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January 31, 2014

Turkey – Are Trading Correlations to Global Risk Valid?

Filed under: Forex Strategies — Tags: , , , , , — admin @ 4:45 pm

It’s probably worth following up on the last post as there are a few linkages in the markets that we feel now need questioning.

TRY and ZAR and of course current account deficit EM in general, are easy meat to attack , even more so as they have a good story to back the trade. “QE USD outflow leads to falling currency as the inflows that have been needed to counter the current account deficits these countries have been building now have no inflows to counter them”. Fair enough.

We then see rate hike responses in said countries. In a way you could think it ironic that these countries moaning directly about US inspired tightening global liquidity causing their problems only to have to respond by hiking their own rates to the moon.

There are a couple of purposes in raising rates. One is to make it more expensive to speculate against the currency but as per our last post we are not sure this works and used the analogy of the UK in 1992 with the GBP crisis. The other function is to actually fix some of the long term problems and as far as Turkey goes this is a sensible move.

The problem in 1992 was that the UK was in a straightjacket where they were ‘forced’ to import German monetary policy, which was totally inappropriate for the UK, whereas in Turkey, monetary policy is becoming more aligned i.e. real interest rates are going positive, and credit growth will be curbed. It’s the right medicine. Whereas in 1992 it was the wrong policy for the UK.

But back to that sentiment function. We also mentioned this morning that a market loves to hang its hat on one price to act as the barometer of fear. Sentiment has so far indeed followed the price of USDTRY almost to the second. Below is USDTRY against inverted S+P futures.

But there comes a point when assumed connections have to be challenged as there is only so far a pack of lemmings can run before one of the pack asks themselves why they are all following each other and whose got the cliff map. So TMM would like to ask a couple of simple questions –

How much does it really matter to the global economy if the likes of Turkey and South Africa are FX torched back to becoming cheap holiday destinations? Can we really justify huge panicky swings in the US top 500 corporates because Erdogan and his mates are going to have to suffer a bit of austerity after years of dinning on cheap USDs?

And do the DM markets grind to a deflationary halt because deficit EM are suffering (and note its Deficit EM countries here we are talking about, the surplus ones are numerous and surpluss’ed enough to make a 1998 style crisis nigh impossible)?

We doubt it. So that leads us to ask if this shake down is DM is actually being caused by EM, or is it just being triggered by it?

DM has had its own reasons for needing a corrective pullback with a number of contributory factors. Such as people being overexposed to equities in general after 2013 and real money (corp pensions mostly) rebalancing from equities to FI en mass as 30yr neared 4% and their funding levels neared 100%. Interestingly there is also a self reinforcing function as the quickest hedge to EM positions is to sell the more liquid DM markets as a hedge on an assumed correlation. This hedging in itself reinforces the assumed correlation in EM and DM through price action, even if the underlying real link is small. This raises the interesting scenario that returning confidence in EM will be indicated by a rise in DM prices as hedges are lifted rather than a lift in EM prices.

TMM think this is a triggering rather than a cause.

Having seen the price action today we are beginning to think there was a spike blow off in in some of the extreme sentiment after EM stories had “gone Tabloid” today and we are now seeing assumed correlation without causality reinforcing itself until someone notices that in the big picture Turkey and South Africa don’t matter.

So, despite casting ourselves in a spivvy light. We are back in the long DM side of the trade.

January 30, 2014

Emerging Market FX Questions

Filed under: Forex Strategies — Tags: , , — admin @ 4:43 pm

Having heard many questions being asked about EMFX (most of which have been answered by new Armchair EM Generals using their favourite  tools of rearview mirrors and extrapolationist rulers), we thought we would ask some much more important questions.

If you had 200 USDs worth of Turkish Lira in your hand would you :-

– Look at them as if someone had placed a turd in your hand screaming “Arrgh!”
– Place it in a Turkish Bank and watch your savings grow by a newly exciting 12% p/a
– Buy corporate bonds in Turkish company Arçelik and display them amusingly on your toilet wall.
– Convert them to USD and find you’ve now only got $100.
– Buy a small coffee in Bodrum and have to cover the difference in Euros.

If you had 200 USDs worth of Russian Rouble in your hand would you :-

– Look at them as if someone had placed a turd in your hand screaming “Arrgh!”
– Donate it to Mr Putin’s retirement home for sick puppies.
– Check your wallet for receipts to work out where the hell you were last night.
– Convert them to USDs and find that you have only $20 and a menacing look from Yuri the money changer.
– Buy a small bottle of water in Moscow and pay the difference in Euro.

If you had 200 USDs worth of South African Rand in your hand would you :-

– Look at them as if someone had placed a turd in your hand screaming “Arrgh!”
– Call up Charlize Theron and tell her dinner is on you.
– Convert them into USDs and promptly get arrested by over zealous FBI for money laundering.
– Buy shares in a local gold mine and go back to writing comments on Zero Hedge.
– Buy half a gram of Biltong and pay the difference in Euro.

If you had 200 USDs worth of Brazilian Real in your hand would you :-

– Look at them as if someone had placed a turd in your hand screaming “Arrgh!”
– Hide them from your wife.
– Ask if they were like Bitcoin as you’ve never heard of them.
– Sell them and buy US bonds in nice Mr Gross’s fund as he suggests.
– Buy a Ticket to watch the World Cup in Joao’s favela bar, paying the difference in drugs.

If you had 200 USDs worth of Indian Rupees in your hand would you :-

– Look at them as if someone had placed a turd in your hand screaming “Arrgh!”
– Have managed to sell insurance to 50 Sky customers in the UK from your cold-call center in Bangalore.
– Find your old rucksack and head off to relive your hippy days in Goa in a cloud of smoke.
– Trade the 3mth vs 6mth INR NDF as a rate hedge and find the spread cost you more than the face (due to market volatility sir sorry).
– Buy a British car company and be given a sweetener by the UK government of £1m to go with it.

