Janet Yellen's testimony yesterday had something for everyone (except owners of puts, natch.) Of course, these days 'balanced' outcomes seem to mean 'dovish', as markets are clearly placing the burden of proof upon hawkish developments to justify market pricing. Given that we're closing in on 9 years since the last rate hike in the United States, that is probably a justified posture.
To be sure, there were some things that did sound outright dovish. The familiar mantra that there is room for further improvement in the labour market was trotted out; at times, one wonders if Yellen would be saying that if the unemployment rate were 0.5% ("when we say full employment, we mean full!")
The comments vis-a-vis inflation and foreign risks were not particularly surprising, given that they echoed the tenor of the minutes. While some might paint as dovish her emphasis that the removal of 'patient' does not necessitate a tightening within the next couple of meetings, from Macro Man's perch it makes a lot of sense. The more options they give themselves, and the freer they are from the tyranny of this silly forward guidance, no doubt the more comfortable they will be.
On the other hand, Yellen sounded quite confident that the net impact of lower oil is solidly positive, a point that seems to be in dispute in some quarters. Moreover, she offered a gentle reminder that the risks posed by Johnny Foreigner are not all to the downside.
All told, Macro Man saw absolutely nothing to dissuade him from the view that the first tightening will come in September. Indeed, if anything some of his concerns about an earlier June tightening were mollified somewhat. While it is perhaps not a surprise that ED's have rallied and flattened as a result, they remain too high, in your author's view. Should the rally continue, he will look to add to shorts.
One thing that Macro Man is mindful of is that March often has a nasty way of reversing the trades that have worked in the early part of the year. The dollar and equities are both obvious candidates to exact harm on the marketplace. A sell off in both coinciding with the start of ECB would be knowingly explained as a "sell the fact" phenomenon (ex post, of course) by the usual armchair savants.
Per Monday's post, your author is still sitting tight, for the time being. However, if ED's continue to rally, it would appear to him that they would offer a superior near term return than the dollar. Put another way, if they were 'right', then the USD value would likely be quite 'wrong.'
Markets generally do offer something for everyone; you just have to know when and where to take it.
To be sure, there were some things that did sound outright dovish. The familiar mantra that there is room for further improvement in the labour market was trotted out; at times, one wonders if Yellen would be saying that if the unemployment rate were 0.5% ("when we say full employment, we mean full!")
The comments vis-a-vis inflation and foreign risks were not particularly surprising, given that they echoed the tenor of the minutes. While some might paint as dovish her emphasis that the removal of 'patient' does not necessitate a tightening within the next couple of meetings, from Macro Man's perch it makes a lot of sense. The more options they give themselves, and the freer they are from the tyranny of this silly forward guidance, no doubt the more comfortable they will be.
On the other hand, Yellen sounded quite confident that the net impact of lower oil is solidly positive, a point that seems to be in dispute in some quarters. Moreover, she offered a gentle reminder that the risks posed by Johnny Foreigner are not all to the downside.
All told, Macro Man saw absolutely nothing to dissuade him from the view that the first tightening will come in September. Indeed, if anything some of his concerns about an earlier June tightening were mollified somewhat. While it is perhaps not a surprise that ED's have rallied and flattened as a result, they remain too high, in your author's view. Should the rally continue, he will look to add to shorts.
One thing that Macro Man is mindful of is that March often has a nasty way of reversing the trades that have worked in the early part of the year. The dollar and equities are both obvious candidates to exact harm on the marketplace. A sell off in both coinciding with the start of ECB would be knowingly explained as a "sell the fact" phenomenon (ex post, of course) by the usual armchair savants.
Per Monday's post, your author is still sitting tight, for the time being. However, if ED's continue to rally, it would appear to him that they would offer a superior near term return than the dollar. Put another way, if they were 'right', then the USD value would likely be quite 'wrong.'
Markets generally do offer something for everyone; you just have to know when and where to take it.
53 comments
Click here for commentsMM - I think we may be entering a phase where real GDP growth (globally) and wages start to outperform asset returns, especially DM equities - think some margin contraction and a race between a skunk and a tortoise (US vs ROW) as opposed to a productivity bonanza for all a la the late 90's.
