Once more unto the breach, dear friends

Once more unto the breach, dear friends, once more.  So at least was the message yesterday, where all manner of risk-asset trades went awry.  Perhaps the most obvious example was USD/JPY, which plumbed fresh depths and prompted one of the lamest, most pleading sets of headlines that Macro Man can recall in some time:

* BOJ LIKELY TO DEBATE POSSIBILITY OF EASING MONETARY POLICY AT APRIL 27-28 RATE REVIEW – SOURCES
* IF BOJ WERE TO ACT, MORE LIKELY TO INCREASE ASSET BUYING THAN FURTHER CUT INTEREST RATES - SOURCES
* WILL BE CLOSE CALL AT BOJ APRIL MEETING ON WHETHER TO EASE OR NOT - SOURCES - Reuters

The timing of this unprompted leak, with USD/JPY on its lows, made the implication crystal clear:  please please please buy the Nikkei and sell some yen! Looking at the chart, while a bounce is certainly possible it continues to look like a test of 105 is on the cards at some point.

Moving over to Europe, and it's a bit like wearing clown shoes in a cow pasture.  Wherever you step, you're likely to land on a pile of excrement.  The two loci of weakness, meanwhile, are breathtakingly unoriginal: Greece and the banking system.

Trouble, of course, is never far from Greek public finances, but the crisis has taken on a heart-breakingly human face as Greece has been at the coalface of migrants streaming into Europe.  With other Balkan nations closing their borders, Greece has been left to bear the brunt of the burden of hosting refugees, though they actually started deporting a few back to Turkey earlier this week.  As things stand, however, Greek public finances may be about to come to the fore again as the country engages in the latest iteration of its semiannual flirtation with insolvency.

The recent Wikileaks revelations do little to instill confidence, though of course common sense would dictate that a massive writedown of the debt is probably the best (and an inevitable) outcome in the end.  The whole sordid situation reminds Macro Man of the wretched Police Academy film franchise from the 1980's: a new episode appears every year, and it isn't remotely funny.

European banks, meanwhile, have had a proper shellacking, dropping nine consecutive days through yesterday.  The ECB recently updated its lending data for February, and sure enough deposit rates barely budged while lending rates to nonfinancial corporations dropped further.  The average rate on new household mortgages actually rose; while that may be good news for bank margins, it's hard to see it as an unalloyed positive for the Eurozone as a whole.

How bad has the SX7E shellacking been?  Well, on a beta-weighted basis at least, it's underperformed the Greek banking index so far this year.

A little context, of course, goes a long way when comparing those two.

Even the infamous DB Coco bond has outperformed the SX7E, however, which does lead one to question whether the weakness in these stocks is simply the result of a large, apparently price-insensitive flow.

To be clear, Macro Man isn't suggesting that the SX7E or SX5E aren't a bag of hammers, because they are.  However, he does find it interesting that the bank stocks have under-performed other, apparently related, asset prices by so much.  It's tempting, therefore, to look for laggards to either trade outright or to spread against the thing that's already been crushed.

The Bund/BTP spread is one that stands out.  It has lagged the recent downleg in the SX7E badly; given that sovereign tensions are heating up elsewhere in periphery, a bit of catch-up is to be expected.   Moreover, yesterday's report that the ECB could start imposing deadlines for Italian banks to jettison turds could apply country-specific pressure to Italy and therefore to BTPs.

While simple overlay charts are a fairly jejune way of generating price targets, it does seem reasonable to think getting that spread on anywhere around current levels offers a pretty good near-term risk/reward given everything else that's going on in Europe.

