Menos que nada

Yesterday's price action provided a not-so-gentle reminder of a few home truths about the current state of play in  financial markets:

* If you don't like the price on your screen, just wait a few hours and it will be much different; if you do, you might want to think about taking profits

* Just because implied vol is high doesn't mean it's expensive

* While authorities can influence some of the people some of the time, it's very difficult to generate all of their desired outcomes all of the time

Wednesday's volte-face in equity prices was nearly as stunning as the rally that had preceded it, and served as yet another timely reminder that just as there is never only one cockroach in the kitchen, high-volatility periods in financial markets also tend to cluster.

The most nimble traders have no doubt already adjusted their strategies and sizes accordingly, as perhaps too have models with relatively short lookbacks for their VaR calculations.  Slower-moving investors, however, may not yet have adjusted to the new regime, so one wonders if position sizes will be reduced if and as they do.

At the same time, and at the risk of continually having a go at the micro-structure of the market, it is useful to consider the potentially outsized impact that ETFs may be having on intraday market volatility.  Index-tracking ETFs are generally a good business to be in because the fees are very generous for a product that does not incur the responsibility of making active investment decisions.   At the same time, however, these products are also short gamma, as dealing with inflows/outflows and maintaining market exposure (particularly for leveraged ETFs) means that they have to buy on close when the market goes up and sell on close when the market goes down.

If they were only a small portion of the market, this would be a fun little diversion to anticipate them and make a little money scalping their flow.   The modern reality, however, is that in a market with a great deal of churn but not a lot of stable, reliable liquidity, the increasingly large presence of these leveraged ETFs makes periodic episodes of fantastic intraday volatility close to an inevitability.

Yesterday's observation that it might be worth having a go at DAX upside was w-r-o-n-g, but at least Macro Man was perspicacious enough to know not to front run the trendline break and to suggest cheap options as a way of gaining exposure.  Wrong call, right instrument, so only a minor amount of damage done.

His equity scorecard, on the other hand, was apparently right in shunning Brazil as the worst of the worst.   Yesterday afternoon's downgrade from S&P took Brazil's sovereign foreign currency rating back to junk for the first time in nearly a decade.  Well done Dilma for overseeing such an epic collapse in Brazil's economic fortunes over the past few years.   If this continues, she might as well change her name to Wilma and join the Flintstones back in the Stone Age.

In any event, the post-downgrade after-hours trading has sent EWZ down to 21.80, which is a cheeky 7% lower from the close and quite literally off the charts.



A few readers have inquired over the past few days as to whether the time is ripe to contemplate a purchase of Brazilian assets.  While this downgrade may prove to be a "buy the fact" opportunity, Macro Man finds it difficult to embrace the notion of any Brazilian security unless you are intimately familiar with (and comfortable with, natch) its foreign debt and/or FX hedging profile.

Witnessing this turmoil and comparing it with the great triumph of modern Brazil just a few short years ago calls to mind the great Brazilian musician Sergio Mendes and Brasil '66.   Who knows...as an FX forecast that might be as good as any other.  In the meantime, Macro Man cannot shake the feeling that those who dive in too early without eyes wide open may be left with "Menos Que Nada."



So, too, those who find themselves long NZD (if there's anyone out there in that spot other than New Zealand residents), as the RBNZ delivered another rate cut while talking down the currency.  Macro Man has always been bemused by the interest lavished upon an economy with a population similar to that of greater Detroit (even if it isn't quite as rural), but hey- it combines the market rates of a developed country with the liquidity of an EM one- what could possibly go wrong?

All kidding aside, the continued about turn from the formerly bullish Graeme Wheeler is just another piece of evidence that commodity producers remain under pressure.   Probably the best that you can claim is that they are fairly priced relative to commodities, though it is equally possible to construct arguments that they remain expensive.   Things will get very interesting when models suggest that the commodity currencies are cheap relative to their underlying terms of trade, but we remains a ways from that yet.   In this, patience is likely to be an unalloyed virtue.

Finally, in a perhaps misguided attempt to connect with readers, Macro Man has taken the leap and joined Linkedin.   Any readers who wish to connect are welcome to do so here.
Previous
Next Post »

10 comments

Click here for comments
Anonymous
admin
September 10, 2015 at 9:56 AM ×

"Just because implied vol is high doesn't mean it's expensive"

A wise man once told me implied vol is something you want to buy when it is high and sell when it is low. Not actually as loco as it sounds....

The big move in equity derivs in the fallout has been the change in skews. For the last 18m in Europe every time spot mkt has moved higher skews have actually been bid, whilst offered on the way down (yes, v much against clear option 101 theory) given the degree of Asian structured product flows into the EU QE filled space (Asian mkts have been doing this a long time, Europe playing catch up). That dynamic broke brutally in mid August, purportedly amongst other factors because bank flow desks forced to scramble to cover inordinate amounts of short variance positions in Asian indices vs some v large UK multi asset institutions and used all global indices to buy skew. Any return to the previous dynamic (spot higher, skew higher, vol higher in fixed strike) should be read as a positive signal for wider mkt in medium term.

Reply
avatar
Nico G
admin
September 10, 2015 at 12:49 PM ×

"Wrong call, right instrument, so only a minor amount of damage done."

you sound like Francois Hollande

:D

Reply
avatar
Macro Man
admin
September 10, 2015 at 12:59 PM ×

OIOI Those are fightin' words!

Reply
avatar
Bruce in Tennessee
admin
September 10, 2015 at 1:54 PM ×

http://www.rttnews.com/corpinfo/EconomicCalendar.aspx?PageNum=2

...Well, I try to look at trends more than daily trading....one of the trends that seems to have intensified in the last couple of months is that industrial production globally seems to have waned...

...Might actually constitute tea leaves? Of course there is that little thingy of the probably rate hike....

Reply
avatar
abee crombie
admin
September 10, 2015 at 2:30 PM ×

I thought everyone was worried about Fixed income ETFs, now we are worried about equity ones as well? Apparently SEC meeting in a few days might show what direction they are headed towards an investigation. Not really a big deal for the average investor, just sucks if you use stop losses

On EM FX, there is no need to jump the gun. The trend isnt going to change over night and currency isnt dirt cheap yet. Patience. But for USD bonds, IMO it doesnt make much sense for Russia to be yielding less than Brazil... Banco Itau 5yr sr paper at 7% is interesting as well, if they ever defaulted it would be much bigger than the Tequila crisis IMO

Reply
avatar
Anonymous
admin
September 10, 2015 at 5:44 PM ×

DIS bot back $2.4B of shares in the last month - Bberg

Reply
avatar
Anonymous
admin
September 10, 2015 at 5:45 PM ×

BIIB shopping 4-tranche bond issue to fund $5B buyback

Reply
avatar
abee crombie
admin
September 10, 2015 at 6:25 PM ×

LB, where are we re: Yield plays? I am finding nice single names in REITs, MLPs and HY, which leads me to believe the yield hogs are getting hurt... are we being led to the slaughter house or just given a gift from the market gods?

Reply
avatar
Nico G
admin
September 10, 2015 at 7:52 PM ×

the slaughter house.

Reply
avatar
abee crombie
admin
September 10, 2015 at 10:22 PM ×

hahaha Nico, that was a nice lob I just gave you ;-) So where do you keep your hard earned cash Sir Nico? Under the mattress?

Reply
avatar