Thursday, April 29, 2010

What We Learned

OK, here's what we learned yesterday:

* The Fed is nowhere near putting rates up or, evidently, moving towards asset sales

* RBNZ tightening will be fairly modest

* Brazil's central bank is taking the more aggressive route, as they hiked by 75 bp yesterday

* The Grim Reaper at S&P has now scored a hat-trick, as Spain was downgraded (following on from similar moves in Greece and Portugal)

*Oh, and there's an agreement in principle between Europe and the IMF to stump up €100 - €200 bio for Greece over a thee year period, thereby obviating the need for the Hellenic Republic to come to market over that period.

€100 -€200 billion over three years. That is a LOT of money. The good news, of course, is that if such funds were actually delivered, Greece should effectively disappear from radar screens...especially as the Europeans seem committed to avoiding bondholder haircuts.

The bad news, of course, is that €100 - €200 billion is a lot of money...and someone's gonna have to stump it up. Needless to say, the IMF's portion would blow away by many multiples Greece's quota, necessitating further contributions from the Fund's members. While the BRICs might be content to contribute, thereby accessing more SDR bonds, it's not altogether clear how well writing a big check will play in fiscally-challenged countries like the US and UK.

Moreover, the Europeans themselves will be adding to their own aggregate fiscal borrowing, as that kind of dough doesn't grow on trees. They had best hope that this package deflects sovereign risk fears more or less permanently....for what would happen if similar or greater amounts were required to rescue other PIIGS?

A back of the envelope calculation suggests that German and French banks each have €300 -€350 billion worth of exposure to Greece, Portugal, and Spain. That's yet another reason to hope that this package succeeds.

Yesterday Macro Man suggested that the equity trade was better than the currency trade. Here's an example of why. Financials make up some 30% of the Eurostoxx 50 (versus roughly 17% of the S&P 500.) Among the top 13 stocks in the European index include luminaries such as Banco Santander, BBVA, and Unicredito. As you can see, the market projection of 2011 dividends has eased off recently, and remains well below the early January highs.

Small wonder, then, that the S&P has outperformed the Eurostoxx by a fairly dramatic margin. (The chart below shows the price ratio between the SPX and SX5E.) This is the shape of line one would expect to see in a European meltdown scenario, not the meandering path taken by EUR/USD shown yesterday.

If (and it's a big if) you think that the European rescue package will prove to be a panacea, then this will prove to be a wonderful opportunity to take the other side of the trend. If you remain sceptical, however, that taking the other side of any temporary outperformance of European equities would be richly rewarded.

Wednesday, April 28, 2010

LEH Redux?

"History doesn't repeat itself....but sometimes it rhymes"

-Mark Twain

Is Europe about to re-enact the Lehman Brothers experience? At the moment it sure does feel like it. The sort of slow-motion collapse that Greece is performing is eerily reminiscent of the last days of Lehman, complete with the breezy assumption in some quarters that the authorities would ride to the rescue.

After all, it was only a few months ago that Greece was fighting off yield hogs desperate for some 6% lovin'....remember those €25 billion worth of bids for the 5 year issue in January? That's now looking like a mistake similar to Dick Fuld playing hardball in discussing a sale of "his" bank in '08.
And just as LEH slipped through the Federales' safety net in '08, unleashing a hurricane of unintended consequences, so too has Greece foundered as the Europeans dither over a possible rescue package. is left to wonder whether Angela Merkel plays the violin.

It's really a no-win situation, of course. The prospect of pre-emptively bailing out what's popularly perceived to be a nation of lazy tax-dodgers is a political no-go in Europe's core. But financial black holes- whether they be in banking or sovereign balance sheets- are like cockroaches: there's never only one.

And just as Fannie begat Lehman, who begat AIG, who begat Merrill, who begat Citi (you get the picture) too might the collapse of Greece (a seeming inevitability now) herald similar difficulties for the rest of Europe. The last two columns in the table below show the change in 2y yields for various European sovereigns on the year and over the last month. Those that have risen are helpfully coloured red; unsurprisingly, Portugal and Ireland are under the most pressure.

