Apologies for the radio silence over the last few days, but Macro Man hasn't really got a lot to say. Illiquid market churn is not "macro"; your author has historically performed best while looking through the noise, so that's what he's trying to do at the moment.
One interesting observation is that this little correction in EUR/USD, some 6 big figures peak to trough, represents the largest retracement of the entire downdraft off of the peak. Classic Fibonacci retracement levels remain quite far away.
That the Fed now feels comfortable talking about the dollar is certainly interesting to note, though at this juncture Macro Man remains of the view that they view it as an input to the decision-making process rather than a policy goal in and of itself. Nevertheless, he will keep a close eye on both the data and the rhetoric; it may end up being the case that either the dollar trade or the rates trade will work, but not both.
In fairness, that's been the story of the year so far; the only reason that Macro Man had both working was his spectacular entry points on his eurodollar trades. Of course, the future matters more than the past, so at some point a hard decision may have to be taken. At this juncture, however, he has the luxury of time to watch and wait...so for the time being, that's what he intends to do.
One interesting observation is that this little correction in EUR/USD, some 6 big figures peak to trough, represents the largest retracement of the entire downdraft off of the peak. Classic Fibonacci retracement levels remain quite far away.
That the Fed now feels comfortable talking about the dollar is certainly interesting to note, though at this juncture Macro Man remains of the view that they view it as an input to the decision-making process rather than a policy goal in and of itself. Nevertheless, he will keep a close eye on both the data and the rhetoric; it may end up being the case that either the dollar trade or the rates trade will work, but not both.
In fairness, that's been the story of the year so far; the only reason that Macro Man had both working was his spectacular entry points on his eurodollar trades. Of course, the future matters more than the past, so at some point a hard decision may have to be taken. At this juncture, however, he has the luxury of time to watch and wait...so for the time being, that's what he intends to do.
27 comments
Click here for commentsFT:
ReplyBoth can't work? or could they?
The US entered officially into recession in 07/1981 (but that effectively started in 1980) and emerged in 11/1982. Fed funds went from 19/20 in 12/1980 to 9 1/2 in 08/1982 and meanwhile the S&P got clobbered by 30%.
In the meantime, the USD screamed higher by about 25%.
So, that's a possible configuration.
I think we are going to enter a similar period.
Per BIS latest estimates the carry trade USD vs Emerging is about 9 tln. The present slowdown in emerging is just the appetizer. There is already a stampede in Brazil and to some extent in Turkey or Russia.
When China comes into play (domino: Thailand and Korea) , we will witness the last USD bull of this century but it will be of gigantic proportions.
We are currently correcting the first USD bull leg which started in earnest last year. The US slowdown might compell the Fed to soften the rate hike rhetoric a bit more. Still, this slowdown will convince the long emerging / short USD crowd (often local corporate by the way) to get out.
This retracement will be the opportunity to short TRY / CNH / MXN / ZAR / BRL (and eventually EUR and JPY as well).
As to equities: the dovish FED can help a bit longer but I would look at the DJT as the canary in the coal mine (considering where oil trades). I expect a 15 to 20 % S&P correction before the last leg up which will be fueled by the FED giving up all pretense at a rate hike.
@FT - I agree. When the S&P corrects some, (followed later by Dax & Nikkei), the Fed, ECB and BOJ will panic. I think it highly likely that what follows will be multiple coordinated rounds of QE (effectively "QE-forever").
ReplyThe BOJ is currently explicitly monetizing it's debt - how much longer before everyone else does the same?
anon 10:45
ReplyYes agree with almost everything you said - I think the first leg of the USD rally which ended a few days ago was the dollar winning the risk on race to the top - the second (and last) leg should be avoiding the risk off plunge to the bottom - it is a real struggle to figure out how far this cyclical correction will go, but I think 92-93 on the index perhaps would be a decent target.
As far as the 15-20% correction in the s&p and this being the last bull market in the dollar this century, you sound too smart to hang your hat on stuff like that, so I hope that is opinion and not conviction!
@washedup
ReplyFT:
The last $ bull of the century was indeed pure provocation not worthy of this forum.
However, I do think we will see this year a scary S&P correction on the back of emerging market stress contagion (of the 97 or 98 variety )
Still, I tend to consistently have difficulties identifying the start of equity corrections and don't allocate much risk to this type of views.
Farmer,
ReplyI would love to thank Mr. T for his advice on shorting IBB last week. I loaded a small position last Friday, and now hoped that I had shorted more. Since IBB seemed to lead the broad indexes to the down side, I am inclined to set the target of the current correction at a much lower level. I would like to hear what others think about SP in the next few weeks. Am I too bearish toward the market or is it just regular a section rotation (from biotech to other sectors)?
