Three things

1) Further to yesterday's post, Macro Man did a little more digging on relative credit valuation.  Small caps have been something of a red-headed stepchild for US equity markets this year, with the Russell 2000 down nearly 4% in price terms.  If equity markets are moving to a quasi-late 90's analogue (narrow leadership, rest of the world in turmoil, commodities in the dump), that would clearly suggest more weakness ahead.   Macro Man plotted a similar "relative value" indicator with his IG credit index to that posted yesterday, and while the shape is rather different the message is if anything more ominous:

As a relative value trade it certainly looks like there's something there and strips out at least some of the energy exposure present in high yield.  To date, however, there hasn't been a solid Sharpe ratio trend in shorting the Russell to own IG.   Interestingly, that has not been the case for high yield and energy.  Owning high yield and shorting oil (at a ratio of 5-1 in terms of face amount) has actually been a pretty good trade for a number of years, delivering an information ratio in excess of 1 (the basket below is sized to target 5% vol):

It should be noted, however, that that 5-1 ratio is not vol-neutral; there is a decent beta to short oil.   Sizing the trade to be vol-neutral would require a 10-1 ratio, and reduces the information ratio over the last year by 50%, though over the last four years the IR actually improves slightly.

2)  China.  Macro Man didn't have time or space to write about it yesterday, but oh dear.  The hemorrhaging in FX reserves reignited last month, with only part of it attributable to the decline in non-dollar currencies....

Meanwhile, the trade account didn't really deliver the goods last month;  imports were slightly stronger than expected but exports were weaker, leading to a $10 billion shortfall in the surplus versus expectations.   Macro Man's real time China growth proxy looked like it was leveling off a few months ago, but no longer; it's now emulating one of those gold-medal Chinese divers:

Perhaps coincidentally- but probably not- PBOC has responded to the recent bout of euro strength by...marking USD/CNY higher; higher, in fact, than it's been since August 2011.  While it's dangerous to pay the top in USD/CNH given their recent predilection for jamming the market lower to squeeze specs, it does seem like having a bit of long USD/CNH in the bottom of a drawer somewhere makes a lot of sense (Macro Man's earlier suggestion to take some profit notwithstanding.)

3) There's little holiday spirit at Morgan Stanley, where more job cuts were announced today, trimming a quarter of the global workforce in FICC (ie, macro) products.  No doubt Elizabeth Warren and Mark Carney, the real life Dolores Umbridge and Dean Wormer of the modern political economy, will be delighted.  Not quite as delighted, mind you, as they'll be when all financial institutions operate as utilities.

On an exclusive basis, Macro Man is pleased to present a clandestine look at a recent presentation on "the future of banking" given by Umbridge and Wormer at a recent meeting of the Financial Stability Board:



Alternative link here.

Edit:  Non-US readers, try this one.