The best-laid plans


But Mousie, thou art no they lane,
In proving foresight may be vain;
The best-laid schemes o' mice an' men
Gang aft agley.

-Robert Burns, To a Mouse

Well, Macro Man had the right idea to get long yesterday, but apparently so did everyone else, as equities were bid when he woke up and only briefly threatened to tickle negative territory in the morning before ripping in the afternoon.   You know what they say about the best-laid plans...well, you do if you can read Scots, at least.

That's alright, at least his short-end trade came good, right?   Err....no.   The Dudley comments that the case for a September lift-off being less compelling than a few weeks ago were not particularly surprising- one might have thought that the recent 14-tick rally in EDZ5 was pricing just that- but that didn't stop the short end from ticking up further, because hey- PermaZIRP!

The long end received no such succor, however, as stories of Chinese selling similar to that reported here yesterday vis-a-vis Bunds began to percolate.   The data was pretty solid, too; the 3m/3m rate of change in core durable goods turned positive for the first time all year.

Interestingly, spot VIX remained stubborn, closing at 30.32 despite Spooz going out more or less on their highs.  Of course, the curve is sharply downward-sloping, which eliminates one of the prime attractions of selling vol (i.e., the roll-down of the VIX curve.)

While Macro Man is of the view that the fractured micro-structure of the market is a clear reason for implied and realized volatilities to be higher than those observed for much of the summer, he is not yet convinced that current levels in any way represent the new normal.  As such, he will continue to use the 30 level as a touchstone for the sustainability (or lack thereof) of any market correction; with VIX here, he is happy to wait for his price (or price pattern.)

Interestingly, the FX market more or less disregarded the Dudley comments that the short end apparently took so deeply to heart.  USD/JPY's back north of 120, the euro sub 1.14, and cable got shunted down the lift shaft some 370 pips below Tuesday's high.  Macro Man frankly isn't sure what drove that weakness, as sterling performed comfortably worse than even the euro.  While it's tempting to suggest the ongoing rise of left-wing loony Jeremy Corbyn has something to do with it, positioning is a much more likely culprit (what's new?)

In any event, the surge in the big dollar yesterday in spite of the Dudley comments would suggest that there was a lot of clearing out done earlier in the week, and that perhaps a few babies were chucked out with the bathwater.   Now, the last week of August isn't normally the time to start rebuilding positions, but then again this has been a pretty unorthodox last week of the summer, so it seems likely that there was at least some real buying going on.

It's interesting to note that October seems to be getting a bit of play now as a "compromise date" for the Fed's lift-off.   Like a lot of people, Macro Man has been running with the idea that the Fed would want to lift off in a quarterly meeting, with the full panoply of support via the SEP/press conference, etc.  He still holds that view, but acknowledges that the Fed has stated pretty explicitly that every meeting is a live one, and they could in theory call a press conference to explain something after a non-quarterly meeting.  The narrative emerging from this week's Jackson Hole conference will be particularly interesting in this regard.

At 3 ticks, the Oct/Nov Fed funds spread offers better than 7-1 odds of an October lift-off.  It's not like betting on the Houston Astros to win the World Series (100-1) before the season starts, but it's pretty darned good as a cheap punt if and as a narrative over a possible October lift-off builds.

After all, cheap bets offering high potential payouts are a cornerstone of the best-laid plans of building a macro portfolio.
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Nico G
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August 27, 2015 at 7:56 AM ×

European equity futures have reached the minimum target for an oversold bounce up 10% since Monday low, terrific move. It can of course stretch higher but i'm shorting a first clip of stoxx to play another leg down, and will short new clips every extra 1% up - the same strategy that absolutely failed in October. But it might pay to be stubborn China reigning in the worry mix this time might finally give the market a chance to behave like one i.e. no bulshit V shape bottom this time, but another leg down Jackson ABC style, a sign that the QE era abnormal price action is over and that the market put a solid, serious top behind us

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Nico G
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August 27, 2015 at 8:04 AM ×

China has finally found a scapegoat

very interesting read

http://finance.yahoo.com/news/china-market-chaos-blamed-exodus-034351949.html?l=1

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Anonymous
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August 27, 2015 at 8:22 AM ×

Mark my words the real disaster is in the Shadow Banking sector.