Since Friday lunchtime, have a modest short position in QQQ, [rather than IBB, mainly for purposes of liquidity]. The last two weeks of March are often somewhat weak, and with reason to suspect some earnings weakness, this seems like a better time than most for such a punt. Having said that, it's a modest one... it stays on as long as it is working....
ReplyBOJ buys all JGB. Cancels debt. Each Japanese citizen buys stocks. BOJ inflates stock market. Utopia.
ReplyMarc Chandler (Brown Brothers Harriman)
ReplyThe dollar will not block the Fed from raising rates sometime between June and September
Euro will test it's low of 2000
We are in early stage of dollar rally
Euro will test it's record low before this dollar bull is over
Starts at 3.25min
http://media.bloomberg.com/bb/avfile/News/Surveillance/vPCB1i0hN2A0.mp3
@Anon 12:28
ReplyYes, that's the gist of it. Governments (via Central Banks) realize it is impossible to ever pay back current debt levels so are monetizing it all.
Most amusing is that everyone is too scared to basically say it as it is - I guess that would involve taking one's head out of the sand.
"BOJ buys all JGB. Cancels debt. Each Japanese citizen buys stocks. BOJ inflates stock market. Utopia"
ReplyYes, more or less other than for 'Japanese citizens' read Pension funds and other Institutions 'owned by' or holding the capital of the Japanese investing into the policy on their behalf .
Nice call mr T on IBB...!!
ReplyMarc Chandler has been a Dollar Bull for quite a while, and has been right, but nobody is right forever. While Marc and MM may be correct about a larger Dollar Bull market ahead of us, the timing of its resumption is questionable, and there are far too many raging Bulls still aboard the Bucky Express at the moment.
ReplyWe are in an interesting place today. This isn't a good time of the year for domestic capital flow into equities, and we are almost certainly going into an earnings season that will reflect (at best) a soft patch in the US economy. Today we see Spoos down, bonds weak, Bucky down. Last year and even in this quarter we had many days when all three were up together, a very unusual event, presumably triggered as foreign capital sought the safe haven of the US.
Now that we have reduced the chances of a June rate hike, we are seeing some signs of the capital flow reversing. Look at it this way. Let's say some big Real Money punters, Joao in Brazil, Archie in Scotland, Dag in Norway, Inga "from Sweden" or Masahiro in Japan are managing global equity portfolio or SWF funds. Last year they might have seen the way the wind was blowing and invested in SPY, or AAPL, HYG or just TLT. They would have received the Holy Grail, the perfect trifecta of investing: the price appreciation in USD, dividend/coupon yield, and the extra kick in FX from the rising USD. So they would all have been Bertie Bigbollocks at the EoY performance appraisal and the December knees-up.
To make it even better, this trade kept on working in Jan and Feb, but following the March FOMC meeting and ensuing rally, we now have seen a reversal in the USD. What this means is that even with US markets flat, our heroes are not only no longer making money, but they are actually losing money in their own home currency. What many of these punters will be realizing is that last year their global equity/fixed income investing became something else entirely: FX speculation. As such, they are now subject to the whims of a very large and powerful market that even they are not all intimately familiar with. Once this realization hits home widely, there will be widespread selling of US assets. First growth equities, then dividend-payers, corporate bonds, and finally Treasuries, will be sold, as this group of investors seeks to stem the bleeding and lock in most of the gains from 2014. When this gathers pace, a largely clueless and unwitting group of domestic investors are going to be taken for a rather unpleasant ride on the down elevator.
QE is 'likely to permanently impair living standards for generations to come':
Replyhttp://on.ft.com/1xyFbQh
Readers should feel free to put out all the bunting, play John Philip Sousa marches and buy the Dip in all things American..... go ahead, excoriate LB as usual, but keep one eye on the markets.
ReplyNeedless to say, we are short the US equity market via QQQ options, but have no position in US fixed income at all. It has been very difficult to maintain the latter stance the last 2-3 weeks, but the threat of currency-driven rotation out of the US is so severe that I don't want to take the risk. Added to the above discussion, if the Grexit threat was lifted tomorrow, probably 25-50 bps start to come out of US10s and 50-100bps out of German 10s over the next quarter. So it makes no sense to stand in front of that.
Things that are working OK in the last week or so are a variety of "reflation" trades and offshore vehicles of many types that tend to be good dollar hedges: GDX, RSX, EMLC. The current move is one that we feel has legs. Everyone is ready to JBTFD, not only in SPY and AAPL but also in USD. We think there has to be a decent flush of these dip buying bulls before a short term buying opportunity sets up. There is an outside chance that accelerated selling by foreign investors triggers a mini-panic by domestic punters and we see one of the larger corrections in this bull market, until Dame Janet soothes the market again with more dove-talk. But... oh dear what if dovishness simply accelerates the flow out of the US???
