Looking for a Turnaround Tuesday

Just a set of quick thoughts as TMM have been having a busy and exciting time over the last 10 days.

It took a while for the momentum to fade but the first US market open after the 19th of Jan was indeed a turning point and we aren't unhappy to have seen the pull back. But what speed. Pretty much 4% in 3 days. It is also interesting to see that it is the consensus trade of "EM to fall" that has ended up crippling the consensus trade of DM equities to rally.

4% in 3 days ... still thinking about that.

Q/E tapering - Knew that, as does the market judging by what they are discounting,
Q/E effect on EM credit - Knew that.
China Credit - Knew that (as much as we know anything in China) but ICBC partially protecting the Trust is better news than worse.
China Data - Yes it was soft, but enough to cause the melt?
South Africa and Turkey - Turkey is an old fashioned Market Turkey shoot. Looks weak , has little reserves and policy is indecisively reactive (are Ed Balls and Ed Milliband advising?). So Macro Jedi-knights are trying on their Soros-wan-kanobi robes thinking they can do a GBP 1992 on it. Which means they are probably loaded on the position already.

So 4% in 3 days .. still thinking about that.

Is there enough new in the last week to change everything? Or are we really just in the correction we were looking for and this move is based on positions? Be they Pension funds moving back to long bonds from equities (as they match liabilities as they get closer to being fuller funded) or is this just a sweep of panicky profit taking with a good story attached. We'll go for the later.

The story of the withdrawal of QE and its support for EM currencies is real but we are back to speed again, 4% in US stocks in three days does seem a lot. This pull back has taken much less time to do the sort of moves we were hoping for, so we have started (bravely or foolishly) buying back and are looking for a Turnaround Tuesday if Monday afternoon hasn't beaten us to it. To be more daring, if this is a correction in 2014 consensus trades with nearly all of them taking a beating EXCEPT for EM, then perhaps a healthy recovery bounce could do more dirty work in bouncing EM harder leaving that surviving consensus trade bleeding, just when it looked as though something was working on the books.

Following on from that, if we are thinking that 4% in 3 days is enough then it may be worth extending a Kevlar clad hand to catch the falling Turkish scimitar. Though we believe that Turkish coastal resorts have nowhere near devalued enough to see coffee and property prices return to below "HOW MUCH? Are you serious?"levels, this sell off has gone pretty tabloid. Even France's Hollande has gone over to talk to them. Can it get worse than that?

Back soon

___

Post Script
But didn't think this soon - A big thanks to AAPL for once again really annoying us. Note to AAPL "Yes, it's about time you fell off your high alter to yourself, but did you really have to do it right now? THANKS A PANT LOAD".
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Leftback
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January 27, 2014 at 10:17 PM ×

Hollandaise sauces everything that moves, TMM, so it's no surprise he's having a TRY.

Textbook technical bounce off 1775-ish. The real tell was US 10s backing up again after midday.

FX market seems to have priced in a little bump for the USD, so if we get another taper (but with dovish language) Wednesday do we see a nice rebound in stuff like, um, emerging market FX and equities, precious metals and other dollar alternatives?

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Anonymous
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January 27, 2014 at 10:41 PM ×

This is my favourite markets blog ever! Don't stop writing! Hilarious as hell while equally insightful

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Nico G
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January 28, 2014 at 5:09 AM ×

you cover now?

chicken

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Anonymous
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January 28, 2014 at 8:09 AM ×

4% in 3 days - well, had gone up for a while before that and risk asset corrections normally faster than bull moves

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CV
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January 28, 2014 at 8:24 AM ×

+1 Nico :) ... I am surprised we are already in knife catching zone at TMM. Maybe we bounce to 1810 or something, but I think we are headed for the 200dma here. It is due a visit anyway.

US 10y at 2.5% and EMs to blaze higher off their lows. Oh and just as an aside here ... if you look at equity performance in the past month half of the markets that are up are EM and Eastern Europe. Not exactly the grand contagion!

Argentina and Ukraine are non-events anyway. Turkey could get nasty, but in the end it will be fine. An inverted yield curve will crush domestic demand and out of the rubble she will rally again. This is the thing about EM ... monetary policy and exchange rate flexibility actually works which means that you can, you know, buy cheap when everyone else is buying Fr 10y at 2.4%!!!

Now of course, if this turns into a real bugbear where US 10y yields squeeze higher AND stocks fall, then we are all doomed. However, so far this is a classic stock-to-bond rebalancing in my view.

Claus

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Leftback
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January 28, 2014 at 2:21 PM ×

Agree with TMM on the bounce (probably to be assisted by dovish FOMC language), and with CV on its transitory nature (due to US weakness). Now, with your permission, TMM, here's a little local insight and some background on the latter.

