Keeping It Simple...Bund vs. UST Rates after the EUR rally

As the US continues to slog through a winter marked by one sub-zero reading after another, let’s do some KISS trading--keep it simple, stupid.


Last week the short USD theme went from sideshow to the main stage of the market’s three ring circus. As noted here, the BoJ woke up to the possibility that the economy is perking up quite nicely, and higher global interest rates caused the YCC flows to dry up, leading to news of a “stealth taper”. Well, if you’re strategy is to buy bonds at a certain yield, and nobody shows up to sell them there, you don’t have much to do! So while I wouldn’t put much stock in the BoJ’s pseudo-announcement that they will be buying fewer long end bonds, nor the flatlining balance sheet--the turn in sentiment and momentum is significant. JPY has finally joined the party, and I think we’ll see correlations to G7 FX increase to historic norms until Kuroda and Co. give us a signal about where the asset-purchase scheme is going next. KISS: stay short USD vs. JPY, scandies and selected EMFX until further notice…


And rates….the UST selloff stalled out last week, despite some very good retail sales and CPI data out on Friday. Maybe the higher rates theme is running out of steam? I think that’s a strong possibility--as I noted last week, I think there is more downside than upside for US economic data, even if that doesn’t mean a reversal in Spoos or UST yields. Let's stick with the theme above--a resurgence in economic growth, investment and outright optimism in countries where the word of the decade has been “malaise”.  


Sure, euro-area inflation came out week again, but you can’t ignore this jump in PMI.


And look who shows up at the top of the table: France and three of the four PIGS! This resurgence is broad-based, and dragging along countries with significant excess capacity.
The ECB is starting to make some rumblings about how they can retool their asset purchase program. There are a number of things they can do--but easing up on buying duration seems like a good place to start. EUR-strength will be a consideration--but if this move doesn’t continue towards 1.25 I don’t think it will be a factor.


There still seems like too much complacency in the rates market. You can see in this pic how the correlation to 10y UST has been very strong lately--interesting to note that the correlation early in the year was pretty weak, but is 65% over the past three months.


Yet we saw a big move higher in bund yields late last week driven by the minutes from the last ECB meeting. bunds underperformed UST...which went hand in hand with the strengthening EUR. Given the fundamentals and 10y bund yields still trading inside the highs of last summer, I think yields can continue to move higher from here. I’d be careful with the bund/UST spread since there is a beta component there (if you trade dv-neutral, your long ust/short bund trade can get barbequed on a global move higher in rates) but what I see in the chart here is a spread too cheap given the underlying fundamentals:  there is still value in the market pricing in some combination of higher European rates and monetary tightening.  




Then there are articles like this one, which highlights GMO’s Jeremy Grantham abandoning his value-based principles and thinking about just how far this “melt-up” rally in stocks can continue.


I won’t go into any detail here other than to say this market won’t die of over-valuation. Something will break it. We just don’t know when or why.    

Shawn
TeamMacroMan2@gmail.com
@EMInflationista
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IPA
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January 15, 2018 at 6:06 PM ×

Donald may just do what it takes to kill this rally. Just like you, Shawn, I don't know how and when. But I have said this before, this rally is his to end.

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JohnL
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January 15, 2018 at 8:22 PM ×

Shane, the formatting of the post is rather screwy (I think that's the technical term?). It looks like a word wrap issue or something. I could read the post fine on feedly but not on blogger.com
By the way XGD.TO looks like it's breaking out nicely. If GDX follows suite it'll make a good move on the open tomorrow.

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Shawn
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January 15, 2018 at 9:03 PM ×

Yeah that seems to be a problem, I don't know why. But thanks for the head's up. I'm not nuts about the blogger interface so I write in google docs and export it, and once in a while this happens (and usually when I'm travelling and in too much of a hurry to check my work).

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IPA
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January 16, 2018 at 5:20 AM ×

JohnL, I am with you on GDX calls. It actually broke out already, if you count 23.80 resistance as an important level. I think 24.50 and eventually 25.60 is next.

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January 16, 2018 at 9:54 AM ×

Macro Man, I have been KISS for the last 15 years trading the US/UK pair. It doesn't have anything I want anymore.....

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January 16, 2018 at 10:01 AM ×

Macro Man, find another mug punter to trade it for your. I don't take risks anymore.....(would you?),especially in the US and UK environment. Who needs that shit.

