What now?

It's times like these that Macro Man really misses his Bloomberg account.  Not so much for the news- life without the "red headline" is just fine, thank you very much- but more so for the charts (in terms of the breadth of chartable instruments) and especially the downloadable data.  Unfortunately, the kinds of ad hoc studies and indicators that have generally made this place so much fun to write (and hopefully to read) are just not possible without having reams of data close at hand.

Nevertheless, it is still possible to comment upon the doings of the financial world, even if it's from a more detached perspective than your author would prefer.  Indeed, a somewhat detached perspective allows one to maintain a sense of equilibrium when it seems others may be losing theirs.  The current environment may be just such a case, if some of the missives that Macro Man's received are any indication.

What do we know?

* The SPX has broken a 2 year uptrend line and breached the 200 day moving average for the first time in a couple of years.

By an amazing coincidence, the Federal Reserve is about to stop purchasing assets for the first time in a couple of years.  In the QE era, there has been a very strong inverse relationship between the degree of policy accommodation and the level of equity vol.  As such, from Macro Man's perspective, the current "collapse" merely represents a normalization in the Sharpe ratio for holding equities, credit, other risky assets etc.

* The Fed reacts asymmetrically when the newsflow turns somewhat negative.  Dodgy growth in Europe, Ebola, a strong dollar....pick a card, any card why hikes need to be priced out.   This is hardly a new development, however, and recall that a couple of the notable hawks will feature on the committee next year.

One of the reasons that the last few years have been challenging for global macro investors is that key assets haven't really gone anywhere, oscillating within ranges that sometimes are broad and sometimes aren't.   One of the key features of this environment has been that central banks have tended to "push things to the middle."   CBs have tended to lean against price extremes in markets, most notably against overtly hawkish developments in monetary pricing and "undue" weakness in risky assets.

EDZ5 is now at (actually, slightly though) the top of its yearly range.   Macro Man's call to fade strength late last week was clearly premature.  That being said, key Federales have kept singing from the "mid-2015" hymn sheet; even if that's proven incorrect and rates don't move til September of next year (Macro Man's base case), pricing LIBOR at just 80 bps for the end of next year looks low.

* FX corrections are painful.   Industry performance reports suggest that macro is fully engaged with the long dollar trade (as forecast here!), and the research-sphere was awash with "OMG Record $ length on CME" emails over the weekend.  Let's leave aside the fact that the CME captures CTAs, not "macro"; they may overlap in the Venn  diagram, but they aren't the same thing.  CTAs don't care that their Twitter feeds are going haywire with panic or that the Ebola headlines are pretty scary.   They push the button and do what the model tells them.

Now, an uptick in market or portfolio level volatility may encourage some position reduction to  maintain a constant level of portfolio level VaR.  But the meat of the $40 someodd billion dollar long won't be cut until the main signal turns.   By Macro Man's read, we're still a ways away from that.

Which leaves discretionary macro.   USD/JPY has fallen 3% from its peak and looks more offered than glossy photos of Roseanne Barr in a leopardskin bikini.  The euro has corrected by about 2%, but somehow feels like it's less than that.  This probably tells you where the positioning was (and still is?)  Early returns for the industry this month have not been encouraging; one can only assume that they have deteriorated further over the last couple of days as a flock of flamingos takes flight.

Having crossed the proverbial P/L Sahara for much of this year before finding an oasis in August/September, it seems unlikely that punters will wish to venture forth once more with only a thimbleful of water.   In other words, the impulse to protect what gains remain in the tank will be very strong indeed.

From Macro Man's perch, this is not 2000, 2007, or any similar market-topping analogue.   While there has been some financial excess, there is nothing like the kind of real economy excess to produce a proper meltdown/recession.  As noted above, what we are observing is the start of a normalized volatility regime, at least in certain segments of financial markets.  If anything, the proper historical analogue for next year will be 1994 or 2004- two years when stocks kind of scuffled as monetary policy was tightened for the first time in several years.  (For fun, look what happened to USD/JPY on Valentine's Day 1994.)

While your author is not yet dipping his toe into equities to re-engage, nor is he selling any more at these levels.  Standing pat might be a luxury that professional longs don't enjoy...but it's one that he's going to exploit while he can.