How Bad Is It?

Macro Man has had the decorators in, and they've tarted the place up a bit.  He reckons it looks a bit cleaner, and it should be a bit easier to scroll through recent posts.  The old template had been in place since 2008, a geologic age in Internet time and so long ago that the iPhone looked like this.   Any feedback on the new look, positive and negative, would be welcomed. 

That your author has had the time to fiddle with website templates and XML tells you everything you need to know about recent market price action.   As discussed on Friday, Macro Man was of two minds vis-a-vis equities, and thus far the decision to follow the original plan and cut risk looks to have been a good one.

More broadly, however, there appears to be an unusually paltry opportunity set, at least in terms of attractive major-market set ups.   At the same time, this week offers a menu of potentially important event risks of the type that can produce sustainable (in the short run, at least)  market gaps that have also been somewhat difficult to forecast.   Finally, and perhaps most importantly, risk appetite must be exceptionally low at the moment, with macro suffering since the bell rang on  January 2nd and many equity strategies getting carved up over the last six weeks or so.

How bad is it?   As of the time of writing, the 2 week realized vol in EUR/USD is 2.64%, the lowest in history since a few days in (gulp) May-July 2007.

Putting it another way, the range over the last 2 weeks has been 80 pips- and that's come in the context of a re-escalation of the Ukraine crisis and a full court press from the ECB commenting on the unhelpful strength of the currency.  Bull or bear, that's not a lot of meat on the bone, even for the most Micro of Men.

If EUR/USD cannot break out of its lethargy after Wednesday's CPI/Fed and Friday's payroll....well, then it may well be a very long summer indeed.

What about rates?  As noted in posts from a few weeks ago, Macro Man is keying on EDZ5 as a fixed income lynchpin, given that it is a "dot month" and should capture the first rate hike, barring an even larger dose of castor oil financial repression from the Fed.  Unfortunately, there's not exactly a great set-up, with the contract stuck bang in the middle of the year's range.

The problem with layering fresh risk at these levels is, of course, that payrolls could easily move the contract a dozen ticks in either direction in more or less a gap- and if you happen to be on the wrong side of the number, good luck and God speed.  One of the reasons that Macro Man prefers futures flies and call ladders to outrights in the futures is that these positions are a lot easier to hold over gappy economic data than the latter.

None of this is to say that that there are literally no good trades out there, of course- you just might need to go a little off piste to find them.  What it does say, however, is that it's probably a bit unrealistic to expect risk appetite to recover in the short run when bellwether assets don't offer much and the strasse finds itself in a bit of a P/L sinkhole.  It's not the worst situation in the world....but it's still pretty bad.