It's de-risking, it's destruction, it's de pensions?

Plus ca change, plus c'est la meme chose.   Although this year has not started identically to last- the generally solid performance of the dollar being a notable exception- there are nevertheless striking similarities.  

One need not have the memory of an elephant to recall that 2014 started with all of December 2013's popular trades inserted into a blender, popped into a scalding hot bath, and having a plugged-in toaster thrown in to boot.  Generally, this entailed weaker equities, stronger fixed income, a stronger yen, and a weaker USD.  Other than the last, each of these sequences has repeated itself thus far in 2015, albeit in a miniscule sample size.

Of course, the set-up wasn't exactly identical.   Punters ended 2013 enthusiastically short US fixed income, whereas natural selection weeded out bears who didnt learn how to hibernate in 2014.  Interestingly, the squeeze in the long bond has been much more pronounced thus far in 2015, despite the apparent absence of out-of-court positioning.



A similar phenomenon is observable in equity markets.   Macro Man's recollection was that stocks stumbled hard out of the gate last year.   While it's true that they fell from the word go and didn't get back above flat on the year til the end of February, the early swoon we've seen thus far is much worse than we had last year, even including yesterday's tasty squeeze.



It makes little sense to posit a conventional de-risking phase as an explanatory variable, as that sort of activity would be more likely in December than January.  The ongoing destruction in the crude market and the concomitant collapse in inflation expectations compensation could be a valid explanation, given that lower headline inflation could credibly depress yields while carnage in the energy high yield market could submarine equity performance, if only temporarily.

That having been said, the magnitude of the moves begs for a deeper explanation.  Widespread reports of abject illiquidity in markets suggest that it doesn't actually take a lot of size to push the price around.  If this is what the alphabet soup of regulators want, then they can say their huzzahs, because they've got it.  Just don't come crying to Dr. Market when the wind changes (if it ever does!) and the direction and price moves are not to your satisfaction.

From Macro Man's perch, which admittedly is one not particularly close to the flow, the price action smells strongly of pension rebalancing.   Certainly those institutions were at the epicenter of the bonds up/stocks down trend in early 2014, and it stands to reason that they could be repeating the exercise this year- even if the relative price moves of 2014 were nowhere near as large as 2015.

In reality, it's probably a mixture of a number of the above mentioned factors- oil, illiquidity, and pensions.  If that's true, then we can probably expect the trend to continue a while longer, possibly irrespective of what payrolls do on Friday.

De-risking, destruction, de pensions- punters probably won't care as long as they can avoid the dee-saster of early 2014 this time around.
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Nico G
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January 8, 2015 at 8:33 AM ×

MM thanks for your (ever) right words on Charlie

i am not sure the buyback activity will be as virulent this year as in the past two. That too is a spoo-ky consideration.

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Nick
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January 8, 2015 at 9:18 AM ×

I wonder how much of the selling is coming from countries affected by lower oil prices such as Saudi and Russia. Could central and other banks be selling to raise liquidity ?



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January 8, 2015 at 10:24 AM ×

Nobody wants euro anymore. ..is draghi riskying a rublè parallelism?

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Polemic
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January 8, 2015 at 11:01 AM ×

Collapsing energy prices , fallen currency, potential to patch things up with Russia ( and yes, I do see this as being a big part of the confidence problem in Europe), Greece not sinking EU ( no, it won't), Merkel being a genius diplomat just under the surface ( UK hopefully taking lessons) all lead me to think that the growth data we are seeing is lagging some immediate or upcoming positives.

So we may well be ready to see some positives that will feed through but we are at a lagging dip right now which the ECB sees as a reason to throw in a QE stimulus bomb. Which is like chucking a firework in the petrol store because it feels a bit cold in there.

So basically all the reasons to sell europe are indeed negative but they are only just negative and all could rise together.

Interestingly the positive side effect of the horrendous Charlie event is that I don't think I have seen Europe so unified in oneness.

Watch this space on Europe.

