Friday, May 07, 2010
Where to begin? Let's forget the nonsense with P&G, or the supposed fat-fingered futures butchery at Citi ("your tax dollars at work!") Yesterday was a game-changer, a sea-change. Obviously, anyone who saw the SPX melt 60 points in 5 minutes probably doesn't need Macro Man to tell them this, but consider that:
* E mini futures posted their highest volume day (by a huge margin) since October 9, 2008.
* VIX soared higher and is now up on a y/y basis.
*The front end of the eurodollar strip got slammed in a long-overdue comeuppance for the "pennies in front of the steamroller" crowd. The chart below shows the continuous first eurodollar contract...ouch! At one point yesterday, EDM0/EDZ1 had flattened 45 ticks: the former was down 22 and the latter was up 23. Ouch, indeed.
* The day after posting its high print of the year, USD/JPY posted its low print of the year. Unless you're in the first week of January, that's normally not a good sign.
At the heart of everything, of course, is the ongoing implosion in Greece, and the European "response". It seems pretty clear that neither side (the Germans with the money, or the Greeks with the sense of entitlement) really wants to do a deal...and the fact that Greece has hired an investment banker to "advise" on its debt profile should raise a big 'ol red flag to any potential bottom-fishers in Greek debt.
The only centralized body in Europe with any sort of the authority is the ECB. And frankly, at this juncture, it looks like they are in over the heads. Now, perhaps we might wish to extend the benefit of the doubt to Trichet and company until after the Germans vote on the rescue package. Perhaps the governing council took the view that if the ECB acted pre-emptively, the necessary fiscal support would not be forthcoming.
Somehow, though, that doesn't ring true. A central bank that talks of being "inflexibly" wedded to price stability isn't one that sounds capable of quick, credible action. After everything that's happened over the last few years, how the hell can any Tier 1 central bank talk about "inflexibility"? It's asinine.
And if they really, truly didn't even discuss a bond-purchasing program, even in passing...well, then the single currency is going to deserve everything that it gets. Sticking your head in sand and hoping everything turns out OK isn't really an option if you're the custodian of a reserve currency in crisis...and yet that seems to be the policy response pursued by the ECB.
The natural result would be to strip the euro of its reserve currency status. OK, OK, the ECB isn't doing nothing. They're having a conference call, by gum, with some of Europe's largest banks to talk about the state of the money market! They'll presumably be told it's in bad shape...the scramble for dollars has sent EUR/USD forward points screaming to the right (i.e., pricing in higher USD rates than EUR rates.)
They've also publicized a conference call to be held amongst the G7. Leaking news of the call might not have been such a swell idea...because if it doesn't produce anything, what then? Sure, the Fed can re-open swap lines with European central banks, but both the US Congress and taxpayer may justifiably question as to why the Fed should lift a finger when the ECB itself doesn't seem prepared to do so. (And that's before Congress has gotten its teeth into the idea that they'll have to appropriate several billion dollars towards the IMF bailout of Greece.)
So while "risk" is currently enjoying a bounce, Macro Man wouldn't exactly be scurrying to build longs here. After a day like yesterday, he suspects that you're (finally) supposed to sell rallies now.
Alas, one place where a sea-change may not be in the offing is the benighted UK, where a hung parliament has now been confirmed (thereby putting paid to one of your author's non-predictions for the year.) While the Tories have a comfortable plurality of the vote, the vagaries of the UK electoral system (translation: Labour districts are the size of a postage stamp; everyone else's are the size of the Grand Canyon) mean that they are denied a majority.
Noted creature of the underworld Peter Mandelson was pimping the notion of Labour crawling into bed with the Lib Dems before the first result was announced last night, and it certainly sounds like Gordon Brown will need to be forcibly ejected from Downing Street (ed. note: now that, I'd pay to see.)
So even though the Tories will be the largest party in the house by a decent margin, we're looking at a few days of uncertainty at best and another 5 years of Gordon at worst. Ugh. Will the last one to leave Britain, please turn out the lights.....