Pincers

So what now?   Friday's price action was as stunning as the employment data was disappointing, and punters could be excused for wanting to take some time off to gain some perspective and clear their heads.   Unfortunately, that option probably isn't available to many; we're entering the sharp end of the year with many, many YTD P/L's in uncomfortable territory- while it's not quite "find the trade to bet your year on" time, it's not far off.

In perusing a few charts over the weekend, Macro Man was struck by a number of them that appear to be caught in the middle of pincer-like narrowing trendlines.   Some, like gold, still offer a little room to maneuver:


Others, like the euro, look like a resolution will happen soon.  The irony is that there is relatively little on tap data- or policy-wise this week to give it a jolt....then again, large moves often happen in the absence of an obvious catalyst.  The pincers are currently 200 pips wide and narrowing fast.
The tell on which direction goes might come from oil, where the pincers are tightest of all.  There was admittedly a false break higher last week- was this a bull trap or a prelude to the next leg of the reversal?   Either way, it seems likely that the environment of high volatility is like to remain with us.


Last Friday, you could almost hear the market pining for a hint of QE4 when Spooz were on their lows.  It's nonsensical, of course, but such is the outcome of the modern day "every asset owner's a winner" Lake Wobegon financial markets.

In that vein, Macro Man was intrigued to see that after Friday's number most eurodollar curve spreads collapsed to their lowest levels in nearly 2 years.   The generic 2nd vs 10th contract spread, for example, is now at just 99 bps, pricing LIBOR less than 1% higher between March 2016 and March 2018.  By way of comparison, the median dots in the infamous SEP plot rise 225 bps between the end of 2015 and the end of '17 (not an exact match on time frame, but close enough.)  Fading this now is a bit of a falling-knife play, but the pre-taper low of 81 bps will look nice as a stop-loss risk parameter if we get another 5-10 bps lower.




If the flattening continues, though, pretty soon the Fed is going to run out of room to maneuver, because the market will be pricing nothing at all.  Between now and then, they're going to have to make a choice: do they continue to kow-tow to the whims of the market and its propensity to throw the toys out of the pram, or do they start delivering a tough-love type of lecture that market pricing doesn't reflect the Fed's intentions?

It's kind of ironic, really.  For years, the market has assumed a kind of omnipotence that central banks have over asset prices, whereas latterly, it is the market itself that seems to hold all the power over the Fed's lift-off decision.  In reality, of course, neither is all-powerful or all-knowing, and the longer that each side attributes these traits to the other, the nastier the surprise will be when reality bites.
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Anonymous
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October 5, 2015 at 8:48 AM ×

not sure if you care but your name is on the final screen

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Booger
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October 5, 2015 at 8:48 AM ×

yes, it is fascinating isn't it. Perhaps we get a bit of chop sideways until there is more EM turbulence or a good set of US numbers. Spoos look bullish from that move on Friday and I am tempted to go long with the apparent double bottom in spoos, EM, commodity FX but it does not look that convincing in terms of the fundamentals. I like to play in the direction of the underlying trend. I don't know how I would be able to sleep at night with a long EM or commodity FX position with size currently. Probably I would be waking up in a lather of sweat often wondering whether I will get my brains blown out any minute. I am not sure the long term trend is still up with spoos. But then again the short term trend is definitely not down. Hard to have any conviction here.

I reckon I'll stand aside, and wait for a nice rally in risk assets. I think shorting aud.usd above 0.725 would be something I would be atrractive. Looks like the trade after FOMC to be in was long treasuries, but that has now left the station and with the Chinese selling, that doesn't look like such a low risk play either.

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Anonymous
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October 5, 2015 at 8:55 AM ×

Japanese names are putting a large bid under equities today. Heavy buying in the Asian session carrying through to the London session. The Bank of Japan will NOT let equities fall.

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CV
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October 5, 2015 at 9:50 AM ×

Completely agree with the sentiment MM. A lot of tight ranges here.

1) The euro - I think it will probably to naught until Draghi reveals his hand October 22nd. More stimulus or what?