People who didn't want to invest in stocks because they where too "risky" instead invested in Wealth Management Products offering interest rates higher then state controlled banks interest rates, after all they where safe right....

In most countries when shadow banking falls over it produces a knock on don't trust deposit takers, this in China will be massive, stocks are one thing but WMP where considered much "safer" then stocks



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Anonymous
admin
August 27, 2015 at 8:48 AM ×

http://www.theguardian.com/world/2015/aug/27/china-small-time-recyclers-down-on-their-luck-amid-stock-market-turmoil

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Anonymous
admin
August 27, 2015 at 11:22 AM ×

Month end ramp & short covering into Jackson Hole. QE2 & ECB QE hinted at previously.

While risk appears minimal of another sort of indication, market doesn't want to take the downside risk.

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CJ
admin
August 27, 2015 at 1:42 PM ×

Solid revision to real final sales to domestic purchasers. Indicates to me that there is absolutely nothing wrong with US growth and that despite its size, it remains a relatively closed economy that can successfully weather a the slowdown in external demand.

If NFP is within range next Friday and the FOMC does not hike in Sept, I think they would be sending the wrong signal.

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Anonymous
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August 27, 2015 at 2:27 PM ×

$VXX rolling more & more into OCT future. & it's not dropping when it's still 9 under spot and 2 under SEP. OCT +.70 since 4pm cash close.

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abee crombie
admin
August 27, 2015 at 2:31 PM ×

JBTFD again... meh I give up. Got no idea now. Great market to swing trade but that is it

Was that the end for EM? hard to believe if you think Fed will raise rates this year. anyawys I wont be selling till Spoos get back to 50 day, which knowing these markets will probably be on Tuesday

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Anonymous
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August 27, 2015 at 2:39 PM ×

abee
BBG:"Emerging-market equities aren’t the bargain they appear to be, even after valuations fell to an 11-year low relative to their developed peers, according to John-Paul Smith, who has been warning of a China-led selloff for more than a year. “Sometimes cheap isn’t enough,” said Smith, an ex-Deutsche Bank AG strategist who now works at Ecstrat in London and also predicted the Russian debt crisis in 1998. The selloff is “about to get much worse given the recent massive falls in commodity prices” and deteriorating economies across the board, he said."

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Anonymous
admin
August 27, 2015 at 2:46 PM ×

Nikkei +13.6% ytd
Why bother having an economy. What an archaic concept. Watch Netflix buy Amazon all day long. Or read MM.

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Nico G
admin
August 27, 2015 at 2:55 PM ×

do not despair abee you always hear jbtfD ADTER D happened. It is called back trading. And which D anyway did you miss? Buyers of the 2080, 2050, 2020, 2000 1980 and 1960 lost their money

buyers of the 1950, 1930, 1910 and 1890 were probably stopped, too. If you were still waiting for the big D 120 points lower then you got too scared by the 1890-1840 liquidation segment anyway when 'crash crash' was all over the media

Can we please stop with the back trading, it is moronic. Dip buyers never make the call on real time (apart from FM but he was scalping for a few hours, not swinging so who cares) when they buy it anyway, they never give you their stop and target and if they did here other members would ask them to stop posting their trades !

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Nico G
admin
August 27, 2015 at 3:00 PM ×

having said that, if you want to stop watching what you missed and want to PLAN ahead, 1950 was the level a few of us chose to reposition short in October (bouncing from the low 1800s) ... and we got smoked

but who knows it might work this time. As said earlier on i am short my bounce target 3270 on stoxx for a 200 point new leg down and will stop scalping and watching the tape tick by tick and go kiting now

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Anonymous
admin
August 27, 2015 at 3:17 PM ×

oil setting up for a pop, what with all this positivety of the equity rally.

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Anonymous
admin
August 27, 2015 at 4:08 PM ×

Quiet, calm market...drugged, sated.

