Doh! ha

Your view of the broader significance of this weekend's failed Doha summit directly relates, in all likelihood, to your pre-existing view on asset markets.  If you are of a bearish mindset, then of course the failure of oil producers to freeze production is bad news, and renders predictions of "supply/demand balance by H2" as little more than a wishcast.  The implication, it need not be said, is bearish for risky assets.  If you're more constructive, on the other hand, it's easy to say that many asset markets have shrugged off tepid growth and lousy earnings and negative rates for awhile now...why shouldn't they continue to do so?

Macro Man was fortunate enough to sit in on a debate between two well-known commentators discussing the weekend summit.   They generously allowed him to record it and share with readers, who can listen via the soundcloud below:



Seriously though, you can muster the same data to provide a "compelling" argument to favour whatever view you happen to hold.  Let's look at something as simple as the correlation between crude and Spooz.  Macro Man ran the 120 day rolling correlation between Spooz and the crude price going back to 2005:

That's a pretty darned high correlation, right?   And it makes sense, because of the underlying narrative of financial market volatility via the high yield debt markets due to impoverished shale producers.  As such, the 5.6% decline in WTI bodes ill for risky assets, as evidenced by price action in equity futures, FX, and fixed income thus far on Sunday.

OK fine, but what if we run the same 120 day correlation on daily returns, rather than price?  After all, if there were really a strong causal relationship between the two markets, we'd expect to see it show up on a day-to-day basis, right?   Or B).  The 120 day rolling correlation of returns is actually negative; indeed, it's rarely been more negative over the last decade.


That's a pretty darned low correlation, right?  And it makes sense, because there are a myriad of factors that impact broad equity markets, of which the oil patch is only a small part.  As such, any any moderate weakness in crude this week is actually good news for stocks, as it provides an ongoing boon to the large section of the economy that benefits from low oil prices and will keep the Fed's hands firmly in their pockets.

CORRECTION:  It looks like Macro Man was working with dodgy data.  After getting some fresh data and re-running the analysis, it appears that the return correlation is actually quite positive, which probably does make sense.   I guess it's "Doh!" from Macro Man and "ha ha" from readers.  Apologies!



If you're so inclined, choose the chart and explanatory paragraph that best suits you view.   For choice, Macro Man retains his small speculative short in Spooz and does wonder if the Doha thing may just alter the narrative enough to encourage some profit-taking from tactical longs.  We could perhaps see similar in BRL, where Dilma's lost impeachment vote could see some "sell the fact" profit taking.  Soon enough, Macro Man will know whether to say "Doh!" or "ha ha".

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Anonymous
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April 18, 2016 at 11:57 AM ×

Looks like BTFD worked again this morning.

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Anonymous
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April 18, 2016 at 1:26 PM ×

Macro Man, I think you need to double check your numbers on the 120 day rolling daily correlation. I just ran it and see a number around positive 47%. Ran it with different combinations of SPX, ES1, CL1, USO, and got the same result. I would be very, very surprised if the rolling correlation were that negative.

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Macro Man
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April 18, 2016 at 1:48 PM ×

I did run log returns based on an existing dataset I had. I got a fresh dataset and ran the same analysis, and damned if the new numbers don;t agree with yours. I have no idea what happened here. I did double check because the numbers looked wonky to me as well...dammit. Thanks for pointing it out.

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Anonymous
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April 18, 2016 at 3:55 PM ×

@MM - too late - some momentum algo keyed in on your 'bad news is good news' conclusion and ran stops. Kind of ironic given your position.
Poor bears.

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Anonymous
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April 18, 2016 at 4:46 PM ×

Didn't see this coming in oil and equities. Kuwait oil strike and Iraq govt falling apart at the moment. Have to respect that price action.

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Anonymous
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April 18, 2016 at 5:04 PM ×

Until we dump on good news turn wont come... Have to wait for that to show...

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abee crombie
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April 18, 2016 at 5:10 PM ×

JPY IMM longs rose to JPY827bn as of April 12th, printing a new historic high in JPY longs on our records, topping the prior historic high of JPY824 in March 2008, in one of the fastest improvements in JPY positioning YTD seen historically” according to JPM. The market currently is full of complacency across a variety of assets but perhaps nowhere is this greater than in the yen and this extreme sentiment may begin working in Tokyo’s favor.

Some of the risk off crosses (AUDJPY, CADJPY etc) are recovering most of thier earthquake losses.

If US banks are able to power higher and EU banks dont disappoint (a big if) perhaps we can expect the hard hit Japanese banks to rebound as well. Lets see

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Anonymous
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April 18, 2016 at 5:47 PM ×

horrible to see those troll anons were right all along with their repeated calls for higher equity prices. ffs.

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Anonymous
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April 18, 2016 at 6:01 PM ×

is reason to pause when you realize exactly 1/2 of anon postings are by people with an IQ of <100.

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Anonymous
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April 18, 2016 at 6:54 PM ×

lets run vix vs commentary activity

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Anonymous
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April 18, 2016 at 10:59 PM ×

Stocks are 2% off the all-time highs and we are discussing the potential for helicopter money to fix the economy

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Rossco
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April 19, 2016 at 2:23 AM ×

WTI looks like it has perfectly filled the open gap from the Asian AM time zone yesterday

Not quite time to break out the champagne for oil bulls yet IMO

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Anonymous
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April 19, 2016 at 5:24 AM ×

Running correlations on price levels don't make much sense... Just stick to the returns please.

