Tuesday, January 08, 2013

2013 Non-Prediction No.2

After the hectic start to the year seen last week, this week so far has been somewhat of a damp squib. This leaves short term overbought or sold signals a bit of time to come back from extremes, for USD/JPY in particular. But given TMM are long relatively short-dated USD/JPY puts, they would rather see this correction pick up a bit of panickyness, as opposed to what can so far be considered by bulls to merely be a "healthy consolidation" before a further move higher.

Another notable twist in market dynamics is how the complete lack of shouty news has left the market chasing flow. Moves being blamed on any old news headlines have rapidly morphed into low level debate over who has done or may do what. Yawn. Basically its suddenly gone pretty quiet. So we press on with our Non-Predictions.

2) The Polish Zloty will NOT underperform the Czeck Koruna even if the NBP cut rates aggressively.

Let's start with Poland. Although CPI has surprised to the downside over the past few months, this will not last. The National Bank of Poland often stress that they want real interest rates to remain positive. The model suggests that CPI should remain above 3% for the coming year, which implies a floor for rates. And even if they do cut rates aggressively, TMM reckon that it will not be long before they are once again tightening.



But with the recent NBP minutes suggesting more members dissenting in favour of a 50bp cut in December, the curve prices around 150bps in the coming year, and well below the real rate floor implied above. TMM don't disagree that the cutting cycle may continue over the next few months, we just don't think they will be as aggressive given the inflation outlook and also the coming improvement in the activity outlook (more below).





By contrast, the Czech Nationalbank are faced with the zero bound on rates and have become increasingly vocal on currency strength, the relative real rate spread vs. Poland has moved sharply higher in favour of the Zloty. Of course, the EMU crisis has hit Poland hard as it runs a reasonably large current account deficit (in contrast to the Czech Republic's surplus) and coupled with the risk aversion of the past two years has resulted in significant underperformance of the Zloty vs. the Koruna.



But TMM reckon there are reasons to believe that this is coming to an end now as there has been a dramatic improvement in the Current Account over the past year...



...and while both IP & retail sales have been weakening in Poland, they have not decelerated as much as in the Czech Republic, and look set to bounce in the coming months as the Eurozone begins to exit recession. Poland should be in a good place to be as the data in Europe improve.



The Czech Koruna, however, just looks like a crap Euro to TMM as at the end of the day, it is an EM currency (no matter how credible the central bank...) with zero yield with the possibility of currency intervention to weaken it on the horizon.

Putting those together, TMM like both being long PLN/CZK but also paying the 9x12 FRA in Poland.

39 comments:

Anonymous said...

C Says
Do not know about the topic of the post.
However ,it occurs to me that the banking sector has prbably this year boken the wall of worry that jas constricted them for the last couple of years. In other words,with exceptions of course,as a sector I think they're probably in a position to look at raising fresh capital if they want to. The appetite looks to be there again judging by what we have seen on their debt.
I wonder what that might imply for future credit conditions and so forth.

Anonymous said...

Actually ,what I should have said is they can not only raise fresh capitla ,but can do so without being nailed to the wall on costs.

Leftback said...

A strange day from the macro perspective. EMs, peripheral Europe and China streaking higher, but alongside the dollar. It works for us (we are long EEM, EFA and FXI calls) but we are still shaking our heads a bit. January market dynamics...

Anonymous said...

C Says'
Lot of repositioning going on LB.
That fissqually cliff threw some people.
Moreover we're still seeing people try to short that which should not be shorted judging by some of the moves.

rottor said...

Polish CA earlier weakness was due to infrastructural project before Euro 2012 championship, CA improved as stadiums are already built

Anonymous said...

C Says'
http://www.bloomberg.com/news/2013-01-09/blackstone-steps-up-home-buying-as-prices-jump-mortgages.html

Extremely revealing.

Leftback said...

C

I am NOT negative on mortgages, mREITs, banks or US housing prices in general, but let's be clear, the PE boys enthusiasm for snapping up cheap inventory isn't the same as a boom in new housing construction.

The homebuilder stocks are now priced for Happy Days Are Here Again and Flip Your Momma's Condo but the truth is there is still an avalanche of hidden inventory out there waiting to be unleashed and not a huge amount of new demand to meet it. The recent mini-bubble of irrational exuberance is likely to expire in the usual manner.

