Slightly less amusing than Miliband's monolith

Sometimes the jokes just write themselves, don't they?  Ed Miliband's ill-conceived plan to erect a monolith listing his vapid campaign manifesto will, if there is any karmic justice, be seen as the moment that consigned his leadership aspirations to the dustbin of history.  Amusingly, even if Labour does somehow sneak into the driver's seat of a coalition, Miliband's rock is unlikely to get planning permission to sully the gardens of 10 Downing Street.

Slightly less amusing has been the price action in cable, which ripped through resistance to stop out a number of people (including the tiny position of a certain friendly macro blogger) before performing a volte-face and reminding people why they wanted to be short in the first place.  At this juncture  the polling is literally too close to call; a hung Parliament is a given, so it's really a question of how long it takes the dust to settle before someone tries to form a government.  Even then, there's no guarantee that it will be a stable one, so it's hard to see a bullish outcome for Betty in the near term.




Also not laughing are holders of Bunds, which have cratered recently on pretty chunky volume (yesterday was, of course, depressed by the UK bank holiday.)  Is this the "Big'un" turning point?  It's certainly tempting to think so- the rally was rampant and left owners holding 10 year paper at yields that looked uneconomic, to say the least. This is a tricky case, as Macro Man (and he suspects a few others) would "like" to see Bunds trade back to, say, 1.00% yield as a way of restoring sanity....but that of course is no guarantee that they will.  A lousy payroll figure, Varoufakis going all Josephine Witt at the next Ecofin meeting, or a simple equity sell-off....all of these could return the bid.  Macro Man supposes that's just a long-winded way of saying he lacks conviction at the moment, as it's rarely clear how long or far positioning clears outs can go, or whether they serve as a catalyst for a new trend.

One market where a new trend has not yet emerged is EDZ5.  The head and shoulders pattern highlighted last week has indeed broken, but the follow-through has been limp, to say the least.   Of course, there's the small matter of a payroll figure this Friday to contend with; last month was an exception to what had been a solid trend of the front end selling off on payroll days.   It would hardly surprise to see a repeat performance...though whether it holds is another thing.


Frankly, regardless of what Friday's number says, there will need to be a broadening of economic strength in the data to keep the whites from continuing a lazy drift higher.  Although it's seven months to expiry for EDZ5, we're not far off from put up or shut up time.  A bit like Red Ed's monolith, really...
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Anonymous
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May 5, 2015 at 11:58 AM ×

still believe that election risk premium is too low in cable

perhaps crosses look like better gbp shorts.

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Dan
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May 5, 2015 at 3:24 PM ×

Cameron will win, Messina was deployed over there to make sure they know where to drop the boots on the ground.

"I find it ironic that people forecast 1% 10 yr rates and equity crashes as if somehow that would be concurrent"

I find it ironic you are still riding this old tripe. Where did the 10y and 30y close on the October inflection? Where are they priced in comparison today?

The equity bus is loaded and FI ex-UST is loaded. March NYSE margin debt came in at a record level. Where is that money going to run? All into PMs? Bitcoins?

I continue to patiently wait your capitulation.

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Anonymous
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May 5, 2015 at 3:26 PM ×

No comments on Yellen's part in this DoJ investigation? or WSJ taking on Bernanke?

Is there the potential that the mainstream is starting to turn on QE. That the FED is losing its credibility?

So many say, don't fight the FED but, the FED gets it wrong too. And when they're wrong, it's in a big way.

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washedup
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May 5, 2015 at 4:03 PM ×

Dan - the reason I find it ironic (and now doubly so) is because what matters is not what happened in the past, but the possible correlation breakdowns in the future - in any case, since you seem to have very carefully done your homework and are awaiting 'capitulation', how do you explain that the long bond and US equities are up and down together 70% of the time in the last 30 trading days?

Want more irony? I believe I was very clear that I see risk/reward on US equities as favoring the bears, but patently not for the reason that we will get crushing deflation and the 10 yr goes to 1% - if that happens the s&p will go 2500.