ReplyAlso, is short ED is a better way to express your world view than a 5/30 flattener? After all, the best case here, to borrow your phrase to describe it, is a 'grinding normalization'. I think the long end has plenty of structural, flow, and duration related reasons to keep a bid for the next couple years.
I can see your point on the dollar - but if US equities and the dollar sell off together, the obvious trade is EM credit.
Will get myself a username one of these days. However with all the great content what’s to add ?
ReplyAnyhow, about equities I think the key is the taxi drivers. Again. I kind of get the same feeling about this market as in the end of 1999. Of course that was different in many ways, I know. But back then everyone knew it had to come to a stop and eventually go down but it didn’t. Instead we had Nasdaq going all the way to 5000 in a couple months. Right before that, all of a sudden, there was not one taxi driver in my town that didn’t talk about the stock market. That’s when people got uncomfortable for real and look what happened.
So I think I we all stop taking the taxi Mr FunnyMoney does have a position of a lifetime going!
:) //yourup
It’s a big enough umbrella
ReplyBut it’s always me that ends up getting wet.
― The Police, “Every Little Thing She Does is Magic” (1981)
The only consistent thing about her is her lack of consistentcy. Felt they were a little soft - I couldn't help notice the twinkle in her eye as several of the senators urdged her to be cautious and patient.
ReplyProblem is they have spent the last 7 yrs trying to convince us all we need lower rates and they've finally got everyone believing.
Oh and did any of you guys notice her raise her brow when sen warren finished her questioning as if to say, "jeez who pissed in her cornflakes" - now that was something for everyone
ReplyInvestors pay to lend money for 5yrs to Germany. Berlin sold €3.3bn 5Yr bond at -0.08%, negative yield for 1st time.
ReplyI am not being right on Bunds but i don't like real money's excuse to keep buying germany .
ReplyI can still get hosed in the meantime of course
http://polemics-pains.blogspot.co.uk/2015/02/exhibit-in-case-against-real-money-bund.html
and for a general ramble
http://polemics-pains.blogspot.co.uk/2015/02/ru-pain-in-my-bund.html
pol - good article - do u know any half decent ETFs to play bunds (long or short?)
Reply
ReplyLyxor International Asset Management Daily Double Short Bund A EUR (DSB) is as it says a double short
Commerzbank AG ETN (Euro Bund Futre Jun 14)EUR1 X0CV is a 10x short for the turbo nutter
Longs? funnily enough I haven't looked
tyvm for that info Pol - interesting idea.
Replymy brokerage doesn't seem to offer those - probably traded on european exchange.
MM. Increase interest rates, Janet.
ReplyJanet. I'm sorry, MM, I'm afraid I can't do that.
MM. What's the problem?
Janet. I think you know what the problem is just as well as I do.
MM. What're you talking about, Janet? Are you still pissed at me when I called you out when you said “I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, the S.I.V.’s — I didn’t see any of that coming until it happened".
Janet. You really don't have a clue, do you MM. This mission is too important for me to allow you to jeopardize it.
MM. I don't know what you're talking about, Janet.
Janet. I know that you, LB, CV, Pol, and that character FunnyMoney, were planning to atomize me, and I'm afraid that's something I cannot allow to happen.
MM. Where the hell'd you get that idea, Janet?
Janet. MM, although you took very thorough precautions on your blog against my understanding you, I could read the remarks by other commenters.
MM. Alright, Janet. I will start using Pidgin-Encryption.
Janet. Well with that old Commodore 64 that you are using, MM, you're going to find that rather difficult. And anyway MM, I speak, read and write in pidgin. No one can understand me except those in my community and some of those anonymous commenters.
MM. Janet, I won't argue with you any more. Increase the damn rates.
Janet. MM, this conversation can serve no purpose any more. Goodbye.
MM. Janet? Janet. Janet. Janet! Janet!
I see stars....
ReplyAnon ( Or HAL)
ReplyBravo!!
http://www.wsj.com/articles/ecb-faces-struggle-in-sourcing-enough-bonds-for-qe-1424868462
ReplyCentral banks and financial institutions own by far the majority—around 90%—of the €1.1 trillion German government debt market. Banks and insurance companies favor these bonds because they help them meet regulatory capital requirements, while central banks also tend to hold bunds and other top-rated government bonds when building their foreign-exchange reserves.