2) Oil - Tricky. Even if it does nothing its annual and six-month return series will mean-revert. I can honestly see it meandering in nothingness.

3) Spoos - No real view here, but if gun-to-head, I would say suggest a squeeze higher in sympathy with FTSE 100, Europe and EM.

4) EDZs - What a clusterf'ck. The doves strike again. I had a little punt on for a squeeze in front end U.S. rates in Q3 and have been stopped out like a rookie. Banging your head against a wall trying to figure out when the ketchup move comes in on the U.S. front end.

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abee crombie
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October 5, 2015 at 12:32 PM ×

If we get the same magnitude in surprise from ism services watch out. For now it's just one job report. I like em FX for a good bounce.

Euro dollars have been the worst to trade. FX has priced in all the rate cuts and more. That's where the pain is. I can see euro getting to 1.20 pretty easily. But agreed, for now it's hard to have conviction.

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abee crombie
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October 5, 2015 at 12:33 PM ×

FX has priced in all rate hike by Fed, sorry

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Anonymous
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October 5, 2015 at 12:41 PM ×

FT: price action in equities feels a bit like post oct 98....I'm not saying the economic set up is really comparable but from a sentiment perspective...
We will probably see a few soft economic stats in the coming weeks which is only a reflection of the EM carnage with a lag (as usual) but I think Q1 and Q2 growth will surprise on the upside; french PMI bucking the trend...it's a new one...I can see the CAC at 5600/5800 by Q3 next year

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washedup
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October 5, 2015 at 1:04 PM ×

Touching on that 'what works into year end' theme (look forward to MM's survey at some point), still feel like a lot of paths lead u to european equities. They are on the cheap side, have been clubbed like baby seals in the last 2 months, and the news cycle there is due for the rubber band effect. I don't think abee's scenario of a euro at 1.20 hurts european equities that much (unhedged), although it would clearly be consistent with a risk off picture. This was the trade de-jure of 2015, hedge fund redemptions through Q4 should more or less be in the price, and those consensus trades have a way of re-asserting themselves in Q4 after the bobbies have come and whisked away the un-ticketed passengers.

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Leftback
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October 5, 2015 at 2:46 PM ×

Closed last week's trade just now - long SPY calls - that was a very nice risk/reward set-up and it has paid off nicely for LB. Still long Europe and EM equities for the time being as vol sellers and JPY sellers re-enter the arena and it's time for shorties to be clubbed like baby seals. All that "Red October" protection that was being purchased in August and September is looking quite expensive now, as expiration looms at the end of next week, and hedges are being lifted left and right.

There is no truth to the rumour LB is leaving for the vacant job at Anfield, and we also turned down Sunderland.

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Anonymous
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October 5, 2015 at 2:46 PM ×

Too big to downgrade?
Glencore...$19 billion of derivatives contracts.

http://www.forbes.com/sites/michaellewitt/2015/10/02/why-glencore-should-make-all-investors-shudder/

Quote of the Day... "More execs should have gone to jail for causing Great Recession."
Ben Bernanke

Sickening.

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Anonymous
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October 5, 2015 at 3:06 PM ×

Never realized that the guys who manipulated gold prices, CDS, LIBOR, launder money for drug cartels, undermine Iran sanctions, commit fraud, steal money, rig forex markets and dark pools, also make cars...

Researchers found BMW, Ford, Mazda and Mercedes cars emitted levels of nitrogen oxides up to seven times the legal limit

http://www.dailymail.co.uk/news/article-3259067/It-s-not-just-VW-Official-tester-claims-four-diesel-car-giants-break-toxic-emissions-limit.html#ixzz3nhZnVyeU

Next step is immunity from lawsuits for the car makers. No jail, no lawsuits. Same as Bush did with AT&T.

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CV
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October 5, 2015 at 3:32 PM ×

"There is no truth to the rumour LB is leaving for the vacant job at Anfield, and we also turned down Sunderland."

