On the off-chance that anyone needed any confirmation about what kind of market we are in, Friday provided ample evidence. The data was somewhat schizophrenic- depending on which row you looked at, job growth in April was either 288,000 or -73,000. Of course, markets initially traded on the headline payroll and unemployment numbers, both of which were spectacular.
Contrary to Macro Man's nagging feeling, however, markets did not feel compelled to chase previously favoured themes. If anything, the contrary held true, as price action suggested that punters used the favourable move in the dollar and Treasuries to trim longs and shorts, respectively. Now, Macro Man does not actually know if that is what happened...but the fact that markets did not seize the bit was telling.
This is not a good environment to take risk.
If someone had told you early Friday morning that payroll growth for April would register 288k (higher than all but one forecast in the Bloomberg panel), and that the unemployment rate would print 6.3% (and not that far off 6.2%!), would you have expected 10 year yields to be 3 bps lower on the day? For the DXY and equities to be close to unchanged?
The chances are that most people would answer "no" to that question. It is also the case that most people would provide the same answer to the question "are you having a good year so far?"
On the basis of Friday's price action, it certainly seems as if the appetite to warehouse risk is exceptionally limit in the macro community. In a world of abundant non-correlated opportunities, that wouldn't be such a big deal- you'd merely need to find something that few others were in and let the trade work. However, in the current environment of relatively few truly independent thematic trades, the upshot is that themes can get crowded relatively quickly. If you are operating on a similar time horizon or risk threshold to most other punters, the trick then becomes to be one of the first out the door once the music stops, lest you get left holding the bag (if one would permit a horribly mixed metaphor.) This in turn encourages a rapid exodus of positions, which renders fears of a correction a self-fulfilling prophecy...
As a friend pointed out last week, markets tend to be more disposed to maintain or add risk in the face of adverse price action in Q1 and Q4, when they are trying to build positions or make their year. In Q2 and Q3, seasonally weak periods for beta, the willingness and wherewithal to ride nasty price action is relatively sparse.
For better or for worse, that's the environment we're in. It doesn't mean that there are no trades out there, simply that one has to find a way to participate (if one is so inclined) without getting chopped to bits. As much as one might wish that today's UK bank holiday would persist to St. Leger's Day, the reality is that we're just entering the tricky period. Don't fret, however. There are always worse environments....
Contrary to Macro Man's nagging feeling, however, markets did not feel compelled to chase previously favoured themes. If anything, the contrary held true, as price action suggested that punters used the favourable move in the dollar and Treasuries to trim longs and shorts, respectively. Now, Macro Man does not actually know if that is what happened...but the fact that markets did not seize the bit was telling.
This is not a good environment to take risk.
If someone had told you early Friday morning that payroll growth for April would register 288k (higher than all but one forecast in the Bloomberg panel), and that the unemployment rate would print 6.3% (and not that far off 6.2%!), would you have expected 10 year yields to be 3 bps lower on the day? For the DXY and equities to be close to unchanged?
The chances are that most people would answer "no" to that question. It is also the case that most people would provide the same answer to the question "are you having a good year so far?"
On the basis of Friday's price action, it certainly seems as if the appetite to warehouse risk is exceptionally limit in the macro community. In a world of abundant non-correlated opportunities, that wouldn't be such a big deal- you'd merely need to find something that few others were in and let the trade work. However, in the current environment of relatively few truly independent thematic trades, the upshot is that themes can get crowded relatively quickly. If you are operating on a similar time horizon or risk threshold to most other punters, the trick then becomes to be one of the first out the door once the music stops, lest you get left holding the bag (if one would permit a horribly mixed metaphor.) This in turn encourages a rapid exodus of positions, which renders fears of a correction a self-fulfilling prophecy...
As a friend pointed out last week, markets tend to be more disposed to maintain or add risk in the face of adverse price action in Q1 and Q4, when they are trying to build positions or make their year. In Q2 and Q3, seasonally weak periods for beta, the willingness and wherewithal to ride nasty price action is relatively sparse.
For better or for worse, that's the environment we're in. It doesn't mean that there are no trades out there, simply that one has to find a way to participate (if one is so inclined) without getting chopped to bits. As much as one might wish that today's UK bank holiday would persist to St. Leger's Day, the reality is that we're just entering the tricky period. Don't fret, however. There are always worse environments....
1 comments:
Click here for commentsThe bloomy has a new function RRG, which shows quite nicely the churn in equity markets. Outperforming has been your defensives (staples, telecom & utilities) along with oil and materials. Small caps hit taking it on the chin as well. I dont think many would see S&P hitting new highs with those sectors leading as a great sign.
The curve is flatenning, equities are playing defensive and LT yields are falling. Perhaps the market is saying something, or perhaps you just buy the dip and wait for a Grantham blow off top at 2250 (see latest GMO letter).
On a side note, I feel as if macro trading will diverge into a few paths as interest rates continue to be centrally planned. 1) Traditional rates players move out of G7 and into EM to play for more moves. But EM CBs are not for the faint of heart 2) Growth oriented macro players will increasingly use ETFs and play sectors in equities 4) Intramarket specialists will be culled but those who manage to survive will see the next big bug on the window before most