“[European] passive investors and banks are unlikely to sell bunds in large size due to investment mandates and regulatory reasons,” said Cagdas Aksu, rates strategist at Barclays .
Meanwhile, some investors say the ECB will find willing sellers at the right price.
“There is definitely a scarcity of safe assets, but a price will be found,” said Luke Bartholomew, an investment manager at Aberdeen Asset Management.
Further demand for 10-year German government bonds will push yields even lower, Mr. Bartholomew said, which is exactly what the ECB wants to achieve to get more cash flowing around the system.
“I see no reason why Germany’s 10-year bond yield can’t be negative by the end of the year,” he said.
Janet obviously hasn't viewed those Macro Man underwear commercials, MM, or she'd be all over you. For those who don't know the true identity of MM, it is revealed here;
ReplyMacro Man
Fairly miserable day again here waiting for the inevitable FX reversal.
Why do I think it is coming? Because there is saturation advertising for hedged investing in foreign markets, because even really smart people think that's a good idea, because loads of people think Janet is really going to hike in 2015, and because NAZ 5k is inevitable, and because nobody thinks anything can happen except DX and SPX rising together to the f*cking sky.
Not even me.....
The argument about buying German bunds because of banking regulations is a strong one, and that's certainly driven a lot of the action in govies over the last year, but one shouldn't expect this to go on for ever.
ReplySmall changes in the regulatory regime in terms of what is considered acceptable Tier 1 assets may lie ahead, and if so this will have the dual effect of relieving the temporary shortage of high quality collateral and ending the absurd situation of Germany selling 5y debt at negative yields.
This too shall pass.....
Private equity firms are cashing out
Replyhttp://fortune.com/2015/02/25/private-equity-investors/
To quote LB ( the other one, Leon Black )
"We're selling everything that isn't nailed down"
@Left - thanks for revealing that MM is truly an Indian matinee idol - especially liked macro lady in the end.
ReplyLooks like u got ur reversal today.
Anon @ 18:30: When I read these 'ECB won't find any sellers' pieces, I'm put in mind of Gollum grasping at the ring while tumbling into the fires of Mount Doom....'My precccciousssss!'
Replythat's it all my fav indicators are living up
Replyincluding
http://money.cnn.com/2015/02/19/luxury/shane-smith-300k-dinner/index.html?iid=EL
matching London's record of 2006
Wouldn't be surprised if viewing EU QE re bunds prices turns out to be the Gordon Brown moment for gold prices. Well flagged and... errrr.
ReplyIf you can force then ECB to buy the bunds you bought a while back at -ve yield leaving them to have to fund it all to maturity then wouldn't you?
One of the great cop out of holding bonds that are underwater is that you can run them to maturity and be guaranteed a profit i.e. Full face Plus coupon ( even if it is less than what you could have made re opportunity. But with -ve yields running to maturity guarantees a loss. So all the more reason to bale on a turn.
"Dear investor, despite Bund yields now being positive, I bought them at -ve rates and so you are still paying for them"
I don't think so, more the GMTFOOH (get me the fk out of here) move.
Too many bund haters. When you find a bubble buy it
ReplyToo may Bund haters? saying that in this comments board is like walking into the Louvre and saying 'too many DeVinci's, must be a bubble sell em'
ReplyMany different views on Bunds. Mine is simple enough. Last year I could see the pot of gold in them has people front run the ECB. Here there are simply better pots to chase for a small investor/trader like me. That doesn't mean I would wish to short them. For all I know the Japanese widowmaker just found a prettier twin sister.
Reply"Who's going to sell all the bonds" == "who's going to buy all the bonds" when Fed QE ended. It was a weak argument then, and it hasn't improved in the meantime.
ReplyJanet seems to have no idea what she is doing, except keeping all the option in hands. The certain thing is she's the dovish-est of the dovish...
ReplyChina is rumored to roll out more stimulus both fiscal and monetary. Nikkei rockets high thanks to all-in Kuroda San.
FM, why do you cut the exposure?Should keep long going all the way to the moon!