You're holding out for Jose's gig then ? ;)

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Anonymous
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October 5, 2015 at 4:13 PM ×

FT: XAG strong with EUR/USD weakish....unusual enough to be worthy of attention...maybe it's just those commodities shorts who sold indiscriminately and are buying back in the same way...

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Anonymous
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October 5, 2015 at 5:25 PM ×

It is highly amusing that having recently heard the equity short thesis from the usual suspect(s), we witness equities heading for their longest winning streak this year... (lol)

Central Banks will not let equities fall. Period.

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Anonymous
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October 5, 2015 at 6:12 PM ×

6mo TBills : from 0.27% to 0.04% in last 14 trading sessions

US TREASURY SELLS 3-MO BILLS AT 0% FOR FIRST TIME EVER

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Anonymous
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October 5, 2015 at 6:14 PM ×

BOJ MAY NEED TO EASE AGAIN WITH FED DELAY, NIKKEI SAYS...

Quelle surprise!

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Anonymous
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October 5, 2015 at 6:14 PM ×

Atlanta Fed Q3 GDP tracker now 0.9%

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abee crombie
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October 5, 2015 at 6:20 PM ×

Well ism services disappointed but market doesn't seem to care. And frankly if you look at the current business activity can u really blame them, it's still pretty darn good. I can easily envision a 98 -99 style melt up, though I am not heavily positioned for it. The markets are very divergent here and it wouldn't surprise me to see equities rise up on narrow leadership.

China was never the engine of growth, it was the kaboose, as it was and still is running large current account deficits, meaning it was exporting savings and sucking up someone else's demand. Well now with commodities officially dead, demand from commodity exporters is down. But for countries like USA and Europe, which are mostly domestic demand stories, who cares. And lower commodity prices actually help. Lower em growth hurts us and euro exporters ( perhaps over represented in some stock exchanges like dax) but for the economy its domestic demand which matters most. So if us and euro consumers hold up, then companies focused on them should do well ( ala Netflix, Apple, Amazon ) while more industrial, energy etc suffer. Both U.S. and euro have still ample excess capacity so inflation isn't a concern. When inflation, specifically wage inflation picks up, them u have to re examin..It's also the case in HY. Good companies will do ok, and crappy companies with over leveraged bs will lose funding. And that may serve to befuddle analysts like me who see HY crashing and wonder where the next shoe to drop is. Well it will come, but it just might take a big melt up to see it.

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Polemic
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October 5, 2015 at 6:50 PM ×

When I hear long term reasons for short term positions being rolled out as long term positions for hopefully short term positions that finally have to turn into bottom drawer compost heap trades (rotting through carry costs) on a now very long term view ( Greece for e.g.. Hands up who is still short Greece on all the one day it is doomed arguments?) then I take the moves as positional squeezes,

We hear lots about underweight equities in funds and how big PMs are hedged up to the eyeballs. Assuming that these massive hedges were on the back of the most recent China Fed etc theories then I presume they didn't go on during the fist 4 days of the august fall. Folks like to digest a monster dump before racing in with a hedge program. So that would imply that those hedges would be put on in the range we are now in for equities. Which would further imply that further climbs from here would mean those hedges are creating underperformance to the index. I don t know any equity manager who likes to be seen to underperform a simple passive index.

So with that in mind I would not be at all surprised to hear that most of this move higher is pain in the hedges. Nothing worse than falling vol and counter directional underlying to induce thorn bush backward dragging hedge pain.

Big picture woes are there but don't forget the good market lord always provides an excuse for any move. And, Lo, tis foretold that ZIRP forever meme and hedge squeeze excuses shall rain upon the earth for a few days more.

Oh and thank heck for this rally (FTSE red hot poker has been replaced with FTSE soothing balm)

Pol

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Anonymous
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October 5, 2015 at 8:26 PM ×

Russia playing Top Gun with Nato members. Market will ignore until....

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Polemic
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October 5, 2015 at 8:30 PM ×

They've been doing that around the coast of UK for years. To pass the sell stocks excuse from crap China to Crap Fed to Crap Russian Syrian games seems like a position crossing a river on stepping stones. Yes it's there, but are you really short on that or using it as justification for existing positions?