Investors weren't thrilled with the offering of 10s at 1,86. They may be even less thrilled with 30s at 3,07 tomorrow unless someone crashes world equity markets in the next 24 hours.

Anonymous said...

C Says'
Actually LB my interest is not that I think builders etc offer a great buy. That's been pretty much anticipated by price. My interest is that these groups are accelerating their programs for a reason. That is they anticipate they will very soon have much more competition for stock.Hence from their viewpoint where they thought they ahd two ears to do this they at least believe they will have quite a lot less than that and it's worth buying upfront and storing as opposed to buying on their intended program.
Generally this interests me because I think it will indicate that transaction volumes are going to keep going up which helps the associated Industries in services etc.

Leftback said...

Agreed. Everything surrounding housing (mortgage servicing, MBS trading, mREITs, local and regional banking) should be in much better shape this year than last. Even if prices are flat, defaults should fall, which will be good for everyone's book.

It's such an odd market in the US. There are many patently absurd 1999-type valuations all over the place in this market.

The stodgy stuff, in terms of companies that have cash on hand, little to no debt and a steady revenue stream - these are the meat and potatoes of the market but they don't seem over-valued at all. How strange to be thinking of AAPL in the latter group.

I suppose this is what you get when there are essentially two markets, one for Real Money and one for the hedge funds and home gamers. The thing is, the HFs can get in and out a lot faster...

rottor said...

have a look at how lumber has reacted to the emerging housing recovery:

http://i.imgur.com/lIOtC.png

Anonymous said...

C Says
Yes yes,but frankly I'm already out of that for the same reasons that were discussed earlier re builders.Fantastic 2012 run. My one concession in the comm sector,but markets have two sides and when one's loaded up and would like to bank it and all that..

rottor said...

and here you can see polish FRAs:

http://i.imgur.com/Xa0uE.png

(red - 1x4, blue - 3x6, red - 6x9, violet - 9x12)

you can see that the longer dated FRAs have reacted to the words of cbanker that further rate reduction is not unconditional

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Anonymous said...

congratulations are in order for the UK breakeven longs, it seems

which reminds me of this question: what happens to those if/when the world does not collapse, growth looks better AND reduced/terminated QE leads to lower infl. expectations?

DD

Leftback said...

DD

I thought it was now the consensus among TMM and members of the comment asylum that true inflation is ultimately a function of employment costs, whereas UK Mervynflation is regulated to some extent as a function of QE expectations, so that any fluctuations are self-limiting in the absence of wage growth?

In other news, Dr Aghi will be smiling again as he continues to make all the right (non) moves. Spain 2s and 10s declined sharply in yield today after the ECB declined to cut rates, along with Italian 10s, with a commensurate sell off in UK and German bonds. Which brings us to the topic of today's US 30y auction, which will be closely watched.

Another day of no really significant earnings news in the US, markets drifting up, this could go on for quite a while until someone lays a really big egg.

Anonymous said...

C Says'
Be interesting if Asia closing for the week coincides with a second leg consolidation on the JYen. With only a weekish to go for the key date you can visualise a move down and backup ending in a balancing point at the date itself.Compression.

Uk Indexed Kinked gave me my best ride of the week,but it was a low probability outcome to setup for so I wasn't able to get what is the term Bolivian? One day I will know what that means.

Anonymous said...

What a typo !!! "Kinked" not Linked .I may have on a real Freudian there.

Anonymous said...

LB my question was more, for people who want to care about a rate accident in 2013, wouldnt you expect the inital reaction to be growth exp up infl exp down, so the linked stuff to be hurt more. Thinking outloud only at this stage. DD.

Leftback said...

DD

I don't see any disorderly rate accident - certainly not in the US. A smooth steepening out to the Spring and then maybe another flattener in the summer. I don't know much about the UK, oddly enough, but I don't fancy UK, France or German fixed income on unwind of fear trades. Whether that constitutes an accident I don't know. Generally to have a +100-200 bps spike occur, someone has to have made a right cock-up of something.

Having written the above, yes, we do have some small "tail risk" positions on all the way out to June to hedge just such a possibility.

Leftback said...

Chart Watchers Anonymous. We ain't bearish, but we do see a double top here in SPX and in XLF.