And while the ECB can blithely ignore the ratings agencies when it comes to their collateral rules (which are going to take on a distinctly "make it up as you go along" flavour), private sector investors cannot. S&P's 3 notch downgrade relegated Greece to junk, and heralded its ejection from some European bond indices. Were Moody's to follow suit (and how can they not? They're now 4 notches above S&P on a country with 18% 2y yields!), Greece would leave more indices. The upshot is that real money managers benchmarked to these indices would have to sell all of their Greek bonds if they have (or had) not already done so. Bonne chance, mon brave!

And so we come to the euro, which has plumbed its lows of the year but remains some 7c above its 2008 crisis lows. Hard as it is to believe, the CB bid has remained (though might some of that be covert intervention from the Eurozone via the BIS? Enquiring minds want to know!), thereby dampening the sell-off that everyone expects.

Given all that's happened in Greece and elsewhere in Europe, EUR/USD has actually been a surprisingly difficult trade; it really ought to have fallen much further, more directly. But then again, what's new? Perhaps at this juncture equities are a better bet; divergence between the US and Europe has been steady all year, and seems very likely indeed to continue as Europe shoots itself in the foot.

Yesterday the story surfaced that Europe would convene a "Greek Aid" summit on May 10, with possible payouts a week or so later. All well and good, of course, but real time events are moving substantially quicker than policymaker negotiations. Again, it all sounds vaguely's Lehman redux.

Tuesday, April 27, 2010

A Tale Of Two Flashpoints

Congratulations to those who voted for option 3 in Friday's poll. This choice (Greece receives bailout, other EMU member(s) receive bailout, euro remains intact), which won the plurality of votes, is now looking ever more likely. Sentiment towards Portugal, for example, has deteriorated very sharply indeed- 2y yields have more than doubled so far this month. That the Belgian government has collapsed isn't exactly a ringing endorsement of European stability, either.

The contrast between peripheral Europe and another supposed locus of distress, the US mortgage market, could not be greater. Remember when the big fear was that the end of QE would cause the mortgage market to tank? Seems like a lot longer than 4 weeks ago, doesn't it? While it's true that the spread between 30y mortgage rates and 30y Treasuries has widened a smidge, it's still way, way below the prevailing levels during most of the Fed's QE program.
Moreover, 5 year ARM rates are just about the best they've ever been. A quick glance suggested that in the UK, for example, the equivalent product (marketed as a '5 year fixed rate', rather than as a floater, as in the US) is offered at interest rates roughly 100 bps higher.
Despite this of course, the US housing market remains tepid at best. Were mortgage rates ever to "normalize", the housing market would be in very deep doo-doo indeed. And so Macro Man will be watching tomorrow's FOMC statement with great interest. The current language is probably nearing its sell-by date, if for no other reason than greater flexibility is desirable. Yet anything that rocks the boat too hard could possibly send mortgage rates careening back up....and at this point, that's the last thing that the the FOMC or the US economy want right now.

Monday, April 26, 2010

The Policymaker Draft

Macro Man was struck by two things over the weekend: the ongoing meltdown in Greece, where public sector workers continue to demonstrate for their right to remain bone-idle, and the orgy of attention lavished on the NFL draft.

The Greek crisis should reach some sort of denouement this week; 1yr CDS are now trading at 1200, which isn't far off the yield on the 2 year GGB. The Germans continue to play hardball, which to a degree is understandable; one would presume that the Greek government is working overtime to hash out a deal with the IMF (well, at least those that aren't marching to protect the 12 hour workweek, or whatever it is that the Greek public sector slogs through.)

