Treading warily

Although the passage of month/quarter end should once again open up the taps for risk-taking, Macro Man (and he imagines a number of others) is treading a bit warily.  For all the ink (or, in this day and age, bytes) spilled over the equity market, the SPX is pretty much unchanged on the year.  To be sure, there's been stuff to do in single names and sectors bets, but in terms of big-picture index-level risk taking, it's proven to be a fairly fallow field.

Moreover, the longer the skein of weak (albeit weather-impacted) releases continues, the more bold the market will become in second-guessing the Fed and its presumptive resolve to raise rates this year.  EDZ5 is now back at the highs of the year, and at this juncture Macro Man isn't particularly inclined to get involved some more.  In the span of a few months, the onus has pretty clearly shifted to the data justifying a hike, rather than justifying standing pat.  Calls for QE4 look more like wishcasts than forecasts, but clearly you don't need another round of QE to lose money being short fixed income.

This week, of course, sees the release of another payroll report, with the consensus forecasting a still-robust  reading just shy of 250k.   While the ADP has proven to be not particularly useful in real-time forecasting (the correlation to NFP is much higher after all the revisions are in place than at the time of initial release), yesterday's well below-consensus reading was still noteworthy, insofar as it reinforced a pre-existing narrative.  Ditto for the ISM.

What really gives Macro Man the willies, however, is not the data itself but the liquidity environment in which it will be released.  Readers with sharp memories may recall that the March 2012 payroll figure was released on Good Friday in early April- as this week's will be.  Stock and futures markets were and will be closed, leaving short-staffed desks to manage as best they can in bonds and GLOBEX.

Three years ago, market consensus was for  a solid number of 201k, down slightly from the previous month's 227k.  In point of fact, it came in at 120k, way below the lowest forecast in the Bloomberg consensus.   Unsurprisingly, carnage ensued, with the 10y yield gapping lower, a gap which held through the announcement of QE3 later that year.  Macro Man also recalls a particularly nasty gap higher in USD/MXN (he was short), among other dislocations.



With a full quarter's worth of scuffle from the US economy, no net gains in the SPX, and most short fixed income positions offside, Friday looks like a particularly acute opportunity for a capitulation.  No guarantees of that of course....just a general feeling of uneasiness that it's not a great time to be taking a lot of risk.   Sounds like a perfect time to tread warily.
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April 2, 2015 at 9:11 AM × This comment has been removed by a blog administrator.
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Anonymous
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April 2, 2015 at 10:20 AM ×

FT:

I wonder how he could get past the "I'm not a robot" thingy....

As to staying on the sidelines....I think EEM is asking for the long patrol to intervene.

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Anonymous
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April 2, 2015 at 2:17 PM ×

Interesting thought on EEM - why so?

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abee crombie
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April 2, 2015 at 2:19 PM ×

Actually futures markets will be open (except Eurex) along with FX. But for sure it will be thin

Looking at the Europe trade, which has been the best one so far this year, the SX5E/SPX historical spread has lots of room to run (just on a price basis, but that is probably bc EU banks suck) but if I look at DAX/SPX, which seems to be more mean reverting (at least since 07) we are at dangerous levels.

http://imgur.com/c9LR5rq

Im still a fan of the trade but looking for a good entry

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washedup
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April 2, 2015 at 3:46 PM ×

abee - agree with valuations being too stretched on eurostoxx - if the dollar could temporarily correct, as I think it might, its not clear to me why european stocks should rally a bunch from here when the whole premise behind the bullish case is a weakened (some would say over-weakened) euro.

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Martin T.
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April 2, 2015 at 4:45 PM ×

You are not alone in thinking about room for disappointment on Friday with the NFP:
http://atimes.com/2015/04/risks-are-weighted-toward-downside-in-fridays-us-payrolls-number/

Best,

Martin

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Mr. T
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April 2, 2015 at 5:11 PM ×

It's an interesting point MM but payrolls seem to have not mattered for so long it seems an unlikely catalyst. The fed has moved the goalposts sufficiently that even with an unexpectedly strong report it's not clear to me at least that it will meaningfully change '15 hike prospects.