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January 16, 2018 at 10:07 AM ×

Macro Man, I'm moving shop to South East Asia. When the market bubble burst in the states I'm going to be set up with my own trading shit on a beach making trading calls to private investors and the Macro Man Team. End of year parties will be brought forward to "full moon party" schedule. Otherwise, you don't get subscription , you shit sandwichs instead.

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Anonymous
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January 16, 2018 at 10:48 AM ×

Dow Jones futures up another +245 hours before the market opens. SP reaches 2800. Eezee money!
When are you macro boys gonna stop punting on silly ideas and do some real trading? I keep telling you, the money is just waiting to be picked up - if you're man enough to do it.

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Anonymous
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January 16, 2018 at 3:21 PM ×

"The Dow Jones industrial average tops 26,000 for first time in history, in the fastest 1,000 point move ever - just seven trading days. - CNBC / FOX"

Exactly as we predicted. Watch & learn.

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Shawn
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January 16, 2018 at 4:18 PM ×

amps, would you bet under 38 in the vikings/eagles game on Sunday? It's what everyone is doing. Really, Nick Foles! But it's what everyone is doing. 38!

And indeed BS, you learn more here by accident than elsewhere by design.

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checkmate
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January 16, 2018 at 6:04 PM ×

"Exactly as we predicted. Watch & learn"
It would be apparent to most people by now that on this forum you have a mixture of people. Some managing money for others with specific mandates what they can and cannot do. Some others retail like myself as an example who have a mandate laid down by personal or familial circumstance. What you don't really have are any as such who are going to go all in on one asset group.
Out there I think you would find hundreds of sites full of people who like to debate based on how high they can piss against a particular wall. Consequently, I keep thinking what kind of brainless smuck chooses to keep coming back to a group of people who have nothing at all in common with him? Who don't really show any interest in him, because there is little or no commonality ? Even squirrels chasing the but up the pole in that well known behavioural experiment usually by trial and error learn from their mistakes. Are you less than a squirrel?

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johno
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January 16, 2018 at 6:47 PM ×

Just very focused right now on USD. The action we see is just so bearish. Take EURUSD which traded up almost 100 pips in Friday NY hours taking out 1.22 barriers and then just kept going Monday. I haven't back-tested that, but it's telling to me. I think the cat's out of the bag now. What the Trump tax cut means to the market is HUGE DEFICITS. I think the chart people will point to is DXY versus the twin deficits. The direction of travel is set. The USD bull market is over.

Near-term, we do have to worry the SPD reject their on Jan 21 given how their party is polling.

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Shawn
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January 16, 2018 at 7:42 PM ×

Johno, that was the crux of my argument for long JPY that perhaps I didn't make forecefully enough--the global manufacturing machine has cranked up a notch and likewise, the US govt/consumer is cranking up the export of capital.

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johno
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January 16, 2018 at 7:48 PM ×

Yes, excellent, timely call, Shawn. Thank you!

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abee crombie
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January 16, 2018 at 8:53 PM ×

it sure does feel like the USD bull market, based on trump and rates is over. Though I would still argue USD is tightly linked to global growth. On that front, my fav pairs to look at are the asian exporters and EM's and so far I dont see anything to give me pause. China isnt slowing much, despite many predictions to the contrary and commodities and exports are holding in there. Until something changes on that front its hard to be dollar bullish.

On gold, I actually wonder why it isnt stronger. Perhaps everyone is trading bitcoin/altcoins.

corporate america likes a weak dollar so maybe trump is not so dumb at all, just catering to his base. if markets really cared about the deficit, let them push on rates.

good podcast from Ed hyman on wealthtrack, echoing grantham. interesting times indeed.

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January 16, 2018 at 9:40 PM ×

Shawn, I'm not focused on the football at the moment. So I can't help you with the vikings/eagles under/over. But , if its any consolation for you, the under/over is one of my specialties , and will be implemented as a vital variable for the amount of days the end of year parties on the South East Asian beaches go for. Seriously, though, who the fuck does your country think they are.

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IPA
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January 17, 2018 at 4:53 AM ×

@abee, gold likes to fake a little before taking out an important resistance level. Once 1,344 - 1,347 goes the next area to draw the price as a magnet is 1,360. As I've said here before, I don't think that cryptocurrencies and gold share the same trader profile.

