Tuesday, July 13, 2010
Sorry, we fell unconscious for a couple of days. We caught it off the markets.
Dull this isn't it? There we were looking for the Euro negatives to come back into focus and whilst the euro has indeed stopped going up, someone instead appears to have tripped over the power lead to the markets. A bear market doesn’t end like this does it? How does a bear market end? Well, in the "long only" days there was normally no one left to find out. But that has changed with many punters eagerly enjoying down legs as much as up legs. So the asymmetry of desire and expectation has changed dramatically thanks to spread betting and futures trading opening up to the masses. TMM is reminded of reading trading books earlier in their careers that instruct traders to look at volumes to confirm prices, and often comes across comments like "there isn't any volume or breadth in this rally/sell-off", which seems to TMM a bit like an excuse not to cover if you are short or not to sell if you are long. Perhaps this is another feature of "modern" bear markets. You only have to look at CNBC who now seem to be happy to wheel out streams of bears calling doom and gloom, while 10 years ago it would have been corporate suicide to even mention an equity negative. The best they could get away with was a "well it's dipped but this is GREAT news for us permabulls as we can buy it cheaper". Hang on... Where have we heard that recently. Err, oh yes, the GGUF crowd. You might as well prepare yourself to be buried up to the chest and stoned to death as mention that Gold may go down. In fact there is a frightening correlation in the comments column between the G word and emotional if not religious content. So that’s enough about Gold (with a silent L for many).
But anyway, you can't really say that a bear market ends these days in silence. A whole market itself can end in silence like a burnt out star in the depths of space, but this market still has too many folks jumping up and down on the sidelines cheering on their favorite trades. Its just a shame that they all appear to have stopped for a relax in the sun. Even BP shares have relaxed (I wont say “popped down to the beach”) , poking up to 400p again = 35% rally blah blah. Don’t be fooled by percentages.
But the massive dichotomy in outlook remains. In equities its either massively down, or massively up with very, very few folks happy to say "You know what? Despite all the recent fun and games, we go nowhere this summer". But as the "path of pain" is the way Mr Market likes it and if sitting quietly saying nothing has the same terrifying effect as the knotted ropes and electrodes, then so be it. Remember the school-class terrors of the teacher's "I can sit here as long as it takes ….". Well, it's already starting to hurt...
In times of low vol the carry army tend to come out of the woodwork and no doubt carry creep will drift in again. The other trend is that instead of looking at the main current of global trend, with zip-all happening at this slack tide, folks start to explore the eddies around the edges for some movement. And so it may be with peripheral markets and pairs that have been swamped for the past few months by the general "risk on, risk off" correlated movement in G10. So which periphery shall we have a look at? How about our dear friends the Scandies again. Do you know the Scandies ? Lovely couple. And they've been doing rather well.
Norwegian GDP (yellow line), Swedish GDP (orange line) and Eurozone GDP (white line):
Swedish Industrial Production (white line), Norwegian (orange), German (yellow), French (green) and Italian pink):
And when we look at today's critical test of fiscal discipline they are in the "Miss Whiplash" camp, which Mr Gross prefers to call his "Axis of Good". Nice (remind us to write a post entitled “Miss Whiplash and the Axis of good” one day). Sweden, for example, is projecting a nearly balanced budget for 2010, a feat at which many other Western sovereigns can only marvel. Far, far from the Nitro-glycerine, Fire and Brimstone budgets of more southern latitudes. Mr Gross has even provided us with his "ring-piece of fire" chart, we think that's what he called it:
So if we consider the PIGS at Vindaloo strength (sorry, but we don't know what that is in Scovilles and we look to our American readers for a curry/chilli conversion matrix) then we can see that Scandinavia is but a mere Korma with extra yoghurt by comparison. What is more, both the Riksbank and the Norges Bank have recently surprised the markets with relatively dovish statements, while delivering the widely expected rate hikes. The full set menu indeed, with the bhajis and nans thrown in. The only concern is how long ago was that Norway data cooked as it may be on the turn. But we should be well out of the restaurant by the time that causes any grief.
And if Scandies are the buy in a drifting market what is a reasonable sell? Well, when the market gets frustrated with everything else and looks to load up on some short risk, the NZD is a usual boredom target. And if we look at NZD, as the world tends to through AUD/NZD (chart below, white line), we can see it tends to behave inversely to global volatility as measured through the VIX (yellow line):The market has been pretty washed out of its last lot of NZD bashing positions and so the longer we sit here the more folks may drift into that boredom driven NZD-selling trade.
So whilst Mr Market leans back in his chair, the summer evening sun streaming through the windows, our friends with proper jobs wandering off home or on holiday. We are thinking of killing some time by tucking into the NZD/NOK Lamb korma cross.