Friday, June 18, 2010
Team Macro Man are up to their eyeballs in administrative rubbish and other work-related stuff. So, just a few bullet point thoughts today:
Today is triple witching, and the tail-end of MSCI rebalancing.
Those that have been bullish have had much of their exposure in the options space as recent volatility has provided a desire for defined loss-characteristics. This delta rolls off at 2.30pm and given the way that risk assets have traded over the past few days in the face of poor macro data, there may be a rush to put that back on either today or on Monday.
The BoA/ML Fund Manager survey yesterday showed Macro funds are short equities (again...) on the back of a deteriorating growth trajectory.Many have been highlighting lack of volume on as we have drifted higher. Trading discipline suggests low volume moves are "not real", and thus is seized upon as an excuse not to cover. These positions become increasingly offside the higher we go and a decision to cut these will be thus driven by price and not by macro data.
The Eurozone Stress Tests are VERY important. Cynics will suggest that any test that does not include an allowance for sovereign debt losses will not be credible. But the EU will *never* release such a test because it would let the cat out of the bag. However, a "double dip" scenario will convey significant information, and accelerate the recapitalisation of the Eurozone banking system via the capital backstops in place. Just like in the US, no-one believed the stress tests (Team Macro Man included), yet they marked a significant turning point for markets.
Whites-Reds in Eurodollars have flattened to within a whisper of where they were in late-May when Libor fears were at their maximum and EDZ0 was 40tics lower and showing stress. A lot of hiking has been taken out of the curve now: with EDZ1 at 98.52, Dec11 FRA/OIS basis at 45bps = 98.97. Taking term premia from the back Euros of 4bps/quarter that implies a Fed Funds rate of about 0.79%, or just 59bps of net tightening by the end of next year. If the eventual hiking cycle is 25bps/meeting (which is probably on the low side given the 2003-5 experience), that implies a 59/225=26% probability that the Fed begins to tighten in Jan11, which seems a little low to Team Macro Man. However, perhaps justifiably, the recent Eurozone worries have led to investment banks pushing back their Fed rate forecasts.
"The cost of the BP oil spill in environmental and economic damage could hit $100 billion (£67.5bln), according to new predictions as concern mounts over the company's liabilities". You know when the "silly" numbers start to appear that the worst is probably over. But as a side point, if "economic costs" suddenly become claimable, then what sort of bills could US banks expect for their role in the financial crisis?
Though the Baltic Dry Index is becoming less reliable as an indicator of true demand as the new ship supply side has picked up and the Baltic itself is increasingly affected by tradable derivatives in it, background data is showing a real slowdown occuring. The Baltic Dry is clearly underperforming its seasonals (see chart below - white line):
- Team Macro Man has a sneaking suspicion that we are setting up for Turnaround Tuesday next week...