Today may see at least a temporary attempt to bounce, given the rally in crude after yesterday's API figures.  This may offer better entry points, though those of a more bullish persuasion may think this will just propel the market up the wall of worry once again.  Macro Man can only hope that, to borrow from Henry V once more, we don't close the wall up with our English dead!
Previous
Next Post »

18 comments

Click here for comments
Polemic
admin
April 6, 2016 at 7:28 AM ×

Not much me writing a blog post as you ve covered all the themes I was going to touch on. However there is another way of playing the lag/catch up trade and that is not to trade the laggards but to reverse trade the leaders.As you said there could be a risk bounce, in fact I am much more in the wall of worry camp and think we will see it snap the elastic backwards and up on yesterdays dumpsters than see the downward laggards catch up on the downside. Commodities notably stopped falling yesterday just when other markets were using them as an excuse to fall. A lift today from them will be a strong sign of a general turn. Europe basket case may be put back in the bear toy cupboard for another couple of days. But it is there and fully agree re Greece.

Timing of exposure of Eurocrap vs brexit vote is crucial.They cant afford to have folks see how bad it is before the vote

Reply
avatar
Anonymous
admin
April 6, 2016 at 12:48 PM ×

U.S. FICA/Payroll/Withholding taxes are rolling over just like in 2002 and 2008

http://imgur.com/pZsSNmE

OK, so tell me again that wages are going up and employment is rising.

Reply
avatar
Polemic
admin
April 6, 2016 at 12:50 PM ×

anon .. have you tallied that against the Panama figures? ;-)

Reply
avatar
washedup
admin
April 6, 2016 at 1:28 PM ×

anon 12:48 - thx for that - I disagree with your conclusion - those pictures don't tell me taxes are rolling over in absolute terms, rather that their growth rate has been slowing continuously, which, as can be seen from the chart on the left, was also true in 2006 and 2007.
I do concede that its a good barometer of the 'quality' of employment, in that if employment was turning much more into full time you would generally see an upward or flat slope.

Reply
avatar
Booger
admin
April 6, 2016 at 1:37 PM ×

Yen: Will the BOJ be likely to do direct intervention below 110? Might be better to short after the BOJ intervene, twice for good measure.

Oil: I've been thinking about the OPEC meeting next week. It seems risky going short oil into that. Why have an emergency meeting unless something is announced? They must have figured out that if they have some announcement about an imminent freeze or eventual quota cut, then oil gets supported. Oil will crater unless they announce something, so I would have thought, odds are they will. One would expect at least an announcement about a freeze to be finalized at the June meeting. Then they could make noises about an actual quota cut. This would support oil until it is obvious everyone is still pumping like crazy.

Storage running out: more of a risk in nat gas one would have thought. Oil storage running out is a bit like Keyser Söze (*). If they do run out of storage, and oil craters ridiculously, someone should buy the front end for delivery, buy some shale beds and store it in there. That would be funny.

(*) a feared, elusive thing nobody has met.

Reply
avatar
Anonymous
admin
April 6, 2016 at 1:50 PM ×

Booger - you are ignoring/forgetting El Bahdri's comments when he was last in the US. Also, the Saudi Princes recent comments in relation to Iran increase. Saudi's will not cut and Iran are increasing supply. The history of Opec and Russian deals says no sig ificant deal amd not one that will be adhered to.

This is without Libya and Iraq at full pelt.

Interesting DBank comments on the market since Draghi's recent launch. Available on ZHedge.

Reply
avatar
Booger
admin
April 6, 2016 at 2:14 PM ×

Anon 1:50, yeah noted. The recent Saudi utterances I interpret differently, as a message to the Iranians "get in line bitches". It could be all part of the negotiation process. They will let the Iranians increase production to 4M or whatever.

More interesting is if the Saundi's are going into the meeting wanting to make an announcement, then they may feel they get more payload by enticing some more oil shorting before smoking it out.

Everyone knows opec is a failure at following through with freezes or cuts, so it could be a good setup for a sell on the news if it does occur.

I tend to think there will not be a bottom in oil until at least the second opec quota cut. But I also think it might bounce to high 40's on this meeting if they do announce something favourable.

Reply
avatar
Anonymous
admin
April 6, 2016 at 2:29 PM ×

Coming to market...