The NFL draft, meanwhile, is a nonpareil example of American (champagne) sporting socialism. Rather than a free market of new players, such as one finds in world soccer, American sports allocate new talent via a draft process, wherein the worst team from the previous year gets first choice of the incoming talent pool. The system is designed to ensure relative parity amongst the teams; it tends to work quite well in the NFL but less so in sports like baseball where the development trajectory of young players is less certain.

In any event, the NFL draft has morphed into a 3 day extravaganza, where an industry of full-time analysts has emerged to break down the physical minutiae of hundreds of young college students. It would make for entertaining viewing if it wasn't so drawn-out; still, it generally serves the purpose of allowing wretched teams to improve themselves through shrewd player selections. (As an aside, the draft has generated a quite interesting market in microeconomic analysis; given the often extravagant salary demands of the first pick, it carries less expected economic value than second round picks.)

Anyhow, the juxtaposition of the Greek crisis and the draft caused Macro Man to wonder: what if there was an annual "policymaker draft" for the world's countries? Those deepest in the mire could have first choice of any policymaker of recent vintage, with the draft proceeding in order of relative economic outcomes.

We can probably assume that Greece would have first choice...but who would they choose? They'd need someone committed to smaller government, someone willing to stand up to the civil servants and unions, someone who wouldn't be afraid to be unpopular.

Macro Man can just imagine Dominique Strauss-Kahn approaching the podium and intoning "With the first pick in the 2010 policymaker draft, the Hellenic Republic chooses Margaret Thatcher, prime minister, Oxford University."

Who would the rest of the PIGS choose? The US? The UK? China? Who would countries like Canada and Norway be left with? 'Twould be a fascinating endeavour, and surely cure the economic sciences of their "dismal" reputation.

Moreoever, it's not at all clear that such a draft would substantially alter the nature of popular analysis one whit. Imagine Mel Kiper breaking down the policymaker draft ("Greenspan's really sliding down the Big Board on character concerns...")

...while the CNBC clowns break down which quarterback the hapless Browns should take....

Macro Man for one can't really tell them apart....

Thursday, April 22, 2010

What Now For Europe?

With Greek 2yr yields skyrocketing north of 10%, it would appear likely that the Hellenic Republic has passed the point of no return.
While the euro has weakened sharply over the last couple of days, if this is in fact "the big one", then there could be a heckuva lot more downside to the single currency, especially if/when the market focuses it's laser on the remaining PIGS. And if Voldemort and co. ever pull the bid in EUR/USD?

Whoosh! We'll party like it's 1999.

Macro Man is curious what the market is expecting...not in terms of financial pricing, but with respect to actual economic and policy outcomes. So if you have a view, please vote in the poll below, which will hopefully be correctly formatted with 5 choices.

Sneak Peak

As short sterling gets clattered (yet again) and the pound tempts the unwary with its siren song, Macro Man is pleased to offer a sneak peak at this evening's party leaders' debate on international affairs:

Adam Boulton (moderator): Welcome to the second party leaders' debate, right here on Sky TV! For just £65 a month, plus £199 for the box, plus £130 for annual insurance, you could be watching this debate in breathtaking HD! Operators are standing by! Two of them, in fact, so you'll only need to wait an hour and 45 minutes before speaking to someone! Call now!

And now.......LET'S GET READY TO RUUUMMMBBBBLLLLEEEEEEEEEE. In the blue corner, from the Conservatives, David Cameron! In the red corner, from the Labour Party, Gordon Brown! And in the yellow corner, from the Liberal Democrats, a man who needs no introduction, your next UK Prime Minister, Nick Clegg!

OK gentlemen, first question, what are your views and plans for Afghanistan? Mr. Brown.

Gordon Brown: Well, first of all, let me just pay tribute to our brave soldiers in Afghanistan. They are true heroes, and without them, we wouldn't have any soldiers in Afghanistan.

AB: David Cameron.