The whole '15 hike seems so far off from reality. The fed has been consistent in their language about letting a host of economic indicators guide policy, a shift from U6 targeting. In this environment with persistently weak data the fed would lose a lot of credibility to hike.

I'm going to take 222 - 1SD off mean.

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washedup
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April 2, 2015 at 5:27 PM ×

I am a 1 handle this time - 190k - a spot normally reserved for LB!
I think payrolls are about to downshift lower next few months, the fed will hike anyway, and the dollar is going through a minor US growth scare which will eventually be digested, adopted, and finally, celebrated as the catalyst for another surge up in equities, possibly the last but who knows.

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Anonymous
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April 2, 2015 at 5:41 PM ×

FT:

@washedup 5:27 pm

Exactly my favorite scenario (60% weighting I would say); some serious slowing down in the US economy over Q2 and Q3 and a FED capitulation by late Q3 early Q4 which will bring the last (in this cycle) up leg in US equities (12 to 18 months)

I can envision a 15 to 20% correction at some point before that; US stocks show some serious distribution and although I doubt the payroll will be a catalyst, at some point all the blue eyed islanders will leave in a mad stampede;

EEM should nicely take it on the chin as well

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Anonymous
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April 2, 2015 at 6:55 PM ×

@FT & washed-up,

Does that mean we all should hide out in the long-bonds for the next 6 months?

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Anonymous
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April 2, 2015 at 7:15 PM ×

Very similar to the drop in 2008

Value of Manufacturers' New Orders for Consumer Goods Industries

http://imgur.com/D6VGx8y

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washedup
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April 2, 2015 at 7:17 PM ×

anon 6:55:

I am really not sure on the long bond - kind of depends on if/whether the market chooses to treat a US slowdown as a global risk/off event (which would be good for the long bond, bad for global equities) or as a rotation play (sell US and buy Europe/EM) which would be slightly bearish the long bond. I say slightly because i think in any case, post a selloff, they would be back to it with their tails between their legs sometime in the next 12-18 months.

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Anonymous
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April 2, 2015 at 7:30 PM ×

http://www.bloomberg.com/news/articles/2015-03-31/sell-your-equities-and-take-six-months-off-says-saxo-economist

Steen Jakobsen, Saxo Bank A/S’s chief economist:

Investors should sell any equities bought over the past year, hold the proceeds as cash and take a holiday from the market for six months.

“If nothing else, reduce your stock portfolio to where it was on the first of January last year, put the money into cash and take a nice long summer holiday,” said Jakobsen, 50, also chief investment officer at the Danish lender. “You won’t make any money, but you lose all the downside risk.”

A likely increase in U.S. interest rates will intensify market volatility and threatens to wipe out any gains investors may have made in the past two years, Jakobsen said in a March 29 interview in Dubai. Slower expansion in the economies of the U.S. and China will also hurt investors holding stocks, said Jakobsen.

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Anonymous
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April 2, 2015 at 7:54 PM ×

Bloomberg:
Shanghai traders now have more than 1 trillion yuan ($161 billion) of borrowed cash riding on the world’s highest-flying stock market...a nearly fourfold jump from just 12 months ago. The city’s benchmark index has surged 86 percent during that time
2.8 million new stock accounts in just the past two weeks

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Nico G
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April 2, 2015 at 9:22 PM ×

meanwhile as i've repeatedly said everyone is underestimating the Greek commies and the deflagration to come at the heart of Europe

trail your profits very closely.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11510384/Greek-defiance-mounts-as-Alexis-Tsipras-turns-to-Russia-and-China.html

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Anonymous
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April 3, 2015 at 2:03 AM ×

One of my zenny teachers sums up this market around this spot succinctly..." it is you, but you are not it"
That a fuck you wall street if I've ever heard one

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Martin T.
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April 3, 2015 at 10:37 AM ×

"Does that mean we all should hide out in the long-bonds for the next 6 months?"

That's an enticing proposition. I've been super long duration since January 2014 and added on February's weakness.

For Macro friends out there I highly recommend reading the posts from David Goldman at Reorient Group on Reorient's website as well as the newly revamped Asia Times (atimes.com).
They recently pointed out that protection on SPX was becoming pricey on OTM put, meaning some people out there are bracing for a fast and furious correction.

Best,

Martin T

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