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Anonymous
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April 19, 2016 at 7:18 AM ×

Looking at recent price action I have NEVER seen the bears so wrong.

Equities are aggressively bought regardless of oil/FX moves.
Oil is HUGELY bullish (regardless of news).

Looks like we're going to see a massive upside breakout on equities taking out all time highs - maybe the start of a new bull market.

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Celeriac1972
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April 19, 2016 at 9:40 AM ×

This morning has seen my short orders dealt at 2100 and 6400, so I am on the bus.

Ding ding....!

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Anonymous
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April 19, 2016 at 9:57 AM ×

ES 2100? It hasn;t trade there yet...??

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Anonymous
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April 19, 2016 at 10:03 AM ×

anon7:18

this is April squeeze. relax it happens every year, markets temporarily top in April when bears cannot hold their short. I say short covering as the only reason because noone in their right mind should buy equities outright late April unless yes, your IQ is <100. Remember those words: as SPX is ticks away from April 2015 multi resistance (how smart) Europe for example is still 20% under. You know what i mean? If you were buying the wrong equities a year ago you were still deep in the red. If you were shorting them you are still deep in the green, since Europe topped in April 2015

if you want another perspective this jorning Europe is back to its 2016 resistance that it first reached when spoos bounced back to 1930 late January. So if you bought equities on February 1st you are making 160 points (!!) on SPX but are barely back to entry level in Europe (!!) after some horrible drawdown that an emotional trader like you would probably not survive. Lastly you did not hear 'hurray' from bears when spx 1800 was being retested and the whole world was pretty scared. I do not know why you are polluting this forum so much with your bullish QE propaganda. The year will be long and i am worried that you might invite inexperienced traders to buy at the worst time and the worst price. I am sure many would appreciate if the perma-bullish anons could tone it down a bit. I am not sure the 'i told you so' posts contribute anything to this very good forum especially at market extrema.

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Anonymous
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April 19, 2016 at 10:27 AM ×

anon 10:03 - I'm not sure perma-bearish posts contribute anything, especially when you always get it wrong and lose money. Go buy some equities, make some money and stop being so gloomy.

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Rossco
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April 19, 2016 at 10:36 AM ×

MM - i suspect if you keep the commentary FICC centric the trolls will bore easily

lets face it - theres more to life than spx

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Anonymous
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April 19, 2016 at 10:43 AM ×

Rossco,
Most banks are firing FICC staff, downsizing those desks and replacing their management with equities people. Just sayin'...

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Rossco
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April 19, 2016 at 10:48 AM ×

anon

theres plenty of l/s equity hedge funds blowing up left right and centre and plenty of macro funds doing very well

your comment is inane

thanks for coming

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Rossco
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April 19, 2016 at 10:52 AM ×

on that note : MM , personally , I would be very interested to see the output of your 4 factor model for $AUD as there has been quite a lot going on there, not least of which a newly non-dovish RBA and and a likely contractionary budget in the offing - thx

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Booger
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April 19, 2016 at 12:15 PM ×

celeriac, I'm in too, short spoos @2100. I'm watching carefully for a top over the next 2 weeks. It is pretty boring.

MM: please don't embed sounds in your excellent blog. I was reading your article during a call and pressed the link by mistake. Most embarrassing!

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Macro Man
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April 19, 2016 at 12:29 PM ×

For the record, anyone who thinks in single dimensions like "the bears" or "the bulls" has no business commenting here with the adults. Those are sports teams from Chicago, not terms reflective of anyone with more than a few brain cells.

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Macro Man
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April 19, 2016 at 12:29 PM ×

@Booger...at least the sound was appropriate for your gaffe.

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Curious
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April 19, 2016 at 12:56 PM ×

I have a serious question regarding equity indexes. Can someone explain who/what the likely buyers of equities are in these rallies? We seem to have a pattern where equity indexes range, then burst upwards in a strong trend, range again, then maybe another strong burst up. It also appears that most of these 'bullish rallies' happen across global equities (so the buying is not regional). Also small and large-cap rally together. Sometimes the equity rallies are correlated with JPY and/or Oil but often not. The price-action also seems very one-sided: very few pullbacks, just sustained buying.

I'm not convinced on conspiracy theories but would v much like to know people's thoughts/explanations for the above. Thanks.

PS I have no stance long/short equities, but am an observer.

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Anonymous
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April 19, 2016 at 1:14 PM ×

It's asset allocation. A fund or other turning on its machine to purchase a basket over a period of time. Trying not to leave a major footprint by buying at a slow pace.

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Anonymous
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April 19, 2016 at 5:05 PM ×

anon 10:27 AM

anon 10:03 here. if i told you i made a little less than two million euros shorting European equities since April 2015 you would not believe me right? Right. Come on my yacht this summer and i will teach you how to up your size. You are getting restless trading 1 lot i can see that. Now you go buy that 2100 SPX and we talk in a few weeks.

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