Tuesday, November 09, 2010

No Man's Land

The weekend has brought us little new. APEC members have once again promised not to do what they are currently doing and most likely won't stop doing, effectively turning the current FX Wars into the FX Cold Wars. Expect bags of used notes to be exchanged in shady Vienna bars, and billions of USDs to be found in bushes in lonely city parks. Smiley's people indeed.

What is interesting is the market's spin on the US jobless figures. The number of blogs and commentators downplaying any excitement of a growing upward trend in US data adds weight to our suspicions that there are an awful lot of people in denial of anything that may damage their short USD possies or their short Equity dreams or their US down the Swannee ideals. This is all looking like a perfect set up for another explosive equity up move.

The Euro data continues to look like a roll over (see chart below, Citi Economic Surprise indices: orange - Eurozone, white - US), while the US data is re-accelerating and the market is happily kicking the Euro's butt around the yard on the peripheral concerns But the move in Euro related to the post-QE unveiling of the peripheral mess feels as though it is now priced in. In other words, we will need new bad news to get this moving again...

...We are all watching for the hair line cracks in Spain to open up again as the Zapetero denial policy cant hold it together for ever but so far Spain has only leaked wider, but it's not trading like Ireland or Portugal (see chart below, 10yr Bund-spreads: white - Greece, orange - Ireland, yellow - Portugal, pink - Spain).

But the other function for Euro is what happens in Asia. China appears to have added 5bp to its 1 yr bills today, but what if they do another small pseudo move in FX to appease G20? We think that differential competitiveness matters more to Asia than purely vs US as they are frightened of losing export market share to their regional neighbours. So where China leads, the rest will follow. And less USD/Asia "Cold War" buying means less EUR/USD buying. So really, putting it all together, as we sit here in no man's land between APEC and G20, it looks like short Euro vs long risk assets is the trade for now. Looking back to the first few months of this year, that was pretty much how the market traded the Eurozone crisis to start with: growth in the US was beating expectations and Asia was going gangbusters. In response, punters used Euros to fund their long-EM carry trades. It was only when the moves in Peripherals got very ugly and spilled over to Spain that markets got ugly. So, if Spain does crack, and it morphs into a general "risk off" move, we buy USD and sell those Risk Assets effectively leaving us short EUR/USD... Phew...

Oh and one final point, we have lifted the "comments" restrictions to allow anonymous non registered contributors to return to the fun. We are hoping that US health care issues are far enough behind not to have it descend into chaos again.


Anonymous said...

"... that may damage their short USD possies or their short Equity dreams ..."

Isn't it that shorting USD equals longing equity nowadays? Do I miss something?

btw, 1st for anon reply...

Anonymous said...

sounds like u'd just be better off selling eur/cad or eur/nzd given ur eur view and whats happening to commodities here based on the last fed brain fart.

yay! 2nd anon!

Anonymous said...

there may be a possibility that sudden down move in 30 yr yields (or equivalent risk off) is on the horizon.

count me as anon 3rd.

Nemo Incognito said...

Anon 3, check out JGBs. Quite a slide recently - maybe that great "Japan is finally screwed in every way" trade has come.... was working for a bit before US easing came into the picture.

Minty said...

I've stolen this from Greg Mankiw's blog but it makes very amusing reading and is one that Mr. Man (first name Macro) would be proud of I think:

It's Called Quantitative Easing

I heard it in the headlines
It's news all over town
We might be double dippin'
Green shoots have all turned brown

It's a balance sheet recession
With a housing overhang
But they've got a brand new program
And it will start you with a bang

And it's called, quantitative easing
They say results are always pleasing.
When liquidity all starts freezing
Just warm things up with Quantitative easing

I will say it straight and simple
It's clear, just like a bell
There's some long term bonds to buy
There's some short term bonds to sell

Don't talk about the good times
Don't ask me where they went
Just move your inflation target
On up to three point five per cent

And it's called, quantitative easing
This ain't no joke, it ain't no teasing
When the GDP starts wheezing
Treat with a shot of quantitative easing

Good and magic things will happen
It might take a week or three
Unemployment plunging downward
Recovery shaped just like a V

You'll see Nobels at the Treasury
There'll be rock stars at the Fed
It'll take hair off of Krugman's face
Put it on top of Ken Rogoff's head

And it's called, quantitative easin'
This ain't no scam, so don't call no policeman
When the engine of commerce starts seizin'
Just add a quart or quantitative easin'

Show no mercy to the critics
Don't let no one stop your nerve
You can mock Ricardian Equivalence
You can laugh at the Laffer Curve
Tell that guy at the Minneapolis Fed
To shut up, or you'll break his legs
And if the Bond Vigilantes don't like it?
Well, they can go suck eggs

And it's called quantitative easin'
You know I say this for a reason
When the economy just sits there squeezing
Loosen things up with quantitative easing

Anonymous said...

DOL's data is crap. I would take anything coming from DOL with a grain of salt.

Workforce participation shows unemployment is still increasing:

FX said...

TMM, looking at another digestive period?...Jumping in the swim with you below 32.1/2 hedge vvs Dow...

Anonymous said...

probably 4.25 is enough to entice buyers of Wed 30B gov sale.
But it just have disturbed the qe2 meaning or there may be the future case that free qe2 money wil be absorbed by japanese.

Anonymous said...

Don't think I quite agree with your article.
Appears to me that the Euro debt is at least temporarily going to trump QE and will be enough to cause Equities to come off their overbought plateau.Indeed risk in general being overbought could come off. At this time we have almost uniform pressure across all risk of corp bonds and the last time we saw that was back at the end of April.

Anonymous said...

"we have lifted the "comments" restrictions to allow anonymous non registered contributors to return to the fun."

Thank you for that. I have liked making a quick anonymous contribution.

"We are hoping that US health care issues are far enough behind not to have it descend into chaos again."

For better or worse, with the Republicans in charge of the House, I feel that it will definitely make its way back into the news (especially as some of the peripheral issues - like the requirement to send millions of additional 1099s out - come to light), but I will enjoy the relative calm while it lasts. :)

I thought I would see something today on the other contentious topic - gold (and other precious metals).

Bought one silver future at 27.600 yesterday. Needless to say, I was quite happy as it rose to 29.340, but then it fell all the way to 26.415 about two and a half hours later. Yikes!

Feels like something big is about to happen (but I don't know exactly what).

abee crombie said...

T-Bond breaking, S&P looks like it double topped, EuroDollar (interest rates) blowing out a little and possibly silver had a blow off top as well.

Looks like risk off for the next few days... but lots of monkeys are still buying every dip.. and I have been a bit biased to risk off for a while so perhaps I am not looking at the market though the same lense as everyone algo that is chasing the market up

If anyone watched the close in silver yesterday, its clear to see how easily we could have another flash crash again... Algo-riffic

JohnL said...
This comment has been removed by the author.