Playing dominoes

June has started with a thud as the market has set a number of dominoes tumbling, most of which represent popular or embedded positions in either the leveraged or real money community.  It might be a bit early to declare flamingo hunting season, but nevertheless it doesn't appear to have been a happy to start for many punters.

The euro, which looked more offered than glossy photos of Silvio Berlusconi in leopardskin Speedos a few days ago, has ripped, ostensibly because of "encouraging Greek headlines", but really because the market got short at bad levels and was primed for a rogering:



Meanwhile, news on the US recovery from its anemic Q1 has been uneven at best.   However, there's a lot of money that's flown into fixed income on the global liquidity/Fed pushback bandwagon, and despite the tepid activity data bonds have had a bit of a high volatility shellacking:


Of course, bonds in Europe have also come under the cosh, and not just because the HICP "ripped" higher this week.  If you've been sitting lazy long BTPs at miniscule yields on the assumption that QE will keep them supported forever, all you can say is "Mamma Mia!"



Credit, meanwhile, has dribbled lower but largely hung in there.  Certainly we haven't seen the sort of volatility that characterized trading in Q4 of last year:



Insofar as credit is the nexus through which higher rates can impact equities (or at at least one of the ways that they can do so), the absence of high volatility widening is probably reassuring to equity investors.  That having been said, the dramatic increase in rate vol at the back end of the curve is probably not a risk-positive development, though at this juncture there probably needs to be more from the Fed than a throwaway comment from "Hollywood" Bullard to make it a permanent feature of the landscape.

All of this having been said, high-vol, low-liquidity P/L destruction in macro-y products is rarely a good sign for stocks.  Although Spooz did rally yesterday, equity investors don't exactly have a history of reacting swiftly to changes in the macro landscape.  (Then again, they don't stop themselves out nearly as often as EUR/USD punters do, either.)

Macro Man will continue to watch credit as the canary in the coalmine.  If and when there is some high-volatility distress in that sector, it will probably be a pretty good sign to break out the red tickets in stocks.  Until then, he is keeping it pretty tight and trying to avoid both giant dominoes and angry flamingos.  


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Bruce in Tennessee
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June 4, 2015 at 12:30 PM ×

http://www.bloomberg.com/news/articles/2015-06-03/bond-rout-wipes-out-15-gains-as-traders-fret-even-leaving-desks

Bond Rout Wipes Out 2015 Gains as Traders Stay Glued to Screens

....How does Lefty do it? Bladder training...

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washedup
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June 4, 2015 at 1:34 PM ×

"Although Spooz did rally yesterday, equity investors don't exactly have a history of reacting swiftly to changes in the macro landscape."
Touche to that - in fact, I fully expect the clown car to start pointing to higher rates as a 'sign' that the global economy must be improving, and clearly now companies will now go back to minting $'s on good ol' fashioned sales growth - heads I win, tails you lose.
Equities overall are certainly overvalued - they are also highly likely to remain that way - maybe a good idea to start looking at shorts in homebuilders perhaps. They may be about to face a rather nasty comeuppance on this brewing storm.

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Anonymous
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June 4, 2015 at 3:02 PM ×

This is exactly what I have been missing...

“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘the moment you doubt whether you can fly, you cease forever to be able to do it,’” Bank of Japan Governor Haruhiko Kuroda said at a conference hosted by the BOJ on Thursday.

Didn't that SOB Peter steal children when they slept at night, was extremely selfish and not able to take care of himself..perfect central banker description.

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washedup
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June 4, 2015 at 3:16 PM ×

well spoken anon - and now, let the rate cut diarrhea begin anew, this time off some choice shellfish served french style by none other than christine lagarde.
There is not a chance in hell yellen has the balls to ignore the call for no rate rise by the power elite - which means LB is probably right, and I am probably wrong about a small hike happening in the Q3 timeframe.
But, there is a different suspicion I harbor now - there is a possibility of a genuine productivity/wage inflation scare in the US - to me, the picture is more of a Fed that is cornered from all sides than that of a Fed that is benignly spreading largesse because everyone asked for it - the trade may be to own some 2/10 steepeners, perhaps..

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Leftback
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June 4, 2015 at 3:19 PM ×

Everyone is on song today.

+1 to MM for "leopardskin Speedos" and another one for "rodgering" (SIC).
+1 to washed for "clown car", very nice, like that.

Bruce, the traditional answer to urinary output constraints in confined spaces (e.g Welsh rugby crowd, trading floor or packed football terraces ca. 1980s) is to use the coat pocket of the bloke standing next to you.

From Mr T yesterday, this reminder: "its not uncommon to run a substantially higher leverage ratio in FI vs other asset classes".

