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!