What will punters do?

In many ways, Friday's number was close to ideal.   By coming in pretty much bang on the consensus, it afforded us an unvarnished view of what markets "wanted" to do after Eurogeddon, and perhaps offering some clues as to what the balance of the year might hold.

Maybe the biggest and most immediate question is the mindset of punters after last week.   Anecdotal reports from late Thursday suggested that a healthy percentage of macro risk-takers were keen to pack it in and close up shop for the year.  Although the euro didn't exactly come back for them on Friday, the stunning rally in US equities may have bolstered hope that the single currency will take a dump once again.

Although one can never really trust real-time hedge fund indices, particularly in gauging the risk appetite of individual punters, it is perhaps instructive to note that the while HFR Macro index understandably took a dive, it shed only a moderate portion of its aggregate gains since since the October ECB meeting.

A perusal of the HSBC hedge fund report pre-dating the ECB meeting suggests that the average macro fund was up 3% YTD; perhaps last week left them up roughly half of that, give or take 50 bps?  In the good old days when December regularly featured superb tradable trends, one could probably rely on punters to get back on the horse.  This one, frankly, is a bit more difficult to call.   Macro Man's sense is that if EUR/USD drops like a stone, guys will get back on board....but he's not at all sure that macro selling will be the thing that makes it drop.

Certainly EUR/USD looks to have overshot the move in interest rates, though that's perhaps not surprising given the breadth of positioning, the shock of the event, and general illiquidity.  It was curious to see a jet-setting Draghi attempt to mount a rearguard action on Friday, implying that there is scope for the ECB to more.....almost as interesting, in fact, as the latest "sources" story suggesting that Draghi's mouth wrote a cheque that certain elements of the governing  council were just not prepared to cash.

Constancio's attempts to blame the market for "misunderstanding" the ECB's communications would be droll if they weren't so pathetic.   Was it the market that floated trial balloons in the media about a number of outrageous policy proposals, none of which saw the light of day?  Was it the market that couldn't keep its button zipped, engaging in the sort of anonymous tips last seen when Bud Fox relayed Blue Horseshoe's taste for Anacott Steel in 1987?   Hmmm....if the ECB want to be properly understood, maybe the President should "speak for the committee" rather than himself.   Either that, or they should go back to just telling the privileged few what they're going to do at dinner the night before.

USD/JPY and USD/CAD suggest that the dollar trade is very much alive, though of course the latter has as much to do with OPEC's affinity for early house music as the merits of the greenback.  Of course, the zillion-dollar question for the USD is how the Fed will craft its statement accompanying what appears to be a locked-down lift-off next week, and what impact that has on markets.

For years, markets have faded the "dot plot" because the Fed clearly didn't have the cojones to move rates one basis point.  Now that they do, will markets retreat back to the plot, or continue to price at a premium on the expectation that the Fed will stop sooner rather than later?   For choice, Macro Man would opt for the latter, at least until or unless the tone of the economic data shows some sustained improvement.

That being said, there remains some distance between where we are today and what the dot plot suggests:

This is one reason that Macro Man has mentioned liking the EDH6/H8 steepener on a number of occasions...it captures the dynamic of the 110 "missing" bps in the ED curve over 2016-17.  To mitigate exposure to a further deterioration in US data, it's tempting to look at layering some US/Europe bond spreads, which are near historical wides:

Note that the trade looks much better in bond space than swaps, thanks to the massive difference in swap spreads between the two markets.  It's instructive to note that US 10 year yields had a local (18 month) high a couple of weeks before the first rate hike of the last cycle.   In retrospect, of course, (and in real time for those not too busy congratulating themselves on their own credibility) Greenspan's "conundrum" had more to do with massive inflows from FX reserve managers than how wonderful the Fed was, a factor that will decidedly not be at work today.

Then again, at that point the Bloomberg economic surprise index had been positive for a year, not negative.  This isn't a trade that will make your 2015....but if things break right, it could go some ways towards making your 2016.