There are 27 VLCCs and suezmax tankers with a combined capacity of 43 million barrels, waiting off Basra, shipping data on the Reuters Eikon terminal showed, about twice the norm.

http://www.reuters.com/article/us-iraq-oil-tanker-traffic-idUSKCN0X315L

Reply
avatar
Anonymous
admin
April 6, 2016 at 2:37 PM ×

JAPAN: stocks down for 7 days in a row and -17.4% YTD Nikkei as the BeliefSystem breaks down

Reply
avatar
Anonymous
admin
April 6, 2016 at 3:20 PM ×

given futs position in oil( aggressive longs) and people believing fundamentally lower but technical pop , this could revisit 30 i feel

equities everything looks crap except US , which is the short i have..hmph

Reply
avatar
CV
admin
April 6, 2016 at 5:03 PM ×

Hmm, it would fit the whole story that the market resumes its rally just as I slapped on a short in some turds wouldn't! :)

Reply
avatar
Anonymous
admin
April 6, 2016 at 5:18 PM ×

USD being sold heavily today by US parties ahead of the Fed minutes (which have no doubt been leaked again). Spooz went from low of day to high of day on EIA oil data (which was front-run by algos - check your charts and you'll see the Crude buying started 1-2mins before the EIA data hit the wires). Today has all the hallmarks of the Fed being in the market f*cking over other parties and manipulating stocks via crude algos. Trade accordingly.

Reply
avatar
Anonymous
admin
April 6, 2016 at 7:42 PM ×

Fed minutes dovish. Hence they were indeed leaked this afternoon.

Reply
avatar
Polemic
admin
April 6, 2016 at 9:49 PM ×

If you are so sure these things are leaked a couple of mins early why don't you go with the flow 1 min before release instead of complaining that someone pipped your points off the starting gun?

Are you all really trading the instant release? Because if so you might as well give up now as the algos will always beat you. I know that I'm beaten whether unleaked or not. Pragmatically I would suggest I have better information to trade on if I know they are always leaked!

Reply
avatar
Anonymous
admin
April 6, 2016 at 11:03 PM ×

We did go with the flow: Long US indexes before EIA release (when the Fed, or their proxies, dumped the USD at the start of the US session), added to longs after EIA, long again after FOMC. Just thought we'd point some of the info out to other parties. You are dealing with an extremely manipulated market here. Trade accordingly.

Reply
avatar
Leftback
admin
April 7, 2016 at 1:44 AM ×

The last few days have been very interesting/slightly painful* to watch, but you have to wonder when a boatload of Q1 earnings reports are going to start being priced in, as there isn't much time now before that lot begins to cross the screens. Energy companies are still knee deep in red ink, and that's going to continue for some time. It will take a lot more than a Kuwaiti rumor and a mini squeeze in crude oil to alter that fact. Btw, does anyone think that the € can remain suspended up here at 1,14 while Draghi is still working out new ways to monetize European debt and extend NIRP?

*Yes, FYI, LB's trading week has been about as pleasurable as a week at the dentist, or like running a 10k with new shoes, blisters and an ingrowing toenail.

Reply
avatar
Anonymous
admin
April 7, 2016 at 2:44 AM ×

LB,
Perhaps q1 earnings debacles were priced in some time ago and the market is looking forward to q3 and 4, where energy companies that can still fog a mirror will face dismal comps, and barring something untoward the grind looks to continue upwards.
Always enjoy your comments-

Reply
avatar
Anonymous
admin
April 7, 2016 at 4:28 AM ×

"Going back to 1920, the eighth year of a US president's term has been bad news for stocks. The eighth year of a presidential term has seen the Dow fall about 15% on average since 1920. The two most recent examples are 2000 and 2008, which saw the end of the Clinton and Bush years as well as the collapse of the tech bubble and the US housing market."

http://www.businessinsider.com/presidential-cycle-stock-market-performance-2016-1

Check out the single graph in the article ... are we "rhyming" perfectly thus far?

Reply
avatar