David Cameron: Allow me to join Gordon in paying tribute to our brave men and women on the other side of the world. It's not easy fighting the Taliban armed only with a rubber band, a deck of cards, and a decoder ring from a box of Sugar Smacks. It's an absolute disgrace that they are out there so under-equipped. That's why a Conservative government would invest in our troops, to give them what they need to win the fight. And so I am promising tonight that each and every one of our brave troops will have access to the entire library of MacGyver on DVD, to prepare them for fighting the Taliban using a rubber band, deck of cards, and cereal-box decoder ring.

GB: Och! What the Tories won't tell you is that you can only get all seven series on the North American NTSC format! Only series 1,2, and 3 are available on PAL!

AB: Nick Clegg.

Nick Clegg: What these two donuts won't tell you is that we have zero chance of winning in Afghanistan. Zero. So while I join Gordon and David in paying tribute to our brave troops, the Liberal Democrats would bring them all- as well as the rubber bands, decks of cards, and decoder rings- back home where they belong.

DC: What a girly-man.

GB: Aye!

AB: Let's move on. What do you plan to do about Iraq? Gordon Brown.

GB: The next Labour government will almost certainly commit to sending Tony's old dog collar, leash, and poodle-grooming kit to George W. Bush at his ranch. But let me just pay tribute to our brave soldiers in Iraq. They are true heroes, and without them, we wouldn't have any soldiers in Iraq.

DC: The history books (at least the ones written in Britain) will tell you that our brave soldiers are undefeated since 1066. I am not going to be the one that breaks that record, I can tell you.

NC: What these two donuts won't tell you is that we have zero chance of winning in Iraq. Zero. So while I join Gordon and David in paying tribute to our brave troops, the Liberal Democrats would bring them all- as well as the rubber bands, decks of cards, and decoder rings- back home where they belong.

GB: Girly-man.

DC: Yeah!

AB: OK, let's shift gears. What do you think about Britain's nuclear arsenal?

GB: I think it's swell.

DC: We were the third country in the world to achieve nuclear capability. That's bronze medal territory, and I am not going to be the leader that takes Britain back to fighting long-range wars with extra-large rubber bands, I can tell you.

NC: We would nuke it, if you'll pardon the pun. It costs 4 billion quid to update and maintain our Trident missiles, and Gordon already pissed that money away into Fred Goodwin's pension and hiring the entire county of Rutland to design new administrative forms.

GB: What would you do if we're attacked?

NC: By what, a bloke holding a rock in one hand and a shepherd's crook in the other? Last time I checked, Osama bid Laden wasn't standing up in the Hindu Kush, cocking a snook at Britain and chanting " the Arsenal...."

AB: What about terrorism and granting safe harbour and legal aid to hook-wearing preachers of hate?

DC: Chuck the bums out!

GB: I would need to hire the entire East Riding of Yorkshire to conduct a feasibility study.

NC: We're in favour of it! The more the merrier! Turn the other cheek and give peace a chance!

AB: What about our near neighbours in Europe. How would you deal with the EU?

DC: Hee hee, they're more tin-tucked than we are, believe it or not! It's an Englishman's, excuse me, a Briton's God-given right to nip down his local for a cheeky pint, and the Conservative Party will fight tooth and nail to preserve this cornerstone of our society.

GB: If only the Greeks had listened to me when I was saving the world, they wouldn't be in this mess.

NC: What these two won't tell you is that Britain is sick and tired of seeing the Queen's leering face on all our money! We believe in a fair society where everyone is more or less equal. That's why we want to join the euro, where we can blame someone else for all our problems and commiserate with everyone else who's buggered.

DC: So you don't want to pay for any wars or weapons, but you're happy to pay for a bunch of terrorists and tax-dodging Greeks?

NC: Yup.

GB: Ooookkkaaaaay. How the hell can I be losing to this guy?

AB: Beats me. Sadly, that's all we have time for. My thanks to Gordon Brown, David Cameron, and Nick Clegg. Coming up next on Sky One (after sixteen minutes of adverts, of course): Premier League Curling in glorious HD!!!!!