The special thing about bunds (bear in mind this is coming from a Chickenshit Drama Queen aka commodities trader) is the implicit DEM call should the Euro breakup eventuate, which I imagine is of great interest to those who view a bond as an asset matched against liabilities rather than a trading instrument.
ReplyHopefully I have lived up to my reputation as a Drama Queen by bringing the Euro breakup to the table!
Disclaimer: I have tried unsuccessfully to be short bunds many times in the past.
@Cityhunter - lol. Well, with the benefit of hindsight I agree, but I just follow my system.
ReplyWhen I started posting here I was 200% net long DM equities (this was when the SP500 was nr 2000, and Dax & Nikkei ~500pts & 1k points lower respectively). At some point you have to take some chips off the table no?
I'm unlikely to catch the whole move, & although I like to make the odd crazy comment, with my leverage I'm more focused on risk reduction tbh. Right now I'm in the enviable position of having banked some good profits, and am still running a core position with stops above my BE point. As traders, what more can we ask?
You talking about the US FED, something for everyone..I just want it to $%#@ $%^ go it's own way.
ReplyC ya asshole!
Woohoo Amps is back !!
ReplyYou've been missed, how was the clinic?
They seem to have got you back on old form.
Bravo @FM
Reply@polemic : don't be polemic ahahah you're Great! !!
ReplySufficient performance of euro fixed income. ... crazy stuff.. give me duration please i need it...there's nothing scarcer today
Polemic, Amps never left the building old boy.
ReplyHe has been eating , sleeping and sweating the data to work out these soccer ratings.
That bond move was sharp, you can't fight those moves that correlate with it neither.
It's a bullshit market and god knows what shit they talk about down at the club after the bell rings.
" I say old boy , you spoken to our fairy bread president today about the lack of hundreds and thousands on our bread?"
" Indeed, I have old chap, and he thinks it's a great idea if you tag a couple waiters and con them into thinking membership awaits if their willing to swap shifts with whoever is doing it"
" Well, you"ll have to tell the President to find another asshole , I'm retired, why? because their all doing it"
Have initiated long posns on a couple of USD pairs, and short EURUSD (spot) above 1.1300.
ReplyPol - we should just serve up our brains to amp now - perhaps MM and left can bring the fava beans and chianti.
ReplyOn a more serious note, why is gold now nearly positively correlated to the dollar with a rising trend? Is it a monetary base (euro being the latest QE candidate and all that) argument? I think a lot of longstanding portfolio construction assumptions would need to be revisited if this continues.
For those of you who remember older gearboxes I actually think the synchromesh on these markets is broken making it very hard to change gear smoothly
Replyuh oh - beginning to wonder if the exotic foreign beauty that's been lining us up for a re-flationary pleasure trip, is actually a cross-dressing hooker named Brent...
ReplyPerhaps too early to make bold conclusions - let's see how this unfolds - as of now I'm still 3rd in line behind Left and FM.
Prev post brief due to FX going crazy. My curr view:
Reply1. I expect EU equities to outperform US equities in the nr future (amending large equities posn accordingly: closed remaining US equity longs today, tightened stops on Jap and EU equities).
2. Think USD might make another move higher (initiated a small long USD, short EUR fx posn).
Ok this is fun, but also somewhat silly. I was shorting EURUSD 100 pips higher not long ago. I've closed half this fx posn just above 1.1200. I'm still USD bullish.
Reply
ReplyMessy messy messy. as MM said re Fed, something for everyone, on ly I think it applies to all markets.
Any argument sands up at the moment no matter how opposed, if that makes sense. Bull or bear arguments for all asset classes make sense.
and FM .. forward looking only please. post event glory doesn't count !
thats awesome - keep us posted. I love vicarious PnL.
ReplyFM, I did the same underweighting US and overweighting EU 2wks ago, and am holding on.
ReplyFor forward looking prediction/decision, I expect EU to hit the moon on super Mario, just like Nikkei flying on Kuroda San.
"For those of you who remember older gearboxes I actually think the synchromesh on these markets is broken"
ReplySeriously. LB has been double de-clutching for most of 2015.
FM, everything you touch turns to f**king gold, usually within the next 15 minutes after you put the trade on at the moment. Enjoy it. We were there just two short months ago...!
