Monday morning bullet points

A few random thoughts for Monday as Macro Man is still settling back in:

* If the dollar were going to turn back up, now would be an opportune time.  As of early last week CTAs (proxied by positioning on the IMM) were net short dollars for the first time in a couple of years; cue rally in the dollar swiftly thereafter.  While this week's Q1 GDP and Fed announcements should dominate short term sentiment, the natural and understandable impulse may well be to expect a continuation of last week's dollar renaissance.

 Source: Goldman Sachs

* Naturally, the fixed income rally that some, including your author, were reticent to sell into has withered as yields drift higher.  Were this to continue it would obviously provide a further underpinning to the dollar's rebound.   Looking at EDZ7, there are another 20 ticks to go just to erase the post-March FOMC rally.  With some erstwhile perma-doves growing a pair of....talons, equities performing well, yields accommodative, and the dollar not rising in parabolic fashion, the Fed should, at the very least, keep the door open for a move in June.


* The market's reaction to Friday's BOJ story was telling, and almost certainly indicative of positioning.   To be sure, lending to banks at negative rates is a somewhat radical, but hardly unprecedented- under certain circumstances, Eurozone banks will be able to borrow in the TLTROs at the deposit rate!  Needless to say, since that announcement, neither the euro nor Eurozone banks have exactly gone the way that the ECB may have wished, providing a stark remainder that any BOJ announcement will hardly be a panacea for the yen or even the Nikkei.  Still, with the market still short USD/JPY it's easy to see the weight of anticipation dragging it higher for another couple of days.  Another couple of percent, however, and it will start setting up as an attractive re-sale.

* Many of the details of today's Saudi 2030 announcement have already been leaked: a sale of 5% of Aramco, the creation of a SWF that targets a $2 trillion size, and cuts to water subsidies, among other things.  Obviously, such a fund would be a counterpoint to some of the equity sales from oil producers over the last few months- but clearly, the time scale is not one that should be relevant for short term price action.

* While Obama's warning that it may take a decade to negotiate a US/UK trade accord post Brexit is not exactly an unbiased view- he did stump for the UK to remain in the EU during his visit- it nevertheless provides a useful counterpoint to the blithe assumptions of the Brexiteers that the world will be beating down their door to sign trade accords ASAP should the UK press the "eject" button.  Predictably, a poll suggested that the UK public were not impressed.

*  The UK is hardly the only country to show disillusionment with the state of Europe, of course.   The latest example is of course the strong showing of the far right in the Austrian presidential election.   Regardless of the outcome of the Brexit vote, it's hard to shake the option that the EU is on the brink of an existential crisis...
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Error404
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April 25, 2016 at 11:19 AM ×

"Regardless of the outcome of the Brexit vote, it's hard to shake the option that the EU is on the brink of an existential crisis."

Actually, it's hard to shake the opinion that the EU is already several years into an existential crisis - and the establishment is losing.

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Anonymous
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April 25, 2016 at 12:02 PM ×

Last week ECB and BOJ supported equities. Today equities fell 1 to 2% in the EU session, then PBOC intervened, stopping fall and sending stocks higher lol.

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Bruce in Tennessee
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April 25, 2016 at 12:45 PM ×

http://www.bloomberg.com/news/articles/2016-04-24/the-tokyo-whale-is-quietly-buying-up-huge-stakes-in-japan-inc

...I looked at this last Thursday..EWJ has done very well the last 3 months...

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johno
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April 25, 2016 at 3:21 PM ×

Re JPY, I'm thinking implications of any BoJ move for stocks will be the first thing to figure out. Adjustments to FX hedges on foreign holdings in Japanese stocks appear to be a big driver of JPY. At YE there was $1.7tr of foreign holdings in Japanese stocks. Say 1/2 of that is FX-hedge and TPX is -10% YTD, then that's $85bn of USDJPY selling YTD (and more at the nadir). JPM in a Mar 14 piece forecast 2016 Japanese unhedged buying of overseas FI of Y3.9tr and Japanese buying of overseas equities Y7.1tr of , so Y11.0tr total versus a CAS of Y23.3tr, netting to Y12.3tr or $110b. Compared against that (full year #), foreigner's FX hedging of stocks is potentially very large and the TPX-JPY correlation bears that out (JPM's Flows and Liquidity piece of April 8 was quite good at arguing why causality runs more from stocks to yen rather than other way around).
So that has me thinking: what can the BoJ do to get the yen down? More deeply negative rates aren't the answer (kills stock market driving hedge unwinds), and allowing banks to borrow negatively probably isn't good for a sustained bounce. More bond purchases seem ineffectual too. If anything, lower rates are just raising the propensity to save. I can only think of a massively up-sized ETF buying program as a catalyst. Any thoughts on whether we'd see that this week? And would foreigners chase an ETF-buying induced rally or sell into it, absent structural reforms?

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Anonymous
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April 25, 2016 at 3:59 PM ×

Whats the IMM?