With the WFC earnings dead ahead, any small earnings disappointments might be met with some selling.

Anonymous said...

C Says'
It occurs to me that European equity needs the Euro going in this direction like an hole in the head.

Anonymous said...

C Says'
As this week closes one is left with the feeling of trying to tip toe through a minefield.Such is the life of selectively picking the right places to be and then rotating as the opportunity closes.

Anonymous said...

C Says'
Oh dear...

"Investors staged one of the biggest moves into stocks of all time this week. Total equity inflows were the second-largest ever, while inflows into emerging market equities were the biggest in history. Inflows into long-only equity funds were the largest since March 2000."

For a start I object to the term "investors". I'm thinking more along the lines of fear, crazed zombies!
We know where this lucre came from and why.We should remember what it tells us about the nature of the people behind it and what they will do when emotionally challenged by any event they don't like.
Personally,these are the kind of people that I don't buy with,They are the people I usually sell to.
Do what you prefer of course.

Leftback said...

LB did do a bit of hedging into the US close yesterday. Wells beat this morning but it was a baby beat, and that might be considered the best of the US banks for this earnings cycle. We smell a bit of profit taking ahead. There are some gaps in the chart for XLF, for those who enjoy that kind of thing. We are short it just for the day.

Anyone got a story on this morning's dollar dump? Just curious, and somewhat surprised to see EURUSD higher again today.

Anonymous said...

C Says
LB
It's not just a dollar dump. The Euro has been thrashing th £ as well. I have not even bothered looking at what it is doing elsewhere. That's why I posted yesterday that the Eurozone needs this "like a hole in the head". In effect they handing FX competitiveness away hand over fist to japan,Uk and US to name ,but a short list.Now would you like to conjecture what that means for a recovery in Europe based upon expanding their share of global trade?
I've bailed European equity from the portfolio based on this. I don't even want to wait for the lagging data.

Leftback said...

My chart gazing suggested a 1,3500 might be in the cards at some point, to form a EURUSD double top. Still long all kinds of Eurostuff here, but LB's anxiety is growing, as it should when complacency fills the airwaves.

Anonymous said...

Yikes, look at yen. That's a one way train, guvna!

Anonymous said...

We dont want to try and time it (rather content just taking some off one step at a time), but audjpy will make quite interesting entertainment when it turns the other way.

Talking 'bout Yoorp but from the credit side. We have done very well over the past few years not being interested by Xover on the other side of 400. We will not get too greedy this time either.

Anonymous said...

http://markdow.tumblr.com/post/40256515803/surprise-index-update

Anonymous said...

C Says'
Anon 2.54
Like so many things these days jawboning done by the right people and often enough can make magic.
By the time they actually get around to doing anything atr all it will have become a sell the event.

Anonymous said...

Anon 2.54

XOver 5y at those levels is tighter than JLo's rear end... I remember very well what happend last time around when poo hit the fan. 1000+ prints and no end in sight. I wouldn't want to sell prot at those levels but buying is also tricky as you got to get the time halfway right (which I won't for sure).

Eddie

Leftback said...

Compression trade seems exhausted in the US as well. High yield priced for perfection.

No significant earnings news for a few days, Empire State index on Tuesday before GS and JPM report before the bell Wednesday.

S&P Earnings Timetable

Snooze buttons. Or perhaps we will have two days of FX fun like the old 5 minute Macro?

Anonymous said...

that was DD at 2.54

Eddie, agreed. Carry is a bitch. Neither side is very appealing, hence the "uninterested".

That said, given the moves in some dodgy cash names, it may have its use.

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Anonymous said...

C Says'
As a great believer in moneyflow and mean reversion.Thats is the art of being where other people no longer appear to want to be the portfolios New Year resolution is less Equity more Ag.

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Anonymous said...

C says'
March to April 2012 was the critical timeframe where events in Europe transmitted a change of behaviour to the various asset groups. It appears to me that ,any recent rallying moves since the summer have been about a 1:1 move. Yes,as the Dax closes in on 8000 and CAC 4000 there's marginally more than a 1:1 move.Given where that places them in relation to previous highs experienced and what I call the longer run business cycle line which they are now well above we have some latitude developing for a bull trap to return to that business cycle line which will at some point tie in with actual economic growth rather than the typical mom move where money buys because other money has.

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