Wednesday, March 24, 2010
Yesterday, Macro Man suggested that the market needed a "wake me up before you go-go" call in the event anything interesting happened. Wham! Yesterday was chock full of interesting developments.
Macro Man has highlighted the attraction of long ten year swap spreads previously in this space. The good news is that it seems as if he had plenty of company in the view. The bad news is that we were all W-R-O-N-G. 10y swap spreads collapsed into negative territory yesterday on what appears to have been massive stop-outs. Savour, if you will, the irony: the financial sector, so recently saved by the largesse of Uncle Sam and the Fed is by one (admittedly imperfect) measure more credit-worthy than their saviours. It must be this kind of prudent lending that has done the trick.
Then, later in the day, when Uncle Sam had the odd billion or two of 2 year notes to auction, it seems as Sir Robin was the only decent bidder. (OK sure, actual bid/cover was pretty good, but it came on the heels of a decent concession with no snapback rally.) 2 year yields have now poked their head back above 1% as LIBOR continues to tick up. Hmmm.....
Of course, the big headline late in the day was that France and Germany agreed in principle that it was just about possible to help Greece in some conceivable circumstance. That's about as far as they've gotten, however, with disagreements still percolating amongst those who actually have a bit of money to slosh about. With Europe seemingly intent on snatching defeat from the jaws of victory, Asia could just not pass up the opportunity to give EUR/USD a little love tap in the night, sending it to new lows for the year. Technically, it must be said, the euro looks pretty dreadful.
Through all of this, of course, equities continue to meander their way merrily higher. At this point Macro Man cannot tell if they are wearing bullet-proof armour, warding off the slings and arrows of outrageous fortune.....or whether they are a doe-eyed naif, utterly unaware of the ugliness around them.
The popular explanation is that they are being floated on a tide of liquidity, which is of course possible. Of course, "liquidity" was also the explanation for the performance of risky assets in 2006...and my, didn't that end well! What is true, however, is that while the stock of money market assets remains large, it was dwindled significantly over the course of the past year: the $800 billion-plus decline represents the largest year-on-year percentage drawdown in the history of the series.
A market this disjointed should eventually offer some opportunities...once the dislocations begin to correct themselves. In the meantime, however, it all looks a bit like a recipe for a splitting headache (courtesy of -wham!- pounding one's head against the wall.) Oh well....maybe the forthcoming RMB revaluation will provide some opportunity...