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Anonymous
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January 8, 2015 at 2:23 PM ×

The FCO Cockpit – Global Bubble Status Report

http://www.er.ethz.ch/fco/FCO_Cockpit_January1st_2015.pdf

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Anonymous
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January 8, 2015 at 2:34 PM ×

A most dangerous man..Soros urges giving Ukraine $50bn of aid http://reut.rs/1s7YD3v

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Anonymous
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January 8, 2015 at 4:12 PM ×

De-pressing...

Lots of talk about Danish pension gntees coming into play with 30y € swaps where they were / are and being short gamma (I assume thats what u refer to), nevertheless 20bp range in 1030s implies some serious stops but that flow wasnt seen as much as the subsequent fades. Puzzlement continues, I suppose it's important to remember that the opening salvos do not the trend of a year make.

Personally looking for some June FOMC action in EDM5 95/93 PS & BoE to come somewhere before sep (L M5/U5 at 6 is practically a free option). My 2c.

Everyone looking at AUDNZD in fx land, tough to call that one...

Cheers MM
JL

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washedup
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January 8, 2015 at 4:18 PM ×

bailing out of all spoo length - been a nice 60 point ride (H/T to Left for raising the green flag on that), but thinking greed is patently not good when you are renting a rally without wanting to own it.
Also, since when are 10 day 150 point roundtrips in equities a sign of impending, calm, stability, and blue skies for equity bulls?

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Anonymous
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January 8, 2015 at 4:22 PM ×

@JL, could you please elaborate a little bit more on AUDNZD?

thx

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Mr. T
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January 8, 2015 at 4:24 PM ×

Another fed minutes, another fed cheerleader, another head snapping rally. Fully aware that humans (even traders!) can see patterns where there are none, this one sure seems to be painfully obvious.

The theme of dot-plot-revision driving risk-on is playing out. I'm going to take it a step further and suggest that the higher-dot fed heads don't believe their forecasts and see downward revisions as a form of cutting in a non-QE ZIRP environment. Frankly, for a fed that seems so concerned about consensus there is an awful lot of data and meaningful comments being dropped by individual heads (presumably without consensus and approval from the rest).

If MM is trying to understand market actions from fundamental, asset-allocation factors I think its going to be a long road. It's cliche, but all that matters now (at least for instruments mentioned in the post) is CB liquidity, expectations of future CB liquidity, and expectations of expectations of CB liquidity.

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washedup
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January 8, 2015 at 4:45 PM ×

T - u hit the nail on the head - clearly still all about CB's - just like everything else though faith in CB's runs in cycles too. The timeline is probably longer than punters like u and me have patience (or capital!) for, but there is one. No idea when this one (I would argue it has been in place since 1984 with Volcker's success the inflection point) will end.

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abee crombie
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January 8, 2015 at 5:27 PM ×

washedup

I am hedging the book a little here. I dont like the feeling. I didnt feel we got a capitulation and I dont like the snap back. call it gut. If I am wrong, let nasdaq make new highs.

Defensives rallying too much for me here, WMT, IYR, Low Beta ETF (SPLV) etc.

Good to see Bund finally sell off for a bit and FX seems tame, so perhaps I am wrong. But i dont mind taking some chips off the table here.

HY is getting interesting but that is still the place to watch. Its not bouncing vigorously and at some point that divergence is gonna come back to haunt

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Anonymous
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January 8, 2015 at 6:34 PM ×

Hi Anon,

Lets just say there are a lot of smelly fingers out there.

Fundamentally many think its an obvious call to go long with diary prices having topped out and the aud taken a massive banging already, but I'm not so sure...

Hope that helps a bit...
JL

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Leftback
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January 8, 2015 at 8:12 PM ×

mr T said: "The theme of dot-plot-revision driving risk-on is playing out. I'm going to take it a step further and suggest that the higher-dot fed heads don't believe their forecasts and see downward revisions as a form of cutting in a non-QE ZIRP environment"

Oh, that is good, very very good, c'est magnifique, Monsieur T. Says it all - and it would have taken me paragraphs of banging on to express it far less elegantly. Bravo.

Still, we didn't half nail that call on the short-term top in bonds and the ensuing vol selling rally, innit? We would hazard to suggest that tomorrow's NFP will be of the Goldilocks variety and that any of the Three Bears who get short ahead of that will likely be rear-ended in spectacular fashion. This one will run on a few days more, at least until volatility has been thoroughly crushed once again.

