Friday, February 05, 2010
It's suddenly turned into a bit of a horror show, hasn't it? It seems as if the combined weight of Greek contagion, Chinese tightening, political risk, and so/so economic data has finally managed to break the camel's back, and Macro Man's Bloomberg screens are a sea of red this morning. Still, the market environment is quite tame by the standards of the past couple of years, so it's hard to envisage anyone outside of last summer's graduate trainee intake (if there was one) panicking too badly.
Indeed, there is still quite a bit of differentiation out there amongst popular trades and 2009's stellar performers. The "horror show" analogy can be extended, as it struck Macro Man this morning that we can probably classify trades along the lines of the US film rating rubric. Consider:
Good clean fun for the whole family! How else can one describe front end carry trades, the 2009 gift that keeps on giving. Sure, there's been a little bit of drama in the Euribor curve, but hey: even Bambi and Nemo's mothers got whacked. When you consider that EDZ0 is at its highs and that something like Jan '11 DIs in Brazil are stable (and offering 0.64 bps of carry per day for the time being), it's pretty clear that these types of strategies deserve (for the time being at least!) the most lenient rating.
Fairly safe, but with a slight edge. That describes the last few months of trading in EUR/CEE3, which has remained surprisingly stable despite the intense pressure on the periphery of the Eurozone. Hungary is usually a prime whipping-boy when sovereign or credit risks begin to materialize, but thus far has been relatively tranquil.
The stability in EUR/HUF has generally been mirrored in the decent-quality credit space as well. Macro Man has observed before that 10 year swap spreads in the US look too low; while they are off their tights of a few weeks ago, they're still exceptionally narrow by the standards of history, let alone the crisis conditions of this time last year. What's particularly bemusing is the report of heavy buying...the price hasn't really moved.
Still, as with PG action movies, there is a faint hint of malice beneath the surface; the director could easily escalate the level of violence, and in so doing change the film rating dramatically.
Mature yougsters can handle it, but young 'uns should stay away: that's not a bad description of price action in financials. In Europe, for example, the banks index has fallen more than 18% peak-to-trough over the last month, which is both fairly painful in absolute terms and fairly modest by the standards of previous volatility.
Adults only, please. What else to call price action in copper which, after defying gravity for longer than Macro Man thought possible, has plummeted to earth with all the grace of a lead (or is that copper?) zeppelin.
The magnitude of the moves in EUR/CHF, meanwhile, pale in comparison. But with a central bank as erratic as the SNB pulling the levers, trading EUR/CHF is a bit like swimming with Jaws. First they defend 1.51 for 9 months....before pulling the bid and seeing the cross trade down below 1.47. While they've hit the market a few times since, their behaviour this morning was not suitable for young viewers. In a market trading 1.47, they put a 1.4905 bid into EBS; panic predictably ensued, stops were run....and here we are trading back below 1.4700 again. Someone in Zurich must love the smell of napalm in the morning....
The most explicit rating these days, and thus aptly applied to EUR/JPY, which- unlike just about every other "pro risk" asset price- is much closer to its 2009 lows than its highs. The cross has confounded the comfortable consensus on both legs, with Greek contagion submarining the euro leg and stop losses driving the yen. While other yen crosses like AUD/JPY and NZD/JPY have been relatively well behaved thus far, one doesn't have to search too hard for recent episodes where they, too, have merited the dreaded NC-17 rating.
Macro Man didn't realize until writing this article that the X rating was discontinued nearly 20 years ago. Still, he feels compelled to revive it this morning; while Portugal and Greece may look like PG, the price action is strictly rated X.
Portugal is the first real example of the Greek contagion phenomenon; 2 year yields were below their 200 day moving average as recently as last Tuesday; since then, they've erupted by 120 bps. With the situation deteriorating rapidly, might we see a replay of the Greek crisis (albeit without the same rollover pressure)?
And then there's the Greeks themselves, who, instead of taking one for the team, have walked out on strike rather than make concessions to the country's fiscal plight. JCT said yesterday that the Greeks are on their own, and really- with this sort of behaviour, is it hard to blame him?
Today, of course, sees the release of US payroll data, which is usually good for some Harry Potter-calibre fantasy. While the January data will be interesting, particularly in light of the recent deterioraton in claims data, focus may well be on the benchmark revisions, where the BLS is widely expected to wave their wands and intone "Opus abolesco!"
Funnily enough, despite the relative "cheapness" of the euro these days, Voldemort has been strangely absent.....