@checkmate, hilarious! Also, did you notice how he casually mentioned paying attention to Druckenmiller's views in one of his profanity-laden comments? (Can't believe I'm even paying attention) I thought he said macro traders are not "real men".

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IPA
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January 17, 2018 at 4:05 PM ×

Guys, I think there is going to be a 10% pullback in WTI. I am initiating a small short here and will add a little more at 64.10-.20 area if given a chance. Stop above YH and 58 is my ultimate target. Will add a lot more on the way down. Scaleouts: 62 and 60. When/if 58 is reached I'll be buying XOP, which I also think should have a similar pullback.

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johno
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January 17, 2018 at 6:26 PM ×

Interesting that all this verbal intervention by ECB isn't sending EURUSD lower. Again, my going hypothesis is Trump tax cuts mean huge deficits to finance mean lower dollar. Wouldn't be surprised if FX reserve managers are starting to bring up their EUR underweights at expense of USD. The breakdown in rates correlation for USDJPY is also signalling a shift there too. Non-USD reserve currencies have also done well in periods of US trade frictions. Reports suggest actions against China coming in the next month or two.

"Google was his dream ...." Interesting article in Bloomberg today about the German-born programmer who discovered the chip flaw. Google has the best brand for attracting the world's best and brightest young technologists (the most valuable brand in the world, IMO), yet trades at 23x '18 EEPS while RTY trades at 26x. Ok, you strip out money-losers from RTY and it's 19x, but if you do the same for money-losing businesses in GOOG, it's on like 20-21x. But difference is the money-losers at GOOG are companies like Waymo (which would be hugely-valued Unicorns despite losses) and stuff like AlphaGo (cutting edge of machine-learning), while the tail of RTY money-losers are probably all going to be wiped out by technological change. It's just incredible that people are buying cryptos when they can own the production of the world's smartest young technologists at basically the market multiple.

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IPA
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January 17, 2018 at 6:29 PM ×

Pardon my frequency... Looks like crypto-kids wanna buy the shiny stuff after all. Welcome, come get it, boys. Bloomy has the story - anecdotes galore:

https://www.bloomberg.com/news/articles/2018-01-17/online-gold-sales-quintupled-as-bitcoin-plunged-coininvest-says

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Leftback
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January 17, 2018 at 6:42 PM ×

Good calls on JPY back there. Sentiment had become extremely bearish.
Sentiment and positioning are currently at extremes among the following groups:

EURUSD and EURJPY bulls.
SPX bulls.

USD bears.
Vol bears.
US5y bears.

I am calling for a short-term reversal in USD - beginning some time this week. RSI for UUP is around 25...

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Leftback
admin
January 17, 2018 at 8:03 PM ×

Btw, there is some presently carnage going on among the "lower quality" members of the crypto universe that represent the failure of the smaller and more obviously criminal of the many Ponzi schemes. It is my expectation that the rest of them will also crumble. Beyond cryptos, there is a particularly interesting pair of Ponzi schemes called "Spoos" and "Xiv" that we are watching, as well.

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MacroWatcher
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January 17, 2018 at 8:29 PM ×

@Leftback, agree with the ST reversal call. In my opinion, a better expression of that trade is pairing the short eurusd with short bunds/long tsy (or use 5y instead) as the recent rally in eur saw longer yield differentials moving little while euribor spreads broke recent levels. Looking at ERZ8ERZ9 @~40bps I see little room for further widening and any further rally in eur should be on the back of long end widening, making this trade quite appealing imo. If you build an historical replication of this trade vol weighted, the underperformance of -rx/+ty vs short eur is at historically low levels.

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Anonymous
admin
January 17, 2018 at 10:11 PM ×

Checkmate/IPA etc,

How are you guys enjoying under-performing the market? No doubt you rubbed your hands in glee yesterday at that tiny little correction, thinking your bearish thesis confirmed (lol), meanwhile those of us who earn the real money loaded up yet again (BTFD). Today we were ofc rewarded as US equities once again broke up to ATHs.

I keep telling you, spooz are going, much, much higher. Macro is dead. FICC revenues at BB banks are crashing. Look, I appreciate some of you guys made a few pennies back in the stone age, but wake up guys, you're history. Today's market's are about equities. This is where the real money and talent lies.

