD (though AUD/JPY is down), which would appear to be vulnerable in that regard. There are a lot of moving parts at the moment, and (unusually), each major market time zone can point at local factors that can significantly impact global risk appetite. The macro picture is thus unusually convoluted at the moment; given the ease with which markets are ebbing at the moment, it's hard to seeing it ending well.


Nemo Incognito said...

Agree - its not champagne time just yet for the China shorts crowd. What has been interesting is the differentiation between sectors and themes within the China complex: all those consumer plays are remarkably resilient at this time whereas Banks, Steel, Aluminum, etc are all getting brutally beat down.

Anonymous said...

yet copper hangs in there like a red limpet !?

Donlast said...

And Obama reportedly wants a 3-year budget freeze which has his Liberal base screaming blue murder and will doubtless will send Messrs Krugman and Brad De Long into a flat spin. Uncertainty, uncertainty, all is uncertainty. It will need more than Apple a day to keep the doctor away.

Anonymous said...

Alu and copper holding and not in dump mode yet. Zinc got hammered and looks most vulnerable.
Oil down from 80'sh, but holding here and could well make a nasty mini bull run , giving the bears a bloody nose (again).

Don't bet against commods just yet!

Donlast said...

Oh and there is Fedgate. The Fed desparate to hide details of the AIG bailout, with the NY Fed in a seemingly rogue role. Mr Geithner yet again. All this now under investigation.

Macro Man said...

Having recently read "Too Big To Fail", I must say that Geithner came across very poorly indeed...seemed to be a bit power-hungry to me.

Skippy said...

I have to agree with MM, the AUD performance is somewhat inconsistent with the performance of Chinese stocks, particularly steel etc. Of course, it may also mean that Chinese equities are a buy?

However, more likely a brutal correction awaits the commodity currencies and the 'safe haven' that we cannot mention.

Anonymous said...


What do you make of this story about the Fed wanting to use interest on deposits as the new benchmark rate? http://www.bloomberg.com/apps/news?pid=20601087&sid=akYMsCezpjlk&pos=4

Steve said...

Silver is out at the woodshed. I'm short HG too, a bit frustrating but every flamingo has his place at the table.

Steve said...

Whoops I mean I am short HG along with some of the commenters, WISH I were short silver.

Bob_in_MA said...

The Chanos argument that China's investment bubble is going to burst is looking much more likely. Their savings/investment bubble is the flip side to our credit/consumption bubble. One can't live without the other. And yet, investment as a share of Chinese GDP jumped last year.

And if that happens, commodities are in for one huge fall.

If you haven't visited Michael Pettis' blog, he basically has been making the argument that Chanos is basing his market call on:


Obama's announcement about freezing discretionary spending (starting next year) is a big deal. He still wants to pass a "jobs" stimulus this year, but the $150B House bill barely passed last December. Who knows how the Republicans will play this, but I would guess we'll see more useless tax cuts and less aid to states.

The stimulus effect per $ will fall along with the level.

Anonymous said...

…out of the woodshed? Only if you let it. Do not wish - short short short!

Anonymous said...

While the sell side has screamed blue murder about Volcker's plan to make them play by the same rules as everyone else, the buy side is pretty unanimous in its support. Here is yet another:

GMO’s Grantham Says Obama Plan to Ban Prop Trading ‘Good Stuff’