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...

Posted by Macro Man at 7:44 AM  


Liquidity as you suggest is a wondrous thing. When everybody seeks liquidity at the same time it can confidently be expected to to zero.

Morph366 said...
11:57 AM  

This was a good day to be short the long end as a hedge. Better to be lucky than good, so they say.

Still I expect we will see buying of USTs after the auction this afternoon. Any Porto in a storm, right, MM?

Leftback said...
1:54 PM  

looks like the negative gamma exodus following 10yr asset swaps imposion from structured products looking for any long tenor bids to hit in size....

ed said...
4:07 PM  

MM -

Technically the EURO does look weak for sure. I noticed on Monday that the Commitment of traders report for the week ended March 16th saw the specs buy back 4.9bln USD of EURs.

What did the EUR do as a result of this (the biggest short cover by specs in years)??!?!?! It rallied a whole 1.5 big figures in that week!!

That kind of pathetic price action in the face of massive buying tells me that this dog may have farther to fall.

BRENDAN said...
4:36 PM  

This morning I heard on CNBC that the latest nonfarm employment number throwing around is abuot 250,000. I begin to think that there has been "buying on the rumor" going on recently.

econobserver said...
5:28 PM  

5y auction and USD maybe already pricing in a hot jobs number? That was weak demand for sure. 3.81% on the 10y. Wonder if we will get the same tomorrow?

Leftback said...
6:36 PM  

Speaking of "buying the rumor", the other thing I've been wondering about is if the financial earnings are already "in the bag". Supposedly the FASB changes are going to force more off-balance-sheet items into the open, but maybe we're going to see less disclosure (and therefore fewer turds) than the bears are expecting?

Misrepresenting the financial condition of TBTF corporations is something of a national pasttime right now anyway, why stop now?

k1 said...
7:27 PM  

does anybody else feel very concerned about EM equities? I am hearing a lot about how this consolidation should be bought, that's where the growth is in the long term...blah, blah, blah. Something is making me think this is just the beginning of EM underperformance.

Any thoughts?

Tyler said...
7:31 PM  

EM equities?

Dollar strength, commodity inventories high and building, hot money inflows, EM inflation rates rising. A bubble in search of a prick. So to speak.

Leftback said...
7:49 PM  

us lawmakers discuss china and then no buyers show up for the auction, nice!

us dollar now above the 1995,2001,2005 lows and 200 week MA:

there's a trade setup called the '5MA' which basically says a market must touch it's 5MA later or sooner...so on the euro it's been a week since the last touch with the 5MA up at 135...the USm0 long bond is now quite far below it's 5MA on the two point loss today, especially on continuous charts that just rolled from march contract

deke said...
11:17 PM  
This comment has been removed by the author.
karen said...
1:23 AM  

Goog blog!!
Good analysis!!
Thank you.
Please hold out in the future.

I has put your link on my blog:
forex chart analysis and a cat
...(I'd be pleased if you exchange reciprocal link with me.)

forex-cat said...
2:45 AM  

Post a Comment