The reason equities are up this year at all is because of M&A and buyback hopes - both are clearly heavily geared to rates and credit spreads.
As for 'where the money will go' question, the market seems to be telling me it will go into crude, rightly or wrongly - oh and btw, that margin debt that you refer to has been making new highs for the last 1 year, and I am frankly tired of hearing about coincident indicators as if they were somehow contrarian ones.

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abee crombie
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May 5, 2015 at 4:23 PM ×

this is a BIG move in Bunds. We've had a couple 50bps moves since 2008 but given the unrealistic low vol due to all the trend followers in the market for the past year, this is looking particularly notable.

this is absolutly killing Eurostoxx. hard to step in here but I am thinking of doing so as I believe the bund sell off is gonna slow down soon

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washedup
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May 5, 2015 at 4:26 PM ×

Pol - any thts on bunds? i know ur LT view but how far do bund yields back up before you would see ST risk/reward as skewed the other way?

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Polemic
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May 5, 2015 at 4:34 PM ×

Hi Washedup.

Short term I don't know but the size of CTA positions is probably underestimated and will give this some legs. I really don't know short term tbh. But I agree with MM that 0.75 - 1.00% yield is more real.

In fact I haven't really been sweating the short term as having worn the reflation trade for a while I am just celebrating a day where everything is going my way for once. Even the short FTSE I put on against my energy and commodity FTSE components.

Actually I have just posted this -http://polemics-pains.blogspot.co.uk/2015/05/reflation-trades-reflating-pl.html

Basically thinking that the moves will continue as the mood appears to beo one of denial and is still only being termed a correction.

Pol

PS. this captcha thing even more mad - select the hamburgers? How very vegitarianist!

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washedup
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May 5, 2015 at 4:43 PM ×

thx much for ur thts Pol - y I'm thinking 75 myself - interesting question rt now (Dan alluded to it) is where the flow would go if everything gets sold - crude seems to be benefiting today but not sure if thats just the usual geopolitical stuff - in any case thats not a big enough market.
Anyone ever heard of cash? It used to be an option way back in the day, remember??
I got to pick sushi - f@#rs proly think if u grew up in asia u must like sushi!

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Nico G
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May 5, 2015 at 6:34 PM ×

Eurostoxx trading has really nothing to do with Bunds unless you were double-stupid enough to buy both govie stuff that yields nothing and an equity index that is doomed with Greece and the coming dominos

my short is ridiculously deep int he money in case you were asking

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CV
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May 5, 2015 at 7:55 PM ×

I agree with Pol on the reflation trade, and I am positioned accordingly. Although I missed both rally and sell-off in bunds ... it has been very fun to watch though. The rising oil price is a big key here. We all know the supply story, but at some point QE (and especially if China chimes in) will drive things too.

As for the the repricing in Europe, what did people expect after the 6m/6m change on the DAX hit 40%. It will go on for a while longer, but you are delusional if you think you can ride it as part of a secular bear/recession in the Eurozone. It won't happen chaps ... sorry! Wait for higher inflation, and complacency to mount at the ECB that the task is done ... then, you will have your pound of flesh (especially in peripheral bond markets).

More generally, MM's Sell in May memo has been heard by someone, and I am not going to stand in the way. Plenty of cash on hand here at Retail r US LLP, and I don't expect to get an opportunity to deploy it just. I do thoroughly believe that we are still in a sector/country rotation world, and that a myopic focus on Spoos means that people have missed too much. But, "value" is difficult to come by. Two sectors stand out. Insurance/banks and energy. Both incidentally are reflation plays if you had not noticed. So before it all goes pear shaped and all those corporate debt turds have to roll their debt (2017 and a FF at 1%?) and the nuclear reactor powering the M&A/buyback circus has a meltdown, I think you can still find corners of the market to be long (which beats trying to sell risk for 6th year in the face of CB intervention). Oh and EM, did I mention EM ... these guys will be fine in the next few months.

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hipper
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May 5, 2015 at 10:07 PM ×

Nothing to worry about Greece or any other country, although it's good to acknowledge that the schizophrenic market will again be "surprisingly shocked" and scared to death by a re-incarnation of the same thing when the time comes, but that just means BTFD since we already know the real outcome won't be so shocking as expectations might periodically get.