Well, well, well..... something happened this morning that we have been trying to tell the readership of MM about for months. If you look at the last jobs report, the new home sales and today's durable goods data, a picture is starting to form. Look at the data - do you get a reflection of an economy that is charging vigorously, ready to achieve escape velocity without suckling on the FOMC teat for the mother's milk of QE? I think not.

The problem is this. Short version: US aggregate demand is PISS WEAK, and in fact close to recessionary levels. Long version: The economy is bifurcated. QE and other insane "trickle down" economic policies have promoted transfer of wealth to a small fraction of the US population that spends a low proportion of what it earns.

Connecticut is a great place to see the US economy in microcosm. Greenwich, Lamborghini dealers busy, jewelry stores seeing lots of traffic. New Canaan, downtown stores busy, new home construction here and there. On the other hand, if you go to Shelton, Bridgeport and Hartford, you see a lot of empty storefronts, most people in the supermarket using food stamps and prices slashed everywhere to try to move merchandise. Blue collar US neighborhoods are now spending their last dollar on food and fuel oil to stay warm and not on any form of discretionary spending.

The US middle class has been squeezed dry by the combination of stagnant wages, rising rents, and an oppressive tax system that ensures Mitt Romney, Stephen Schwarzman and Henry Kravis pay a lower effective tax rate than someone making $80,000/yr. Until we see real reform on these issues, things will not improve.

Now, what are the macro consequences of this? Look, we have all been sold the following fairy tales by the financial media for 2014:

1) Accelerating US growth.
2) Strong USD all year.
3) Rapid tapering of FOMC bond buying.
4) Earlier than expected rate hikes.
5) US and DMs more "growthy" than EMs.
6) Bonds to be incinerated.
7) US homes being bought up by wealthy Martians.
8) Gold price going below $1000.
9) There is no alternative to stocks.
10) Happy days are here again.

Well, you know what? The above is actually a steaming pile. Strategies based on weaker USD, long US fixed income, precious metals and emerging market FX, bonds and equities are going to outperform expectations in Q1-2 of 2014.

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Polemic
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January 28, 2014 at 3:18 PM ×

Thanks lb.. v good.

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abee crombie
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January 28, 2014 at 3:54 PM ×

Agreed CV. 4% isnt so much vs 30% year. TRY made a nice outside reversal, respecting that a little.

LB the point of stagnant wages was brought up by the Economist last week. To me it all comes down to skills and supply demand. Tax reform , better governing would help but education is the key, IMO and about the only thing I agree with Obama on.

Broad thought. Anyone a buyer of 10 year local rates in BRL/INR/TRY in double digits. Is it possible they ever get inflation under control. To me is smells of US in the 1980's but obviously with some caveats. any thoughts?

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Anonymous
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January 28, 2014 at 5:23 PM ×

LB,

You nailed it. Not bad for a rich guy.

Jay

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Anonymous
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January 28, 2014 at 6:56 PM ×

So relieved to see you back TMM.

Things in China on the ground are not good, guess you all know that.

People are talking that small fish in the sea of shadow banking are dying fast. A lot of talk about suicides and disappearances of many small shadow bankers.

But then , they are all rumors for now. The truth is that there are going to be several busts of trusts, investment funds, or small local banks/credit unions this year. We are just waiting for this to happen. My bet is after the annual legislative session in March.

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Anonymous
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January 28, 2014 at 9:12 PM ×

Anon 6:56,

"Things in China on the ground are not good.."

Yes, you are correct...

http://www.liveleak.com/view?i=cc8_1388660532

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CV
admin
January 28, 2014 at 10:22 PM ×

@ Abee ... surely the Indian 10y looks nice here with the new RBI governor's increasing credibility and Indian, generally, being out of the spotlight.

Or is this too risky still?

Claus

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Leftback
admin
January 28, 2014 at 11:31 PM ×

Gordon Bennett, TMM, Turkey did a 425 bp hike on overnight lending rate to 12% and benchmark repo to 10%. I'll have some of the hot sauce that bloke is having on his döner kebab, please.....

Blimey. Send me a plate of emerging market fixed income please, let's lock in some of these yields while they're hot. Might be a bit exciting in equity markets and take a day or two to settle down though. JPY is offered again all of a sudden, and we're happy that we slapped a few hedges on in US rates today.

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Polemic
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January 29, 2014 at 12:32 AM ×

Yes lb.. watching it closely. But doesn t it remind you of GBP 1992 when they threw rate rises around like confetti and then gave up?

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