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henner
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April 25, 2016 at 4:16 PM ×

here you go - from wikipedia: - basically it's the CME futures positioning data

The International Monetary Market (IMM), a spin-off from the old Chicago Mercantile Exchange and largely the creation of Leo Melamed, is today one of four divisions of the Chicago Mercantile Exchange (CME), the largest futures exchange in the United States, for the trading of futures contracts and options on futures. The IMM was started on May 16, 1972.[1] Two of the more prevalent contracts traded are currency futures and interest rate futures, specifically, 3-month Eurodollar time deposits and 90-day U.S. Treasury bills. The other two CME divisions includes the Index and Option Market (IOM) and Growth and Emerging Markets (GEM).

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Anonymous
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April 25, 2016 at 4:59 PM ×

@Johno - what is the idea behind unwinding FX hedges as stocks get trounced? Isn't your value at risk/FX delta still the same, whether or not Topix moves lower or higher?

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johno
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April 25, 2016 at 5:15 PM ×

anon 4:59: If you wanted to have an FX-hedged trade in Japanese stocks, as has been popular, you'd have bought say 100 yen of stocks and sold 100 yen. If stock market prices fall 10% (in local currency), then you've got 90 yen of long stock exposure, but 100 yen of FX hedge, so you'd now be over-hedged and would need to buy back 10 yen of your short.

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washedup
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April 25, 2016 at 5:24 PM ×

henner/johno - I think 7-8 TN is the 'whisper' number for ETF buying by BoJ, and I think the Yen rally was stopped in its tracks last week by this rumor - problem is, if yen gets sold dollar gets bid, since the euro doesn't seem to be going anywhere, and the superstars of the last few weeks (AUD, CAD) have to face a bit of a reckoning - so does the 'OMG China is back' trade.
Interesting times. Same hot potatoes, same people to hold them, except the temperature of the former keeps grinding up on each iteration….

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Leftback
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April 25, 2016 at 6:15 PM ×

Today seems like a good day to load up again on those Long Dollar/Short [AUD or CAD] trades and/or related hedges (short GDX, USO), and we did. It is likely that we will add to this trade further today and tomorrow if the dollar remains slightly soft.

Notable that small crap US equity [we are short IWM] and energy stocks are the laggards today, and that GDX and miners are also off despite the weaker dollar. We expect to see more of that action later this week.

The only way Janet gets Lovey-Dovey with Mr Market this week is if he takes an absolutely massive dump right in front of her. We expect the tiniest bit of hawkish chirp from La Paloma Blanca and her feathered friends on the FOMC.

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Whammer
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April 25, 2016 at 7:08 PM ×

@LB, I am laughing at the romance analogy -- the way to Janet's heart is to take a massive dump in front of her. Had that worked for me, I could have been a killer with the ladies back in the day........

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negative volatility
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April 25, 2016 at 7:22 PM ×

john-o i don't think that's how fx hedging for equities works but i could be wrong. it's effectively long a quanto call and short a quanto put, which therefore means hedging is a function of fx/equity correlation and volatility as well. take the case where you buy nky futures and sell yen futures. if you make say 10% in local terms on the stock, what you actually receive is the 10% gain. that is the amount on which you needed the fx hedged-the expected return, not the full notional. this paper by vanguard also explains it a bit i believe. i could of course be wrong, but just my 2 cents.

https://personal.vanguard.com/pdf/ISGCMC.pdf

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Anonymous
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April 25, 2016 at 7:49 PM ×

@neg vol
the book where risk ends up from that directional flow, be it quanto option or not needs to manage that risk and the greeks' hedge have same(ish) impact on the market

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abee crombie
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April 25, 2016 at 9:38 PM ×

MM and others, I just started to look at the IMM data which at first glance seems very useful to gain an insight into positioning. Just curious as to your thoughts on how well Futures data correlates to a very big CASH/Fowrard/Interbank market that is FX.

Are dealers using futures to lay off risk? Are CTA and other non commercials really using CME futures to gain exposure to short EURO.

Euro banks to report soon. Im guessing all the bad news is in the price and looking for a bit of a rally. or maybe not. Sell in may comming up. But I think markets are going to go vertical as they extrapolate higher chinese growth for the foreseeable future, meanwhile its just another stop/go stimulus package that is forestalling the inevitable. But until then, party on

Hazitus was out saying he thinks Fed will mention risk are balanced this week. That might cause some stir, or not.

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eurokopek
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April 26, 2016 at 1:11 AM ×

Data has been so piss-poor since Yellen's last speech in late March. Opening opportunity for a June hike would be a b-slap for all those who spoke after and either toned down their expectations or spoke about DATA DEPENDENCY.. Evans (doubted there's enough evidence about inflation by the April meeting, but with the recent CPI, retail sales, PMIs it's probably too little evidence until July or August now), Kaplan (said data dependency), Harker (need to see more inflation until 2nd hike), Bullard (concerned about Q2 growth), Lockhart (poor consumer and inflation data). Just 2 out of 5 are voters, though.

Rosengren (too low path in the mkts), Mester (need to remove the accommodation this year), George (keeps voting for hikes), Lacker (Fed's December projection is still appropriate) have made quite hawkish statements recently. Dudley has been quite optimistic on economy too (outlook unchanged from Dec). That's 4 voters already, but methinks Yellen's head will be turned away from her s&P index monitor screen toward screen with BLS website loaded.

Trading BoJ seems like guessing both outcomes of a double coin-flip. Not only do I have no idea if/how they will ease, but I don't know what the reaction will be either.

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