Let me rationalize: Juncker said it before and he'll say again, the euro is irreversible so there you have it, eurocrats are pissing their pants by the very thought, which alone is enough to prevent the genies inside Pandora's box to even think about escaping.

I'd agree that bunds are a big cause and as the sell off begins to cool down it's time to BTFD. The banks probably won't hold that cash forever and they'll play the ECB front running pyramid scheme game again soon enough, attracting Klaus and friends to tag along.

Washedup, I guess the common belief of cash as a crappy asset peaked out a few days ago, as did the complacent momo theme. That's all I've been hearing and reading now about for some while now, since you know, "interest rates are at zero and you can get like magnificent 3-4% divys from everywhere". But I think one or two more violent bund sell off days and its time to... well now I'm turning into a broken record again.

Oil is curious. There's indeed the supply side story but possibly an overshoot is forming again. But I can't see it staying in the overshoot-state for too long because in the previous oil cycle shale oil was unheard off, that's why specs where willing to hold their position for years waiting for eventual geographical shocks but there's really no underlying bullish story for oil anymore other than short term inventory fluctuations, so no reason to hold positions now for too long I think. Most of the cut off supply is going to make a comeback and inventories will eventually begin to creep up again ex summer season effects.

http://www.dailymail.co.uk/wires/reuters/article-3067805/Greece-major-steps-compromise-EUs-Juncker.html

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Anonymous
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May 5, 2015 at 10:35 PM ×

But Europe had its BTFD this morning and got slammed. The last 400 point move in dax was 2008. Now two in 4 days trading.

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Anonymous
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May 6, 2015 at 9:01 AM ×

I think it's way too early for the reflation theme.. It's way too early to question the ECB's commitment to QE when we're more than a year away from the shelf expiry date, when peripheral Europe is still suffering from its debt overhang and pressures from structural reform.

This is transitory

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Anonymous
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May 6, 2015 at 1:59 PM ×

Feb 26th - euro last above 1.13. Dax is about 60-100 ticks higher (as I type) than Feb 26th.

Brent $7 and Cl about $10. Not much of a premium on Middle East and the Driving Season.

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abee crombie
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May 6, 2015 at 2:15 PM ×

Nico, do you really think Eurostoxx will be lower than it is now at the end of the year? I will take that bet.

Sensex broken the 200day. Shcomp taking a little breather along with most EM as well. And yet Spoos look relatively strong the past few days.

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Anonymous
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May 6, 2015 at 3:19 PM ×

Yellen's irrational exhuberance moment? "Equity levelsgenerally quite high"

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Anonymous
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May 6, 2015 at 3:21 PM ×

But I thought we were in a secular dollar long environment, innit?

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Leftback
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May 6, 2015 at 3:39 PM ×

DX sub-94 on dodgy ADP number. We don't seem to be hearing so much from Dollar Long enthusiast Smuggy McSmug recently.

Now, looking at Treasuries, usually the Long Bond would be screaming to lower rates on weak US data, but it's not. It's selling off. So is AAPL. That's a lot of international hot money running from Bucky. We warned about this several times and were rewarded by being asked to model tin foil hats. Johnny Retail, Mickey Momo and company may be buying the dips in US shite like social media and biotech but we will not be joining them. At some point after capitulation selling we will buy the Long Bond again.

Once the dollar bottoms from this extended retracement we will be selling short US energy - and also taking a breather from our emerging markets and European longs. Not sure if we are there yet.

Any gold bugs got insight on selling of GDX? Is Grexit fear abating, and causing a rotation back into €?

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Anonymous
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May 6, 2015 at 3:44 PM ×

gold priced in euros breaking support...watch out now!

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Macro Man
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May 6, 2015 at 3:58 PM ×

LB- international money is not running from dollar-denominated assets. If it were, the DAX and Bund would not be getting beaten like a rented mule on a daily basis.

What we are observing is a pink flamingo event, wherein popular/crowded positions of close to every stripe are getting liquidated regardless of the marginal newsflow.

I know you know this, but trying to distill fundamental insights from a positioning screw-job is a tricky and potentially dangerous business.