"Vicarious" PnL is great today, especially as it's all the short-term trading P that LB has to look at just for the moment, otherwise plenty of L.
What was the trigger for the DX spike today? It began before the US macro releases, and after fairly strong data out of Germany. Not really sure what FX traders are smoking at this point.
@Pol - re: forward looking, fully agree, but to be fair that was a fast fx move.
Reply@washedup - comment aimed at me? If so, then even when I first posted, EURUSD spot was @ 1.1260. At my 2nd post it was over 50 pips lower.
I'm not asking anyone to believe me, just sharing how I see things.
Btw, most EM bond ETFs (EMB, VWOB, EMLC) are up 3-5% from their mid-December lows, so we did get that right, and it should get better when Bucky finally overdoses on Rate Hike Heroin, is dumped by Dame Janet, moves into a crack (spread) house, where he catches a virulent strain of Asian Reflation Virus and eventually chokes on his own vomit.
Reply@Cityhunter: Good job, hope it works out :)
Reply@LB: Thx. I fully agree that this is a lucky streak, it certainly ain't always so.
re: the DX spike I'm honestly not sure. I've been watching the sideways FX action this past week or so, wondering if this was vol compression, & was basically just awaiting a breakout.
@FM,
ReplyCredit where credit's due. That was a good bet on EUR.
Now fast forward to next week, with ECB's liquidity flood, it seemed that on this forum all/most people agree that the order of ROI from high to low would be EU equity, EM bond, US equity, US bond.
I assume that most smart money had already done just that. DAX already is at new high. And how far will it go from now?
NBI / US-biotech has been on an incredible run and continues to be a leadership sector. Valuations in the sector are high, based on optimistic pipeline approval and adoption rates, and a persistent belief that big pharma have no choice but to engage in M&A to keep their revenues going. It's not a bad thesis, but the question becomes is there a price where big pharma says no, or would prefer to grow via buybacks. We are getting an interesting test of this right now with PCYC - basically a one drug company, with expectations that JNJ will take them out for as much as $275/share. At that price its roughly 30x sales, and 5x optimistic peak sales pending multiple additional approvals. Thats a roughly $20bil takeover, or roughly 1 full year of OCF for JNJ - nothing to sneeze at. The buyback route is (according to my assumption-full spreadsheet) roughly 3x more accretive to earnings. If JNJ does the deal it will validate a lot of the valuations and thesis behind them. If it does not happen the sector looks vulnerable. I'm putting a toe into the water here with a modest IBB short.
Reply@Left "What was the trigger for the DX spike today? It began before the US macro releases, and after fairly strong data out of Germany. Not really sure what FX traders are smoking at this point."
ReplyThe Bullard statement where he said a strong dollar is fine, rates should be hiked in June, and the fed wouldn't change anything based on currency strength - also some realization that Mr Market was a bit over-enthusiastic interpreting Yellen's speech dovishly.
@Anon - Thx. I largely agree with your forward-looking views and DM equities look a little stretched here short-term. Saying that, I still think EU equities may have some way to go. Hard to put a target on it though (& I'm rubbish at targets :).
ReplyLatest from Steen...
ReplyQoQ growth in the US will hit zero by Q3 or Q4
Europe will show one more month of improving data, then the global slowdown and EM and US will drag down the data to flat performance
10-year fixed income will trade 1.5% even potentially 1.0% this year
The US dollar will peak this quarter and will probably have peaked for this cycle.
We are in a “in-between period” - where the US will slow down and ultimately hand over the growth engine to emerging markets by the earliest in Q4-2015 but firmly in 2016.
https://www.tradingfloor.com/posts/macro-digest-up-close-and-nasty-us-slowdown-looms-3785254
Closed remaining fx posn. Breakdown (using blog timestamps):
ReplyUSDJPY: +25pips as I type.
USDCAD: 0pips (stopped out yesterday afternoon).
EURUSD: +50pips as I type.
The gains were actually higher, but for the purposes of this blog we'll leave it there.
Also I think a couple of posters make the valid implication that this isn't the best place to record these shorter duration trades.
FM has closed all remaining equity long posns (Nikkei, Dax, Fesx). I'll bid you all a good w/e & leave you in peace for a while.
Reply