Wednesday, April 21, 2010

High Tide For The Financial Sector?

What Goldman taketh away, Goldman giveth. That appears to be the motto of the past few days, with Fraudulent Friday now a distant memory as the market basks in the warm glow of yet another solid quarter from the good ship GS.

Obviously, the financial sector generally has been helped by favourable market conditions, which have boosted sellside trading revenues (if not, alas, the performance of your average macro directional punter.) And in fairness to GS, their effective tax rate of 33% was no doubt higher than that of many of their most strident critics. No more 1% tax rate bonanzas in this environment!

Still....Macro Man has to wonder if we're now at the top for financials, whether the tide is high and set to roll back out. Over the past year, the SPX has returned 42%....a handsome return, to be sure, but trounced by the financial sector's nearly 58%.

Friday's SEC announcement was perhaps only the opening salvo of a popular and regulatory backlash, however. The Obama administration is clearly aiming to wheel out some sort of financial reform package, no matter how flawed, to parade in front of voters ahead of midterm elections.

In the UK, meanwhile, Greedy BankersTM are about the only subject on which Moe, Larry, and Curly can agree. It's not a question of whether to tax Greedy BankersTM back to the Stone's how.

And now, enter the IMF. Tired of waiting for that phone call from Athens and too timid to take on the challenge of international currency politics, the Fund has now proposed a suite of broad-sweeping financial levies and taxation. While the IMF's call for universal compliance is unlikely to be met (check out the history of OPEC compliance, for example), it nevertheless offers a strong suggestion that after more than two years of being on the receiving end of public largesse, the financial sector (and banks in particular) may now face pressure to become net contributors.

In this context, Macro Man really has to wonder how much longer XLF outperformance can be sustained. Not that the news is all doom and gloom. At least Goldman's Board can sleep soundly at night, knowing that they're protected from shareholder lawsuits by none other than AIG. Ah, the sweet taste of irony......

Tuesday, April 20, 2010

Shift F9

** Shift F9 **

On day two back in the saddle, Macro Man already feels like he's become macro man. Allow him to explain.

Consider the day's major talking points:

* Despite (or perhaps because of) concerns over the Goldman case, Magic Monday struck again, buoying stocks into a green close and running its recent record to a Cy Young Award calibre 29-4.

* Despite all the kerfuffle about rescue plans for Greece, Hellenic Republic debt is plumbing new depths this morning, with 5 year yields trading above 7.5%. The government must feel as if they are bearing the combined punishments of Prometheus, Sisyphus, and Tantalus on a daily basis.

* Despite all the "insider knowledge" of a forthcoming RMB adjustment, nothing has happened and suggestions of an agreement have been denied.

* Despite a consensus forecast of moderating inflation, UK CPI surprised to the upside....again. In line with the whispered leak.....again.

Plus ca change, plus c'est la meme chose. Those bullets could seemingly have been written on virtually any day over the past few months. It's almost enough to encourage Macro Man to write a macro to auto-generate a post on days like this.....hence the name change, geddit?!?!?!?!

So sorry to mail this one in, but you've gotta admit, the same themes have been dominating market consciousness for a long time now, with little in the way of successful resolution. So robo-blogger is set up and ready. When you see the telltale "shift F9" sign, you'll know that Macro Man has been replaced by macro man....

Monday, April 19, 2010

May Comes Early.....?

Well, well, well. When the Macro Man's away, the markets will play! Your author is back in front of screens this morning for the first time in a week and a half, though had his flight been scheduled a day later last week he'd still be stranded on the west side of the Atlantic. You know it's been interesting when a volcano shutting down all air traffic in Europe for more than half a week is pretty far down on the list of things to talk about.

Despite all the focus on Greek bailouts and Chinese revals (or the lack thereof), obviously the 800 pound gorilla in the market's living room is the SEC fraud case against Goldman. Now, Macro Man is no lawyer, nor does he play one on TV. But on the face of it, the particular case in question looks pretty damning, assuming that the SEC can prove that Paulson, rather than ACA, selected the turds for the Abacus CDO in question.