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washedup
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May 6, 2015 at 4:52 PM ×

"What we are observing is a pink flamingo event, wherein popular/crowded positions of close to every stripe are getting liquidated regardless of the marginal news flow."

Bingo MM/Left - never confuse a revolution for a rotation!
I think dry powder is about to come back in vogue as an asset class.
Left - what are u thinking for NFP tomorrow?

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Anonymous
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May 6, 2015 at 4:56 PM ×

FT @ Leftback re GDX

Gold is not going up while EUR/USD is screaming higher; add to that the weakness in equities from which the GDX is not imune on a local basis and you have an answer.
In my opinion the move higher in EUR/USD is, as MM pointed out above, the result of a crowded position getting squeezed.
The sad truth is that a catalyst is needed to ignite the Gold long trade. Right now, gold has more or less ignored the weak US data since common perception is that it's transitory. If we get a string a low employment numbers and a little scare in US equities, Gold could run to the 1350 area and GDX will follow.

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abee crombie
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May 6, 2015 at 5:10 PM ×

MM, you have my vote. The trade of the week is called screw the CTA's.

Gundlach has been out talking of a potiential HY problem in 2018. Dont look now, but CDS spreads are slowly picking up, whereas VIX looks similar but you can really see that HY may have put in a bottom at 300bps.

http://imgur.com/rIHjecq

Time to buy some puts?

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CV
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May 6, 2015 at 5:33 PM ×

Sorry LB, I am with MM here, maybe if the Dax stages a good rebound here amid weakness in Spoos and USTs, I will entertain your explanation.

Meanwhile, this has the clearest whiff of a taper tantrum since, well, the taper tantrum! Yellen is clearly preparing the market for something. Of course, when long equities/long benchmark bonds becomes the POMO trade du jour, an unwind HAS to hurt. Unless you are a swashbuckling macro manager with no core directional risk (i.e. not a lot of investors) you will have to suffer some "slings and arrows" here ... no way around it I am afraid. A good vol strategy would not go amiss though!

Indeed Abee, 2017/18 is a big year for corporate roll-overs in the U.S. and I suspect we will see the next big bust right about there. I think it will be a liquidity crisis I think, so look for guys like PIMCO, Templeton, Blackrock, and other wardens of illiquid assets to suffer. These guys are the new TBTF institutions (PE perhaps too). In the short run, though, the world is not one way street ... there will an opportunity to buy risk back, but not nearly enough blood on the street yet.

Surely the FTSE is a sell here incidentally, I think that would be my horse ...

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washedup
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May 6, 2015 at 7:49 PM ×

"“I would highlight that equity market valuations at this point generally are quite high,” Yellen said in a conversation with Christine Lagarde, the managing director of the International Monetary Fund,"

For all you Game of Thrones fans, this is the equivalent of khaleesi locking up her dragons right after they've mauled a few babies.

Anyone know when her next speech is where she will backtrack?

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Anonymous
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May 6, 2015 at 9:46 PM ×

Yellens comments were planned. It was a Q&A with Lagarde asking where she saw risks. She was testing the water. Lockhart and George out after. Why equities didn't dump beats me. I think if they don't react to this and are bid on NFP it's June.

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Polemic
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May 6, 2015 at 10:36 PM ×

I can't see how a dump in bonds is good for equities.

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Anonymous
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May 7, 2015 at 12:27 AM ×

well then, Polemic, you are showing your age.

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Polemic
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May 7, 2015 at 12:45 AM ×

I am not young enough to know everything.

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Anonymous
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May 7, 2015 at 2:13 AM ×

A very sweet and clever retort. Touché !

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Anonymous
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May 7, 2015 at 2:59 AM ×

Iceman said

LB, you have been calling a COLLAPSE in dxy since we broke 85, so i find it ironic your comments on smuggly.

To me im in the camp that this is a good ole squeeze of the weak hands in overcrowded trades. I sit in EM land and money is still flowing in here. I am very cautious though and i have been the lightest i can be. Rather sit back and let other people fight for those pennies...

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May 7, 2015 at 7:43 AM ×

polemic is correct. In the long view, we will look back at wonder of the unusually high correlation between UST and SPX

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