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rp
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October 5, 2015 at 8:39 PM ×

well...so much for waiting for a pullback. Maybe another year.

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abee crombie
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October 5, 2015 at 8:47 PM ×

MLPs up 20% in 4 sessions. Wow. Old leaders arent so far away from highs, Fb and Nflx... the divergence continues. you have to be very tactical in these markets. IBB seems lagging here.

a hot poker might soon be in EEM.

I'll see you at 2050 spoo's, until then you can do what you like

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Anonymous
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October 5, 2015 at 9:19 PM ×

FT@ Anon 8:26
If you look at DJI charts in the run up to 1914 and 1939, the geopolitical situation was ignored almost until the last minute.
If you put things in perspective, it's unlikely that a lame duck president would start a major confrontation in his last year (he already defiled his nobel peace prize to such an extent that the the committee president had to resign).
I think this is a 2017 story. Russia is kicking al nosra's and ISIL's ass so bad it will take a year or two for the coalition (US+FRANCE+UK+SAUDIS+QATAR+TURKEY) to arm an alternative.
At the same time (2017), there is a peak redemption in HY and corporate debt....
So, I would frame the next bad market jittter for that period (2017/2019)
Until then, we have the perfect set up for a 1999/early 2000 squeeze as EM will retrace the 2014/2015 first down leg and DM growth will accelerate (on the back of strong retail sales) propelling DM stocks to new highs.
Just my opinion and I know I'm talking my book.
Safe landing Nico ?
:)

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Anonymous
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October 5, 2015 at 9:29 PM ×

Something strange seems to be going on . . .

https://research.stlouisfed.org/fred2/graph/?g=22ho

I keep finding relationships like this one. Things that would seem to point to a imminent recession. But, its like, the US consumer didn't get the memo.

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Anonymous
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October 5, 2015 at 9:35 PM ×

bullish as i have been over the past week or so -mainly ez equities- i am quite amazed to read comments that the pain is actually a continued rip - really??? given that this feels and acts like a typical bear market rip-fast and furious - and given its getting everybody all excited i have trimmed longs into close here- still got ez vs spoos but alas long bias is gone
expecting a 99 style meltup is insane( but i have been caught out way too many times so who knows) but happy to give the close here and will probably buy the dip when i hear comments about how this was the rip to sell!!!
no a side not us markets tagging 50 day with some room to go in europe

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Anonymous
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October 5, 2015 at 10:18 PM ×

FT@ anon 9:35
I know it does sound insane but as much as 99/ 03 2000 was about the internet meme, this one is about getting a last chance to join the happy few who benefitted from FED's largess and getting rid of 0 to 1% return on devaluating cash....
You can see the harbinger of such a psychology in these last 2 days' PM behavior in spite of stable ish eur/usd
Although I know that Elliotism is backward looking, subjective and post-explanatory, there is something in the 3 waves up explanation; and I think we are entering such a phase. The quantitative minded will lough me off (and I'm rather quantitative considering my background) but since kahneman got his Nobel prize, I feel like I can make some foray into the subjective world.

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abee crombie
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October 5, 2015 at 10:33 PM ×

i dont think anyone really believes equities are going to do a rip like 99 when nasser went from 1500 in October on 98 to 5000 in the year 2000 (that was CRAZY) but we could see a test back up around old highs (or new highs in the leaders) which seemed unthinkable just a week ago...A lot will depend on what china does and the data that comes out of there over the next few weeks.

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Mr. T
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October 5, 2015 at 10:44 PM ×

The tone seems to have improved in commodities - WTI posting some nice days and even copper looking firmer. Probably not a coincidence that the tone out of China is better, albeit with SHCOMP holiday it may be without merit. I'd love to see a rotation back into the commodity sectors - talking my book for sure but its the best TWINE trade out there now. The boogey-man of fall redeterminations so far is looking like a snoozer btw.

'99 comparisons are a waste of bits. SPX breaking even this year would be impressive at this point.

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