Holy Whiplash, Batman!

Holmes and Watson have repaired to Baker Street for a well-earned break, leaving Macro Man to confront the rather more prosaic task of making sense of this week's price action.  With school holidays on either side of the Atlantic and Easter coming this weekend, it's probably safe to say that neither staffing levels nor market liquidity are particularly high at the moment.

Even with that qualification, Tuesday's price action was a little crazy.   The data, such as it were, was generally negative for liquidity (and therefore risk assets): a higher CPI and somewhat weaker Empire do not exactly scream "buy stocks!" do they, particularly when equities (and equity managers) have been on the back foot recently.   Yet buy stocks they did, at least until negative headlines about Ukraine hit the tape.

Now, at his old job Macro Man had a large placard taped to one of his monitors, imploring him "DO NOT TRADE ON HEADLINES."  There is a reason for this.    While the unraveling of eastern Ukraine is certainly a serious matter, as indeed is Russian intransigence, in February we learned that if Americans cannot find a place on the map, it doesn't matter.  And so sometime after lunch, the market came to its senses and rallied back through the intra-day highs.




All of this is one explanation for yesterday's price action.

An alternative, possibly more accurate, explanation is that this week is option expiry week, cash equities are closed on (Good) Friday, and there is a pretty decent slug of open interest in the 1825 strike (25,000 calls and 47,000 puts.)   Assuming that dealers are short this stuff, that's a lot of negative gamma to be hedging as Spooz cross the strike over...and over....and over again.   On an exclusive basis, Macro Man has procured some video footage of this hedging activity from yesterday:




Holy whiplash, Batman!

Not that other assets were immune.  Gold took a precipitous drop after breaking the 200 day, stopping just before the lows of early this month, before retracing to end the New York day just north of 1300.  For longs expecting a Ukraine-related boost, it must have felt a bit like hanging out with Kenny Bania.


Media reports suggest that Janet Yellen made a daring escape from Holloway Castle yesterday and has absconded back to the US, where she will today make a speech to the Economic Club of New York.  Time will tell if she is still in the service of the Professor or whether she has made a break from his nefarious schemes.  Going back to the SPX for a moment, one thing that caught Macro Man's eye in yesterday's tumult was the fact that yesterday's price action broke above last week's low, ensuring that the down trade is a 3 wave, corrective affair.  While it certainly doesn't jive with your author's base case view of weakness next month, it would certainly be consistent with the notion that Woodford still has his tentacles wrapped around monetary policy (i.e., a dovish speech tomorrow.)



Elsewhere, New Zealand's CPI printed a lower than expected 1.5% in Q1.  It seems highly dubious that this will dissuade Governor Wheeler from continuing to hike rates, though of course it does raise the odd question or two about the ultimate magnitude of the cycle.   To Macro Man's eye, AUD/NZD looks to have formed rather a nice bottom and has conclusively closed above the 100 day moving average for the first time in a year (when it was at 1.25.)   He will leave it to the reader (with the aid of Holmes, perhaps?) to explain why a level of CPI consistent with a tightening cycle in New Zealand requires angst and hand-wringing in the United States...
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Angus
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April 16, 2014 at 7:36 AM × This comment has been removed by the author.
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Anonymous
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April 16, 2014 at 8:14 AM ×

Good to have you back. The acerbic cogency of your thoughts always a delight. Agree on Ukraine. Steinmeier and the SPD are Russophile and will never allow sanctions to harm the bottom line. The interesting issue here is whether Poland and the other CEE plays now warrant a higher risk premium.

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Anonymous
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April 16, 2014 at 8:23 AM ×

C says,
"a higher CPI and somewhat weaker Empire do not exactly scream "buy stocks!" do they"
No, but covering short positions especially leading into a bank holiday weekend within the context of earnings season does.
Positions have also been so concentrated that some of those moves this year can go 10% either way so whiplash has been getting more painful than in years gone by.

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amplitudeinthehouse
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April 16, 2014 at 10:41 AM ×

"a lot of negative gamma to be hedging "

Of course it's hedging, when you have one of the best QE programs in your corner wouldn't you? but it won't be around forever my friend! I only hope I'm there when it's gone.

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Anonymous
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April 16, 2014 at 12:48 PM ×

C Says
I'm looking at Betty buck with morbid fascination ,because for Sherlock this could just be up there with Hound of the Bernanke's. With what's in front of us over the next 12 months you would have to say who want's Betty which might explain why those little beauties at IG Index are over 70% short, but don't we just think they are likely to be wrong? Trouble is at this level if being wrong causes upside covering then as unlikely as it may be there doesn't look like a lot of sideways resistance this side of 2 Bucks to a Betty. Now that would be a pain trade in more ways than one. More so as I am damned if I can see the fundamentals for it. Janet ,oh Janet where's "Currency for Dummies" kept.

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Macro Man
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April 16, 2014 at 12:57 PM ×

"Currency for Dummies?" Why, we keep a copy in the Department of Tautology, guv'nor!

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wcw
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April 16, 2014 at 3:35 PM ×

The first rule of tautology club is the first rule of tautology club.

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