The end of another emotional week

It's funny, isn't?   We've had a solid bounce from the lows in developed market equities, but nothing spectacular, and suddenly all sorts of smart people are coming out of the woodwork banging the drum for long risky asset positions.  Indeed, given the momentum displayed into the US close on Wednesday, Macro Man frankly thought yesterday's follow-through was disappointing.   Then again,  vicious bounces are more characteristic of bear markets than bulls...unless they come off the ding-dong lows!

Oil also generated a great deal of commentary after bouncing despite another large build in reported inventories.  Insofar as markets tend to bottom on bad news, this could well be a classic reversal signal.  Then again, the news isn't actually all that bad; Venezuela is apparently begging for an emergency OPEC meeting, while the latest Storm of the Century is forecast to dump more than two feet of snow on parts of the Eastern seaboard of the US.   Strangely, despite a forecast of some 8" for New York City, Macro Man's town is only expected to receive a couple of inches.

In any event, at least some of the bullish chart profile on crude is thanks to the contract expiry and roll; looking at a chart of the March contract (the current front month), we obviously still see yesterday's up candle, but the overall formation is less unambiguously bullish in Macro Man's opinion.  Similar set-ups over the last could of months have led to sideways consolidation and nothing more.   Still, he will concede that that opinion and $2.10 will get you a large black coffee at Starbucks, but little else.

Yesterday Macro Man wrote that it would be interesting to see if Draghi would be defiant or resigned.   From Macro Man's perch he was clearly the former, talking up the economy in a way that was sorely missing from much of the Fed's rhetoric over the past several years.  While he clearly opened the door to a further policy adjustment, he stopped short of promising or even "promising" one; perhaps a lesson learned after December's fiasco?

What might a fresh easing look like?  While Draghi wouldn't rule anything out, Macro Man suspects it would simply involve adding on the extra monthly bond purchases that went "missing" in December.  Sure, they could cut the deposit rate again, but what would that accomplish?  If you'd been told 15 years ago that banks were being charged to hold money at the central bank, and that the price of the charge had just gone up, what would you have expected the share prices to do?   Probably something not dissimilar from what we've seen over the last six weeks.

Perhaps Macro Man's favoruite line from the whole presser was when Draghi acknowledged the possibility that central banks could contribute to financial instability through over-stimulation of the economy and/or financial assets.  This, of course, is a) something that the academics at the Fed have blithely dismissed with the wave of a hand for years, and b) been standard operating procedure at the Fed for the better part of two decades.

So what of the market? Spurred partially by this month's equity weakness, Bobl yields have reached and breached previous lows last seen just before the December ECB.  It's hard to go or stay long (especially if you're a cash strapped SWF of an oil producing nation!); while it's tempting to try a short, that seems rather brave given ongoing equity instability and the six weeks of dreaming and wish-casting that the market can do before the March ECB meeting.

A similar and correlated trade that Macro Man likes better is a reds/greens steepener in Euribor, where you go long the March 17 contract (i.e., when the current bout of QE is slated to expire) and short the March 18 contract.  Unlike Bobl yields, which can kind of go as low as they want depending on what depo rate assumptions people make, the ERH7/H8 curve should retain a positive slope.   It's not quite at its lows, but it's not far off.  Even during Fed QE, the equivalent US spread didn't really trade below 10, giving this one an excellent risk/reward.  (Disclosure:  Macro Man is long from slightly higher levels.)

It's been another emotional week, but a fun one.  Although they haven''t all worked, Macro Man's found himself doing more trades than he has in quite some time.   It's good to see assets react to macro stimuli across the world.  Moreover, the lack of consensus on the state of play, both economically and market wise, increases the rewards for getting things right.  What else could a macro man ask for?