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.


Previous
Next Post »

14 comments

Click here for comments
Anonymous
admin
December 7, 2015 at 9:52 AM ×

Large buyers of equities in the market today (among others, Asian names are buying EU and US equities). I think the reaction to the ECB last week was overdone, expect euro to fall further and equities to reach new all-time-highs in the near future.

Reply
avatar
Anonymous
admin
December 7, 2015 at 2:24 PM ×

What was Friday's huge US rally about? Biggest since August.... Unwind long eu equities hence buying back some short US equities?

Reply
avatar
Anonymous
admin
December 7, 2015 at 2:25 PM ×

Sorry, biggest rally since start of September

Reply
avatar
abee crombie
admin
December 7, 2015 at 2:32 PM ×

On capital flows, China just reported another disappointing number

"Since we expect the combined goods and services trade surplus to have been around $55bn last month, this would imply record net capital outflows of $113bn, up from outflows of $37bn in October." -- http://ftalphaville.ft.com/2015/12/07/2146983/oh-look-were-back-to-record-chinese-capital-outflows/

And with WTI already below $40 and Brent on its way, those international flows are less likely. Oil related FX taking the cue already, COP, CAD, RUB, MXN namely. This will probably continue to pressure HY as well and take the accelerator off the Value vs Growth trade as well.

KMI and the MLP's are getting interesting. Likely capitulation soon

Reply
avatar
washedup
admin
December 7, 2015 at 3:09 PM ×

anon 2:24 - talk to anon 9:52 - anonymously of course.

abee - I have to imagine that if there is further upside left in bucky, that it would have to be a function of general relativity, i.e. an EM and Eurozone debacle grander than anything we have seen so far, and not any inherent mojo in the US economy. The way these indexes are constructed, which in turn dictates flows somewhat by corporate hedgers, the euro has a disproportionate impact on USD, and I really wonder if it is about to completely wreck punters by refusing to play to the march to parity theme without major bloodshed along the way. Lets not forget its everyones favorite trade through year end.

I am also skeptical of any correlations holding between the dollar and commodities - that is so pre 2014! I think we may be entering an 'every trade for itself' regime a la 2008.

LB interesting observation on the NFP day short squeeze from 2007-2009 - I remember experiencing a few of those - do let us know what you conclude.

Reply
avatar
Mr. T
admin
December 7, 2015 at 4:42 PM ×

Amazing delayed reaction in oil to the OPEC meeting. Did it really take all weekend for the market to realize the situation? It's interesting that the idea of anti-dumping tariffs in other raw materials is fine, but if anything upstream oil with export restrictions has to swim against the current. I see oil/gas as a terrific opportunity setting up. Lots of ways consensus expectations can go awry. Would you, as a personal allocator of capital, rather invest in $40 oil in Texas or $30 oil in Iran? Talk about risk premium. Is is possible the expectations for development are too high?

And why is gas being thrown to the wolves with oil? If you want to heat your home in middle america you are not going to do it with gas from Qatar. Associated gas is likely to decline with US oil production, and we are not far from at least CHK and possible CHK+SWN going under, thats the #2 and #3 gas producers in the US last time I checked, and many more less prominent names. The equities seem hopeless but the outright contracts even paying through the nose for outmonth premiums seem compelling.


Reply
avatar
abee crombie
admin
December 7, 2015 at 5:48 PM ×

Mr T. i was thinking about your comment on Friday, good call. Clearly a lot better than my early knife catching in MLP's trying to take advantage of the same theme. Total carnage in that space today with most names down ~ 10%. Dont tell mrs crombie.

Reply
avatar
Anonymous
admin
December 7, 2015 at 6:51 PM ×

this choppiest in spoos looks like a precursor to a trend change down....2020 key...at that level expect vix curve to flip hard as well

Reply
avatar
Polemic
admin
December 7, 2015 at 7:14 PM ×

Chances of no Fed action?

Reply
avatar
Anonymous
admin
December 7, 2015 at 7:52 PM ×

25bps and done until at least end of Q2 as they watch the data... It is strange to see the ECB were concerned FED might not act if ECB did too much.

Reply
avatar
CV
admin
December 7, 2015 at 10:16 PM ×

"Chances of no Fed action?"

Well, maybe MM should write a post. What should economists do? You see, this inflation forecasting is actually dead simple. Core lags, so most of the time you just need a decent PMI, or monthly activity indicator and it will give you the trend about 6-12 months in advance (adjust for currency of course). The headline is more volatile, but baring some crazy assumptions of pass-through, the oil price and a broad weighted ags index usually do ok. Now oil is starting to pinch here. Base effects will still push up energy prices in coming months (and who knows where oil clocks out in December), but but ... it is all getting very disinflationary out there at the moment.

Will the ECB be bullied into action and the Fed to non-action? I doubt it ... but the market is bullying the central bankers here.

Reply
avatar
Leftback
admin
December 8, 2015 at 12:08 AM ×

Dame Janet's main inflation driver just got kicked in the nuts. She is going to have to be a tough old bird to begin tightening here when she can go Full Carney instead. Just sayin'.. I know Mr Gundlach and I think alike on this one, can you say Policy Error?

LB is in NYC, where Falling Knife Capital/Hammock Asset Managament has just moved into new offices near Washington Square. The locals seem friendly, although many of them do seem to be intoxicated much of the time. They are unlikely to offer a great deal of market insight, however, so we will continue to hang out over here at MM's highly reputable establishment.

Our recent portfolio moves to add to US Treasury positions on Thursday's global bond carnage look prescient in light of today's meltdown in credit related to the oil patch. Abee has been watching the shale credit area for some time and warning that the worst was yet to come. Well, it is right around the corner, so scout out a few HY CEFs for bargain basement dumpster dives.

Reply
avatar
Macro Man
admin
December 8, 2015 at 12:12 AM ×

If you want to capitalize "error", perhaps it's best to do so when referring to US monetary policy having any serious potential impact on the price of oil.

As for Gubdlach, Dalio, et al., just file that one under the shock headline of "owner of zillions of dollars of bonds says bonds are good investment".

Reply
avatar
Mr. T
admin
December 14, 2015 at 4:08 PM ×

Natty just brutal decline. Just as production starts to decline and associated gas takes a hit you get a 75 degree Christmas in Chicago. My knife catching in anything upstream related has been a complete disaster, with the gas heavy names being the worst of the worst. There are lots of good long term bullish arguments about NA gas, but none of them matter with the wall of selling pressure across the entire space.

I guess in the end OPEC wins.

Reply
avatar