See you at Dow 40k.

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johno
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January 17, 2018 at 11:13 PM ×

So far, so good on that USD call, LB. I got stopped in USD shorts today (was using very tight stops to play for another thrust lower) leaving me only with option positions primarily in EURUSD.

So, here's a curious thing. I was looking at US CPI versus Euro-zone HICP and stripping out rent/OER components. Seems there's little difference in US versus EZ inflation excluding rent/OER. So America gets higher inflation by jacking up property prices (and therefore rents) with easy money for the rentier class. Well done Bernanke & Co.

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abee crombie
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January 17, 2018 at 11:28 PM ×

Buy stocks. Please do tell what else you are buying besides spy and fang ....fwiw em equities were the place to be last year. Not usa.

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IPA
admin
January 18, 2018 at 1:29 AM ×

BS, "talented" kid, really, you are trying hard to sound smarter every time but it's an uphill battle for you. "FICC revenues at BB banks are crashing"... "How are you guys enjoying under-performing the market?". I give you a credit for perseverance but have to subtract multiple points for your lack of respect. You come here often enough to at least try and learn that we are not into shouting and pissing matches. This being said, I don't mind telling you that my blended crude oil futures position and oil-related equity calls made me more than twice your SPX position. Who told you that SPX is the only "market" out there? You truly need to relax. I am currently not shorting SPX and have no interest in your long-only US equities fantasy. I am simply trying to teach you how to respect the people here. My last question to you is how much sleep did you get between the fall of 2007 and spring of 2009 while holding the bag of precious shit you seem to treasure so much? You probably slept like a baby, woke up every two hours and cried.

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IPA
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January 18, 2018 at 2:49 PM ×

Those who took WTI 63.80/64.15 short... I'll be adding on the break of YL. Be prepared to be stopped out @ 64.60 should the inventory report be something really crazy.

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Shawn
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January 18, 2018 at 3:10 PM ×

"Very few of my trolls would pass a Turing test." --Ian Bremmer

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January 19, 2018 at 12:43 AM ×

@BS "Today's markets are about equities" Well, I guess your right there, sort of at least. It's shocking that anyone would they are a talented allocator when they just hop on some index's and catch a free ride. This overflow (compared to their market adjust capitalization) boost up the individual firms stock price.

This is not talent. Now, I'm not saying you shouldn't take any part in this bull run, but it shouldn't be more than you can loose and not trip about it and I damn sure wouldn't consider it a set it and forget it kind of thing.

Finally, yes Macro has struggled...but I think it will simply change it's structure a bit. The macro hedge funds I mean. Smaller, more nimble, less restricitions, and maybe some way (not through a bank fund of fund ETF) allow wealthier retail to get exposure in a more DIRECT fashion I mean...

@BS I can't help but agree with @Shawn's earlier post about appreciating how much you've accidentally learned from this forum. It's shocking to me, the lack of respect people have anymore...

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IPA
admin
January 19, 2018 at 2:10 AM ×

All trendlines are made to be broken... I just want to emphasize the significance of today's oil report and the lack of WTI's ability to make a new high on good news. Furthermore, trendlines are being broken indeed, the price is chewing on some important support levels at the moment. I know, it's Globex fakeout time and when the "real men" in the Nymex pit return the "kids" may be chased. I doubt it though. Asia has a tendency to put out some feelers in the market lately and Europe may just carry the price away from the value area far enough for an ugly Friday in the energy sector. I am adding to my short here, guys. Pardon my stubborn bearish short-term attitude. Too far too fast is my main thought on this.

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January 19, 2018 at 6:24 AM ×

The greatest bull market in history will be explained 100 years from now. When AI , and the sort will be able to pinpoint the confluence of behavioral, macro-economics and monetary policies at certain points in the business cycle ( confluence to interchangeable variables with statistically lagged - forward points within the rise of market indices) , until then its going to be about the globalization on monetary policies and factors of production. Fraud will be the killer of all bubbles. Find the fraud. Be it price and time action , or out in the real world.

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Shawn
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January 19, 2018 at 4:52 PM ×

@IPA, per your point on oil, note also the WSJ article today about rising OPEC anxiety about production cuts amidst rising demand and losing share to US shale.

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