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Nico G
admin
August 27, 2015 at 5:06 PM ×

China asking Fed to delay rate hike... this is better than 1968 Rolling Stones circus, and without the drugs

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washedup
admin
August 27, 2015 at 6:02 PM ×

thanks for that Nico - here is the most current list of people who have asked the fed to delay the 25 bps rate hike so far:

1. Christine Lagarde
2. Larry Summers
3. Chuck Schumer
4. PBoC
5. Paul Krugman

I have just one question - I know being the fed chair isn't a calm gig, but isn't it a fair assumption that one of these days, yellen will tweet, "100 bps bitches, here is a bird to go with it, now leave me the F alone!"

NOT! she was seen checking into the same clinic which surgically removed greenspan's spine after the 1996 turbulence.

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Mr. T
admin
August 27, 2015 at 6:21 PM ×

This feels like a bear market rally.

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Anonymous
admin
August 27, 2015 at 6:31 PM ×

Well it is in Dax given it entered a bear market Monday. 1000 pts off that. But then, who wants to be caught short month end into jackson hole with a bank holiday in UK Monday.

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Anonymous
admin
August 27, 2015 at 7:18 PM ×

Maybe its just a product of the backwards board, but $VIX futures have not trusted this move all day.

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Anonymous
admin
August 27, 2015 at 7:57 PM ×

$ES_F up 25 and $VIX futures positive. This isn't over.

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Anonymous
admin
August 27, 2015 at 8:24 PM ×

http://www.bloomberg.com/news/articles/2015-08-27/china-said-to-intervene-to-shore-up-stock-market-before-parade-idtyzfdu

"China’s government resumed its intervention in the stock market on Thursday and has been cutting holdings of U.S. Treasuries this month to support the yuan. Authorities want to stabilize equities before a Sept. 3 military parade celebrating the 70th anniversary of the World War II victory over Japan. Treasury sales allow policy makers to raise dollars needed to bolster the yuan after a shock devaluation two weeks ago."

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Nico G
admin
August 27, 2015 at 8:38 PM ×

you mean they're doing all this circus for a military parade? are pandas real bears by the way

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August 27, 2015 at 9:30 PM ×

I'm not the smartest guy in the room by a long shot but the definition of the VIX is:

"It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts"

Seems to me like implied vol when you are going down OR up (or ranges) of 50-90 S&P points in one day would drive the VIX higher. A high VIX does not necessarily imply lower prices. JMO.

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Carry trader
admin
August 27, 2015 at 11:47 PM ×

VIX usually peak at market bottom and has asymetric relationship with price.

I think spot was around 12 in mid august.

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Nico G
admin
August 28, 2015 at 7:34 AM ×

Marshall

you are right in theory but VIX has morphed into a measure of risk/fear i.e. the search for, or the abandon of put protection. many folks still buy calls when they think market bottoms, as they should 'in theory' but as market goes higher people will dump their puts in a hurry volat will be marked down affecting puts AND calls thus your loss on your call vega might annihilate your convexity if it does not rip enough

the best option play at bottom would be to sell ATM puts but it is quite stressful and you'll need an iron market conviction

on the other side, you would think that buying puts at the top, at a very cheap VIX level would then work but as you 've seen markets take much more time to top than to bottom hence you might be right, but too late. This is why so many puts expire worthless or are sold when punters lose patience which consequently compress volatility even more

in conclusion: buying options on equity index very rarely pays like it should (single names are another story)

long before measures like VIX were invented, when people entered aggressively on the long side volatility was marked UP accordingly since the herd was jumping on OTM calls. It was the easiest market for vol sellers throughout a steady rally as the realized volatility would be much less than the implied volatility priced in the calls you sold

if you want to take a mathematical extreme, the implied volatility of a rally shooting straight up along one line is zero.

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Anonymous
admin
August 28, 2015 at 11:06 AM ×

@ Nico - thanks for that, useful explanation.
Chris

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Hwa Jurong
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September 8, 2015 at 2:57 PM × This comment has been removed by a blog administrator.
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