Of course, Macro Man vividly remembers that in the summer of 2007, Deutsche Bank was notable for a road show to investors demonstrating how to short various components of the subprime universe. He also recalls a Michael Lewis article referencing such road shows (though perhaps not the DB one in particular) wherein it was noted that short sellers actually created more product for eager greedy stupid willing investors to purchase. Somehow, Macro Man cannot help but think that there are more skeletons in this particular closet, and that no one will come out smelling particularly sweet.

What does it mean for GS? Who knows. The actual fine for this particular instance is unlikely to approach anything like the market cap wiped off of Goldman's share price on Friday. On the other hand, the SEC does not allege "fraud" lightly; being lumped in with the likes of Enron and Worldcom doesn't exactly suggest that GS's goodwill should emerge unscathed. Moreover, it would be entirely consistent for Goldman, if found guilty, to be banned from a number of different businesses, not all of which are extinct, which could impact future earnings streams.

All of this is supposition, of course. Perhaps the real shock factor is that GS, so widely perceived to be in bed with the government, has been cast back down to reside with mere mortals. Certainly, this is a gesture that will resonate with Main Street....for the time being at least. The real question, of course, is what it means for markets. From Macro Man's perch, it is pretty obviously a potential catalyst to reverse what has proven to be an astonishingly steady 15% straight-line rally. Futures have already broken the uptrend...
..even as cash flirted with the 61.8% Fibonacci retracement of the entire move from the '07 highs to "Satan's low" last year. (Of course, while the eye naturally concludes that the 61.8 level was hit, the index actually fell short of it by 18 points. But hey...close counts in horseshoes, hand grenades, and Fibonacci retracements.)

So for choice, Macro Man would look for a bit more downside from here. 'Twould be especially telling if today's early-sesh futures weakness is maintained during cash trading; the failure of Magic Monday to do its thing could well be a signal to punters that the market regime has changed, if only temporarily.

Of course, equity weakness should provide further support for bonds, which had already started performing decently during Macro Man's absence. One theory as to why (and indeed why bonds had traded so poorly previously) can be found in the Fannie Mae 4.5's, which traded dreadfully in late March/early April on fears of what the end of QE would mean, but have snapped back smartly since.
Macro Man was also gratified to see one serial Asian currency pegger revalue its domestic unit and commit to a path of steady appreciation moving forward. No, not the Big Kahuna; far from it! Macro Man refers, of course, to Singapore, whose TWI (proxied by DB) is shown below. Now, there has been some speculation that the MAS would not move as they did without some knowledge or view on China's attitude towards the RMB. Macro Man is personally sceptical of this view, if for no other reason than he made very good money two years ago being long SGD/short RMB even before the renminbi ground to a halt that summer.
Moreover, it may be the case that the Chin3ese prefer to assess the impact of their other tightening measures before moving on the currency. The new rules to curb property speculation appear to be having an impact; the Shanghai property index has made a new low for the year, helping to send the overall Shanghai index down close to its lows for the year.
Perhaps that's an environment in which the powers that be would adjust the FX regime, but somehow Macro Man thinks not. Indeed, we're only twelve days from a May, a month that typically ushers in a suboptimal seasonality for risk assets. And hey, perhaps thanks to Goldman, perhaps May has come early this year....

Friday, April 16, 2010


Totally unrelated to markets (except with respect to psychology).....

Macro Man played golf today for the first time in about eighteen months (the interregnum naturally a result of his knee injury.) Someone astonishingly, he parred the first hole....then took 4 shots to get out of the bunker on the second hole (his tee shot having lipped off the green on the par 3.)

The good news is that he didn't take 4 shots to get out of any other bunker on the course. The bad news is that this was because he got loads of practice playing out of the sand, as he displayed an uncanny ability to spray shots into bunkers on virtually every hole of the course.

