Monday, January 10, 2011
After spelling out our macro non-thoughts for the past few posts it's about time we pulled our focus back from the horizon to the pot-holes right in front of us.
As we mentioned on our first set of "Nons", this time of year is full of trading peculiarities, as themes and trades for the year are discussed and executed, alongside the micro news-following tunings. As a result, we usually end up with a "wrong way first" move turning around the start of the third week. With the US on holiday for Martin Luther King day next Monday, TMM think this is lining itself up as a suitable turn date to target. We have always had a background belief that US holidays make good general turn dates.
But if we are looking for turns against consensus we need to have a think about what that consensus is. And that isn't so easy.
Europe - As far as we can make out the trade coming out of December was to position for another major attack on Europe kicking off in January. Thus far the news flow and focus has indeed been on the restructuring of the Portuguese and Spanish debt, with their financing calendars being used as the road atlas. But if we think about the chatter/effect ratios in the short term markets then today they appear to be getting stretched again. Nearly all commentary is focused on the doom-mongering side of things with any positive news being studiously avoided. The Greeks, for example, appear to have achieved the impossible in cutting 2010 deficit by more than planned. It's down 36.5% vs 2009 against a planned reduction of 33.2%. Perhaps the bounce against Europe consensus happens immediately after the Portuguese, Italian and Spanish auctions at the end of this week, i.e. slightly before our general 17th turn date?
In equities we think we are detecting the biggest double bluff to have occurred in the markets for some time. It appears to us that the majority is convinced that the market is far too bullish, with all the analysts calling for higher levels. Having learned to do the opposite of what equity analysts say during times of strife, the majority of discretionary investors have in fact stayed out and are looking for a pull back. So we think the consensus is in fact for a move lower exactly because they think that everyone else is looking for a move higher. TMM think the path of pain and risk for next week's turn date is for a rally to really take off.
In commodities we are noticing that flows are really picking up in "recovery" trades and have been weak in Gold. While TMM are not quite calling for the clavadista d'oro, the fact that this is going on quite consistently, with almost no coverage, is leading us to think that the consensus here has gotten quite lazy. If indeed European deflation works along the lines of Greece and we get the Spain solution sooner rather than later, the hyperinflation trade is going to look really, really ridiculous. US real rates are keeping it supported for now but many of the "braindead" drivers of the metal are looking quite a bit weaker.
The "Asia to continue to outperform the West" theme is also still high on the favourite trades lists. We have mentioned Indonesia before, specifically as a barometer of the general Asia leverage trade and potential first sufferer re EM bonds. So to suddenly see inflation concerns causing a rout with their stock market down 8% since Thursday was interesting, to put it mildly. Our Asian alarm bells are ringing in general. This won't be any help to the Aus, which is really beginning to look weak. Its double props of commodity exports (hit via the floods) and a ramping Asia now look more wobbly.
Tomorrow we will turn back to horizon gazing and, despite our conviction that trying to call FX 1 yr out is a mug's game, we will post the last of our 2011 Non-Predictions: FX. For now we await Alcoa's results, as the earnings season opens up. Considering last Friday's headline that they are reopening US smelters, we think they should be positive enough to refocus the markets away from all the negatives they are currently fascinated by.