Friday, February 05, 2010

Horror Show

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:

Rated G:

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.

Rated PG:

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.
Rated R:

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.
Rated X:

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.....


Nemo Incognito said...

And looks like we're back to ~2.80 on HG1 - Nemo's covering and running here.

This price action in China and Europe begs the all important question: how bad does it get before they intervene? Private credit demand still looks slack and could easily be scared out by a month or so of this in developed markets and I'm not sure how much lower Chinalco and the steel producers go over here before someone does something.

Anonymous said...

China Loan defaults rising..

CV said...

"while Portugal and Greece may look like PG ..."

Splendid MM, splendid indeed!


Macro Man said...

Claus, that was actually what spurred the idea for the post: looks like PG, trades like X!

Gregor Samsa said...

Voldemort is a hardy fellow. Whichever way the final act of the Greek tragedy plays out, look out for his return.

Let's see if the final act turns out to be long and boring. Are we even in the final act yet?

Anonymous said...

Hearing whisper number for NFp is +56k....

Nemo Incognito said...

Gregor, while having tilted the book the right way for the last 6 weeks I cannot deny that this has been much more exciting than I had expected and some of these shorts are looking pretty overstretched. That being said, if there is one thing we learnt in 08 its that a good ol crisis ain't over until the regulator/govt does something and SFA is getting done in Greece right now.

Greg said...

Nemo: "...crisis ain't over until the regulator/govt does something..."

Those FREE markets at work again! I miss the days when markets reacted to economic news instead of political decrees and central banker prognostications

L/S Equity Guy said...

Jobs number looks worse than expected but futures rallying. Selling the news? Am I missing something?

Macro Man said...

Huge drop in unemployment: U6 from 17.3% to 16.5%, courtesy of huge rise in household survey and big drop in labour fore.

Anonymous said...

Horror Show indeed! I thought we were past those heady days of risk on risk off, maybe it's to do with the karate kid remake.
Hope your books are all holding up, short HGHO carried mine through.
Any colour on CL1 liquidations?
Good w/e all,
Ta, JL

Bob said...

I defy the gub'ment to name a single person who supposedly makes up this 0.8% who became employed last month...

I know a lot of people who were laid off in January, but only one person who found a new job (and he took a pay cut to get it)

Anonymous said...

JL - check out ftalphaville for colour on the oil market.

As for the unemployment figure - looks like an accounting quirk, it's not because more people are working, but because people have decided to give up trying to find jobs?


Greg said...

The perfect contra-indicator has spoken:

Larry Summers says a rebound in jobs "isn't too far away"

Leftback said...

LB thinks that playing the Monday bounce recently discussed in this space will prove profitable, despite the obvious absence of any macroeconomic rationale.

This seems like a suitable moment to echo Crash Davis' advice to the young pitcher: "Don't think, Meat, just throw the ball...!"

PJ said...

MM - Rise in survey labor force was due to seasonal adjustment, NSA it dropped 1.1 million. Of course some years it has dropped 3 million in January.

Leftback said...

MM, going back to your annual predictions, what was your lower bound for the 2-yr yield? Wasn't it 0.66%? That one might be tested at some stage if this sell-off becomes extended.

Every time I look at the long-term chart for the SPX, 880 looks like a magnet. Of course there will be many bounces along the way...

Anonymous said...

Seen that Chris, I was looking for something more illuminating, perhaps amongst the bookie gossip of the day.
For example yesterday the rumour that Greece was going to default on "half" its debt...

Anonymous said...

We Greeks have a saying: If you have two Greeks in a disucssion, you will end up with 3 opinions. Don't ever expect rational actions out of Greeks.

But the Hapsburg's brought this on themselves by forcing German Royalty on the Greeks.

der Tillman said...

"LB thinks that playing the Monday bounce recently discussed in this space will prove profitable, despite the obvious absence of any macroeconomic rationale."

do you mean that LB, or are you just flapping your jaws?

leftback said...

der Tillman:

What's with the hostility and why is it that people are so hostile to the concept that something might conceivably happen that isn't what is right in front of their nose at this precise moment in time?

Look, I am as bearish as anyone else, but markets never go straight down. A bounce on Monday wouldn't surprise me at all. There isn't any significant economic data ahead and there has been a pattern of buying on Mondays for quite a while. Not making any significant point here, except that conditions are ripe for an oversold bounce. The Euro:Jpy doesn't go down every single day.

der Tillman said...

LB - no hostility intended whatsoever. My intended 'tone of voice' was lost in the 0's and 1's.
you see, i happen to agree with the bounce idea and, if you have seen my comments, you know that I have been long for a while now. I have been sweating the last few weeks.
I guess I was just trying to get at whether you were casually chucking that comment out there or if you really meant it. trying to avoid the always dangerous Confirmation Bias.
so have a nice w/e. no hostility meant. i appreciate the response.

Steve said...

I'm with LB. Time to bounce on Monday. I might sell into it mid-day, but we're due for a break.

aptrader said...

Come on, I don't think we're day traders here... this parade lasted almost one year, and my guess is it stops here.

Gary said...

A cold hard reality that Wall Street and all central bankers are keeping from the public is this:

The zero interest rate policy (ZIRP) more than doubles the cost of defeasing everyone's retirement.

It doesn't matter what legal entity you defease those liabilties through -- pension, IRA, 401k, or something not tax deferred -- nor whether you manage your retirement funds or pay someone else to do it. The money still gets invested at interest rates much lower than what a free market would pay, and that means the cost of retirement is much much higher.

G7 workers will have to save a lot more than they would at "normal" interest rates and/or they must defer their retirement by many years.

ZIRP is a massive subsidy to banks. Blue chip companies like Exxon and IBM are paying 3-4% for short term money, and both have better credit ratings than even Goldman Sachs, never mind all the zombie banks. Warren Buffet didn't lend his money at 0%, he charged GE and Goldman 10% (plus embedded calls, as the preferred shares are convertible)

Any way you cut it, banks are being subsidized AT LEAST 350bp per year. They aren't lending that money out and perhaps they shouldn't be lending to an already over-levered economy -- but then that begs the question of why they need to borrow from central banks (aka taxpayers) in the first place. In the US, 97-99% of mortgage loans (depending on the month) are taken by the taxpayer (via GSEs).

ZIRP is a backdoor bailout of insolvent banks, and nothing more. It is dishonest, bordering on fraud. Neither mortgagees nor big business nor small business get to borrow at 0% -- only the banks.

The cost of this bailout is that the public must save at least double what they would have to save under "normal" interest rates and/or they must defer retirement by decades.

For workers who have underfunded retirement savings (doesn't matter what vehicle) -- the cost of ZIRP is even higher.

Sooner or later, Bernanke and his buddies will be forced to acknowledge this simple truth.

As events in Greece and California unfold this year, the public is going to connect the dots -- registered voters seem to be on the verge of "the lightbulb moment".

If Bernanke et al don't acknowledge the true cost in the next few months -- I would not want to be working for any big bank

Anonymous said...

So PIGS are going bust... I think it is time to register a domain

Anonymous said...

Come on Anonymous, at least use domain privacy!

Created on: 08-Feb-10
Expires on: 08-Feb-11
Last Updated on: 08-Feb-10

Administrative Contact:
Jvakine, Konstantin
P.O.Box 9720
Ahmadi, Kuwait 61008
23983639 Fax --

Anonymous said...

"Rated X" ROFL!