What we are watching is an unwinding of highly leveraged trades in bunds, UST etc. that had been placed ahead of and during Q€ (see what I did there?) by what FI traders refer to as "non-traditional participants", i.e. global macro HF wankers.

LB now waiting to see at least 3 or 4 of the following 6 happen:

1) Media noise about a "bond rout", "bond crash" etc.., mingled with high media visibility of equity carnies.
2) One enormous capitulation selling day with a "loss of liquidity" air pocket and changes of trader underwear.
3) One or more extremely weak Treasury auctions at the long end.
4) Very low volume on still elevated volatility as leveraged wank, I mean punters, depart for good and apathy sets in.
5) Extreme small punter abuse directed toward anyone interested in getting long Treasuries.
6) Death of Treasuries-type magazine covers.

Most or all of these have marked outstanding entry points for US fixed income and shorting equities in the past.

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Anonymous
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June 4, 2015 at 5:10 PM ×

Farmer says,

Agree with wasedup on clown car part. This is usually the final leg of a bull market. It could be months or years. Before 2008, Fed had raised rates several times til 2006. But then there was no QE.

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Anonymous
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June 4, 2015 at 5:51 PM ×

Bund yields soaring in the face of huge amounts of ECB QE... is this the return of the fabled bond market vigilantes?

Chris

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washedup
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June 4, 2015 at 6:49 PM ×

Chris - remember that qe is in fact supposed to make yields go up (as long as its orderly, yada yada) - we saw that side effect with the US chemotherapy, except that it happened to coincide with good growth in Asia and the US - it so happens that this time central bankers have misjudged how important low rates have become in and of by themselves for the entire house of cards. Basically there was a time and a place for QE right after the crisis and only the fed capitalized on it.

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FunnyMoney
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June 4, 2015 at 6:54 PM ×

IMF also adopting "FunnyMoneyomics":

Having input "rate hike" into the FM Model earlier today, the model returned "equity downside". Equities are not allowed to go down, and so an urgent message was relayed to the Fed to postpone any rate hike for at least 12mths.
-from your financial correspondent, FunnyMoney.

http://www.bloomberg.com/news/articles/2015-06-04/fed-urged-by-imf-to-postpone-rate-liftoff-to-first-half-of-2016

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Mr. T
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June 4, 2015 at 8:19 PM ×

NFP lotto: 175k (thats 2 SD's below the mean btw) with hourly earnings growth at .2%. This will be seen as a lower-for-longer goldilocks number and the associated trades will rally. Im using the revisions as a basis for my estimates and the 85k April revision from 223 seems to have not affected consensus at all. Although I guess there might be 2 games here - pick the headline number, then pick the real number later on...

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Anonymous
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June 4, 2015 at 8:56 PM ×

FT: NFP upside surprise....FI crashes some more, equities down / NFP downside surprise, economy weak, this time: equities down / NFP as expected gives a reason for the FED to tighten even in the face of a "not so robust" economy (they are starting to fret over endless criticism from business figures criticizing the risk reward of the current policy of non normalization) equities down
People front running poor July profit reports with the blackout period in buybacks overlapping: equities down
HF net long exposure 800 bln in Q2, front running buybacks....a little squeeze would not surprise me: equities down

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Anonymous
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June 4, 2015 at 9:18 PM ×

Hi,

Regarding the euro rates:
1. We started from a Bund 10y at 0.05% and the 5y is still below 0.2% ( and 2y negative) considering a CPI that has bottomed - in Germany too following the rise in wages over the past year.
2. May was exceptional because there was no redemption of Euro-area Government bonds and not even a coupon payment. There isn't much maturing in June either but in July a lot of money is returning to investors. It's also clear that the natural investors were all already invested and there was no marginal buyer left at those yields.

As for the scenario where long end yields move higher because QE works to raise growth/cpi expectations- like it did in the US for QE 2 or 3 can't remember, well, why not. it was that path or the japanese path so let's hope for the best.

The IMF comments on delaying rate hikes, it would at first seem that the US and the UK would risk a lot of credibility by delaying hikes again. It turns into a similar set up of a fiscal choice for politicians, you can give benefits but it's hard to take it away.

Travis

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Anonymous
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June 4, 2015 at 9:35 PM ×

I am not sure UK can hike rates, given the new government seemed to just begin a new austerity push. If this time the austerity policy is real, then it seems to me that BOE has no choice but keep the current policy rate in place. The US is another story.

Farmer

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Anonymous
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June 5, 2015 at 10:39 AM ×

@Washed - thanks
Chris

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Anonymous
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June 5, 2015 at 11:46 AM ×

@washed

Legarde's comment probably GUARANTEES a US hike sooner rather than later.

Not only does Yellen have the balls to do it, Legarde just put her in the position where she has to prove it.

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