Thursday, April 01, 2010

Betty Grable

Arggghhh. It may be April Fool's Day, but the joke is on Macro Man. After sailing along all winter as the picture of health, this week he has found himself in the grip of a nose-rattling, ear-clogging cold. Ugh.

Another group that has seen their health deteriorate recently has been that previously jolly group of sterling shorts. Betting against "Betty" has been virtually pain-free until a couple of weeks ago.....but now cable has broken it's year's downtrend and put in what looks to be something like a double bottom (though that won't be confirmed until a break of 1.5382.)
Similarly, EUR/GBP has rolled over smartly, and now looks perched on the precipice of a couple of CTA-rattling moving averages.
What's going on? Is this just a positioning shake-out, or is there something more significant going on here? The real answer probably comprises a bit of both. The last CFTC report showed record short spec positions in cable, some of which have no doubt been shaken out (while others are on the verge.)

At the same time, evidence has also emerged that thanks to in spite of the efforts of Messrs. Brown and Darling, the economy is finally picking itself up off the ground. Obviously, the recent GDP revisions showed even "higher" (or is that less low?!?!) growth in Q4 than previously reported, but there seems to be something else going on here. The chart below shows the change in market-forecast dividend payouts in the FTSE and Eurostoxx for 2012 over the last 6 months; after tracking pretty closely through late January, over the past two months FTSE payouts have risen by some 10% relative to Eurostoxx.
That's a pretty impressive outperformance. On the flip side, however, is the fact that interest rate differentials have moved largely against sterling. Over an identical six-month window, we can see that year-end expectations for UK rates have move substantially more (in the direction of higher contract prices/lower rates) than in the US or Europe.
Hmmm.... So if we're trading growth, we should like the pound, but if we're just going to be carry monkeys we should hate it. While Macro Man could certainly see sterling strength continue for a bit longer on positioning, the argument in favour of a stronger pound is hardly unambiguous. And you'd feel like a right fool in May if you woke up one morning and were looking at another five years of this.


Andrew said...

Is this an April Fools joke Macro Man???? :-)

Hope you get well soon. Your blog is the best that I have come across. Keep it up!


econobserver said...

Take care, MM.

On US Treasury, it seems to me that SAFE is going to show up in the auctions next week.

Leftback said...

Payroll number +162K, of which they claim only +47K are census workers. 10y at 3.94%, might get pushed out even further before the auction net Wednesday. We have been short the long end since Tuesday, so will keep that trade on into the auction. Expecting equities to be strong early in the week, not so strong later in the week. Where have we heard that before?

Anyway, MM, since you were short US govvies with your crafty pairs trade into the ADP, then long US govvies, and now you are probably short again, you must have had a bloody good week!

Ivanovich71 said...

LOL! What the hell is this? Greek 10yrs hit 353%?

HURDY said...

Ha, I as well with the colds..

Call me naive, but I have no idea the real world implications of a negative ten year US Treasury swap.

Can you shed any light on this, and what it means for Financial institutions and their outlook on the ten year yield?

Nemo Incognito said...

Well, for one it means some financial institutions are going to be able to issue close to treasuries (or inside) and then match duration and pick up a few bps buying treasuries which are 0% risk weighted under Basel II. Its basically free money / free carry for banks. It would be reasonable to assume that bank balance sheets are going to explode from here, contrary to what any sane person would think was a good response post crisis....