A new twist in the tail tomorrow might be a slight weakening of Buckaroo Banzai's surge, and EMs > DMs, Stoxx > Spoos as the commodity battering is relieved for a day at least.

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Leftback
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January 8, 2015 at 8:13 PM ×

MM, my Cambridge education suggested that the spelling is "minuscule", and the OED agrees with me. I once got this word wrong in Mrs Parker's class at St Luke's (I thought she said mini-skirt) and got the ruler on my knuckles. It's a good thing she's not running the FOMC....

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Anony
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January 8, 2015 at 8:27 PM ×

LB.."Mrs Parker's class"..lol

I was called all sorts of names at another blog..because an old fart didn't agree with my view point;-(

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macrogoldman
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January 8, 2015 at 9:06 PM ×

has anyone kept up with the SPX performance over the past 3 years? up 60% with no real pain. Lesson don't fight QE (at least in the early stages) however lets be honest no one has experience with QE or negative rates--still me thinks best to go early and go big with QE--could the ECB turn be like buying the last leisure suit in 1974?

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macrogoldman
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January 8, 2015 at 9:07 PM ×

has anyone kept up with the SPX performance over the past 3 years? up 60% with no real pain. Lesson don't fight QE (at least in the early stages) however lets be honest no one has experience with QE or negative rates--still me thinks best to go early and go big with QE--could the ECB turn be like buying the last leisure suit in 1974?

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washedup
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January 8, 2015 at 10:05 PM ×

@macrogoldman Depends on what u think the purpose of QE is - its only about asset inflation leading to feel good animal spirits leading to more aggregate demand being brought forward from the future plus currency weakening to fight deflation risks while technology and demographics work slog economies out of the leverage hole over time - don't see why ECB wouldn't have as good a shot as the other clowns who have tried this.
The real issue will be when the Fed realizes that a strong dollar means the other CBs are eating its lunch - OK for rt now (hence the tacit encouragement to foreign CBs to try QE per the minutes released yday) but if theres a hiccup in the US, boy is it a race to the bottom - not sure if there are any winners in that situation, although I know some goldbugs who have rather strong opinions on the subject.
I honestly think EVERY OECD CB plus PBoC will be engaged in full-blown QE in a couple of years.

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Leftback
admin
January 8, 2015 at 10:06 PM ×

Another soupçon of linguistic editing - plus ça change! OK, I'm going back in my box.

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Polemic
admin
January 8, 2015 at 10:19 PM ×

Ok you disasternistas.

you can talk about Fed/ ECB , money etc but you really should listen to this. middle east state from an insider.

http://www.bbc.co.uk/programmes/b04wwqcp

fascinatingly depressingly worrying

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Anonymous
admin
January 9, 2015 at 12:33 AM ×

Pol

“Our strategy is…shaped by a deeper understanding of al Qaeda’s goals, strategy, and tactics,” Brennan claimed. “I’m not talking about al Qaeda’s grandiose vision of global domination through a violent Islamic caliphate. That vision is absurd, and we are not going to organize our counterterrorism policies against a feckless delusion that is never going to happen. We are not going to elevate these thugs and their murderous aspirations into something larger than they are.”

June 29, 2011, John Brennan, who was then a senior adviser to the president and is the current CIA director

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Polemic
admin
January 9, 2015 at 12:40 AM ×

How absolutely even more terrifying..

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Macro Man
admin
January 9, 2015 at 12:59 AM ×

LB, in sympathy with Charlie Hebdo should we institute a Private Eye-style "Pedantry Corner" of the comments section?

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Anonymous
admin
January 9, 2015 at 10:56 AM ×

C Says,
The ultimate 'total state'. Indeed, has the Catholic Inquisition been reinvented under the Islamic flag? The sense of irony doesn't escape me. At he heart of it is the old 'if you don't agree with me I will make you agree with me'.
At the risk of giving offence the sooner Islam follows other religions into the toilet the better. Dogmatic extremeism usually before to education ,but it's slow to happen.

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