Imho, this current juncture is one of the more dangerous that this market has faced in several years. For example, we might see the market decline but the US economic data actually improve a bit over the summer (MM's pent-up demand) which would tend to increase the odds of a rate hike again (Chandler's argument), thus driving rates up and many equity sectors lower. So if 2013-2104 was a perfect environment for Spoos we might be entering a rather difficult one now.
LB, I am not seeing the wide spread selling in HY that would get me worried about a big sell off. What i am seeing is RTY and IBB getting drubbed, probably by the late dip buyers/ momo traders.
ReplyI'd be worried if European stocks really start to slide (for more than a few days). Auto's as i pointed to last week, have been leading the weakness there, but it appears that banks are picking it up.
But eyes will be on Spoo's for sure
Agreed. Yes, I think this is expected. The lowest quality earnings sectors will be the first to go (IBB, almost by definition, since most have no earnings at all), expect US energy and big cap exporters to follow. US HY is going to be fine for now, b/c rates are steady, and if I am right about this, the US credit markets will be the last to see the effects of this move.
ReplyThink about this, though, if you are sitting long US corporate bonds in Tokyo or Frankfurt, a mere 4-5% decline in USD wipes out a year's coupon for many offshore fixed income investors, and there are so many emerging market alternatives out there offering higher yield. Once we get to DX 95, and people start having to buy back JPY, then we will start to see some of these folks panic a bit.
Wait until people start buying the Yen in droves. This is all foreplay until then.
ReplyLB - for once (and may I say relievingly so!) I find myself in full agreement with you - I also think this multi-week, quick, and potentially steep dollar weakness will be bad for european equities, and global equities in general. I also think if it turns out yellen was bluffing all along about the hike, gold will pretty much have to stage a big, probably multi year rally. If she is not, well, then risk is f@#d anyway, just a matter of time before margin compression takes its toll, even with MM's benign muddling GDP growth scenario. It would also be REALLY surprising to this mkt if this current s&p down leg starts to cross the 3-4% plus mark from the highs.
ReplyAgree that the toughest one is US treasuries - I can't decide if there is a global growth scare, if it benefits or suffers. Gun to my head i'd say former given the overall trend, but really tough to reload at these levels. You've called it better than most so will stay tuned to this channel.
Trannies have been screaming US slowdown for a couple of months. It is agonizingly tough to know what the dominant influence on USTs will be. Risk aversion is a powerful force, but we've all seen the power of large and fast FX moves on markets very recently. It's quite possible that people who sit on their hands and do nothing for an entire quarter here may be among the winners, relatively speaking. LB likes to get long bonds only when everyone and their uncle hates them with a passion, so we're not there.
ReplyExcellent case LB. The FX issue potentially could become a real headache for offshore investors. FX, low vol and momo-lever-banana environment were all Utopian tail winds for offshore money so long that it might be challenging/take a while to snap out of it, should they rapidly transform into headwinds. Or even if the change isn't that rapid.
ReplyThe obvious one here are indeed the "traditional" multinational exporters. FX headwinds are already baked into soon-to-be-published real earnings and subsequent guidances and it's probably even generous to assume that prices stay still in the short term. Any FX reversing will take very very long to provide any real mending to underlying earnings (close to meaningless in the short-medium term) but the impact to local currency portfolio P/L can potentially wreak immediate havoc.
I guess the tough part here is to think that selling all those "traditional" MNC exporters (yes, guilty as charged) would leave some (gulp) cash and without those 4x annually divi paying papers which luxury we don't often get over in Europe, and that cash might actually become a fine short-term investment while every basic CB fundamental out there waging war against it is trying to tell us that cash is going to be a terrible investment. And if you're cursed to have a conservative nature, it might be hard to be willing to shove all or most of the leftover cash into the gold, oil, EM and EM debt dollar "hedge plays".
OT: Here's a potential black swan for oil. Politically I think it would actually make sense for the US to get in bed with Iran, inter alia ISIS but go figure:
http://www.bloomberg.com/news/articles/2015-03-25/iran-has-a-little-surprise-for-oil-market-that-s-ready-to-ship
CNXT ... the latest parabolic ETF? Is it different this time?
ReplyPutin has filed an application for Russia to join the EU.
ReplyGreece has raised 100 billion by selling portage to China.
US fracking costs have dropped by 50% because Tyrone developed some new Techhhhhnology.
Abe tripled QE.
LI did.
The FX world required spinal intervention because it couldn't find it's asshole trying to chase the most significant new storyline in so many different directions.
"Sorry old chap, don't quite understand your banter..."
ReplyBanter Sketch
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ReplyNever heard about macro man before so thanks for such info. BTW can u help me with sankofa essays ? I cant even collect the material for start.
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