'Tis really a funny old game....

Tuesday, April 06, 2010

Three Point Play

In honor of Gordon Hayward's nearly-the-greatest-shot-of-all-time, here are three points:

1) There have been rumblings of a Fed discount rate after yesterday's hastily announced Board of Governors meeting. Whether they do hike it or not, we are now at a relative extreme in Fed pricing; the OIS market is now pricing in rates of just over 1% at the eighth FOMC meeting. Levels not too far north of here have capped market pricing over thepast year; this, combined with a 10 year note flirting with a 4% yield, suggests that fixed income might be a scoop here. Unless something has materially changed, in which case it's a sale. Gee, maybe Macro Man has a future in research....

2) El Gordo has called the election for May 6, and sterling has promptly sat like a good dog and tumbled a percent. Perhaps this has something to do with a Guardian poll claiming that Labour could win the most seats in the election. Given that the Grauniad is selling "Step Outside, Posh Boy" T-shirts on its website, however, one could credibly question the partiality of the result, which bears a striking resemblance to a wishcast. A rather more impartial polling source gives the Tories a 10 point lead.

3) Macro Man is travelling for the next week, so updates will be sporadic at best. As always, regulars should feel free to use the comments section to chew the fat on markets.

Monday, April 05, 2010

5 Points

1) Tim Geithner should consider changing his name to "Stradivarius", because the Chinese have played him like a fiddle. A week of Chinese no-shows at Treasury auctions, and Tim is left scrambling to placate Beijing. His decision to delay the release of the "currency manipulation" report in favour of bilateral discussions left Macro Man literally laughing out loud. If a one week buyer's strike is all it takes to save face and buy the Chinese a few more weeks/months of piss-taking, well, let's just say that Timmy Strad is in over his head.

The US Treasury would do well to demand that the Chinese not intervene except when their notional daily fluctuation limits of 0.5% per day are met. Macro Man would like to show those limits on the chart below, but alas, the total range of USD/RMB since late February has only been 0.1%.
2) While it's easy to finger the Chinese as the primary cause of Treasury weakness, that would be a gross oversimplification. The end of Fed QE has no doubt had an impact on quasi-Treasury MBS, and even more prosaic, old-timey, "fundamental" factors may be playing a role. Oil appears to have employed stealth technology in its latest bull run, given the general lack of acclaim that it's received. But as you can see from the chart below, June oil is now at its highest level since Lehman; small wonder bonds have been wobbly!
3) Mumblings of a Chinese reval combined with higher US rates; if you thought that sounded like a perfect storm for Asian currency outperformance versus the yen, you'd be right. The "AJPY" (ADXY * USDJPY) is up 7% since the beginning of March; perhaps it's small wonder that the Nikkei is among the star performers amongst equity indices this year.
4. Following on from Thursday's sterling post and Friday's solid payroll figs, Dec 2011 eurodollars are now pricing in higher rates than Dec '11 short sterling. Obviously, some of that is down to the fact that LIFFE has been closed the last couple of days; no doubt sterling will re-assert a small premium tomorrow. But does seem odd that sterling is rallying in this context, which provides further evidence that it is primarily a short-covering rally. By the same taken, equal rates in Dec of next year isn't exactly what you'd expect when you have one central bank talking about record low core inflation, and the other writing letters apologizing for the high levels of CPI. Hmmmm....

5) Being a sports fan leads to some strange juxtapositions. Tonight sees Macro Man's alma mater cast in the Darth Vader role of perhaps the biggest "good versus evil" morality play since the roles were reversed 19 years ago, back in the days when your author was in attendance.

At the same time, today sees opening day in baseball, where Macro Man is a fan of what has arguably become the worst team of time; certainly they've set the benchmark for consecutive losing seasons by an American professional sports team.

Just goes to show that in sports, as in trading, you can't win 'em all.....

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.