If you had 200 USDs worth of Hungarian Florint in your hand would you :-

– Not worry because it’s a surplus country ‘innit.
– Resurrect the trusty solvency issue and scream “Arrgh!”
– Give them to Kinga the Au Pair to take home to her parents in the mountains.
– Arrange Dave’s stag (batchelor) party in Budapest (when there is no Dave)
– Buy a quarter bottle of Tokaj 7 puttonyos and pay the difference in Swiss mortgage bonds.

If you had 200 USDs worth of Chinese Renminbi in your hand would you :-

– Celebrate as it’s going to be worth even more USDs.
– Offer it to a passing group of HF managers who politely decline it already owning 300bio of their own.
– Buy USDs then USTs, not because you listen to PIMCO but because you are SAFE and its what you do anyway.
– Buy 50 LED lightbulbs off Alibaba and find they are rubbish.
– Buy a Louis Vetton bag from Beijing street hawker and borrow the difference from a local official.

And finally –

If you had 200 USDs worth of USDs in your hand would you :-

– Use them as margin to go short of all the above.
– Buy any of the above as one day you’ll need them as a tax haven.
– Rejoice you got a bonus no matter how small.
– Call your friends and ask if you left the other $800 on the bar.
– Buy a Senator funding the difference by issuing subprime debt that is bought by the Fed.

January 29, 2014

Turkey – Das Boot.

Filed under: Forex Strategies — Tags: , — admin @ 4:46 pm

Turkey has shown decisive resolution and a strong firm hand in order to guide the market back to more sensible levels and punish the evil speculator. Well, that’s what the statement would sound like if it came from the citadel of Brussels or Frankfurt. TMM praise the decisive action and look forward to similar action from Brazil, but the question is “Is it enough to turn the tide”. We have seen this battle fought over history and the ghosts of Thailand, Argentina and all the other fatally pegged currencies still stalk the poppied plains of FX. TMM in particular remember their own experiences of the Sterling crisis of 1992 when interest rates were being cranked up in units of two in as many hours and we know what happened next.

The point then, as it is now, is if you have a full blown attack on your currency raising rates to the likes of 12% in the short term really doesn’t deter a speculator who is having to fund at 1% a MONTH to play potential upsides of 3% or more per DAY. Of course the idea is that forward rates on FX move making it more expensive to sell currency forward.

But forwards are lower today on most periods as the idea of relief brings implied yields lower despite the actual hike in rates (1 month forward points below).

It’s actually cheaper to speculate against TRY this morning than it was yesterday, not only as Spot is lower but the forwards are better too. So though rate rises have effectively kneejerked sentiment they have done nothing to actually make the trade more expensive.

This is worrying as it looks as though they have gone “all in” with the rates weapon hoping for shock and awe but so far today we see spot moving ominously back towards where it started and the forwards looking cheaper.

The speculator has just climbed out of the light scattering of rubble, is dusting himself off and probably thinking “Well if THAT’S all they can do then ..”

Which to be honest is worrying for TMM as we played the Turnaround Tuesday idea and were feeling pretty happy. But we are back to sentiment. Long term the demise of the Turkish lira is probably a good thing (yes we are still bitter about prices charged in some Turkish beach resorts), adjustment in currencies is a hugely important tool and perhaps their effects should be worn as an inevitability that will only appear through other channels anyway if FX moves are attempted to be contained (growth reduction via higher rates counters c/ac improvements through FX falls).

But it’s sentiment. The world was looking for Turkey to take action and the effectiveness of their actions is probably going to be seen as a bellwether. As the markets are so prone to do, for ease of trading, they tend to pick one stress price and use it as the barometer of fear. European crises saw PIGS 10yrs, basis spreads and a plethora of “charts du jour” to trade off. If anyone needs the same today then we suggest that the pressure gauge to watch will be the simple USDTRY and it’s creeping its way ominously back to the 2.26 level it was at pre rate hike.

 Erdogan and Basci are currently living out the scene from “Das Boot” when it is under attack, waiting in a creaking hull with worried eyes on the pressure gauges.

Where does this leave us? On a global picture we aren’t too fearful but the short term sentiment associated with selective EM is intense, so we have about-faced our confidence of yesterday, chopped bounce longs and are playing the short side in global risk today. Hardly long term Macro but you’ve got to swing with the info and try and make a buck!

January 28, 2014

Looking for a Turnaround Tuesday

Filed under: Forex Strategies — Tags: , , — admin @ 4:42 pm

Just a set of quick thoughts as TMM have been having a busy and exciting time over the last 10 days.

It took a while for the momentum to fade but the first US market open after the 19th of Jan was indeed a turning point and we aren’t unhappy to have seen the pull back. But what speed. Pretty much 4% in 3 days. It is also interesting to see that it is the consensus trade of “EM to fall” that has ended up crippling the consensus trade of DM equities to rally.

4% in 3 days … still thinking about that.

Q/E tapering – Knew that, as does the market judging by what they are discounting,
Q/E effect on EM credit – Knew that.
China Credit – Knew that (as much as we know anything in China) but ICBC partially protecting the Trust is better news than worse.
China Data – Yes it was soft, but enough to cause the melt?
South Africa and Turkey – Turkey is an old fashioned Market Turkey shoot. Looks weak , has little reserves and policy is indecisively reactive (are Ed Balls and Ed Milliband advising?). So Macro Jedi-knights are trying on their Soros-wan-kanobi robes thinking they can do a GBP 1992 on it. Which means they are probably loaded on the position already.

So 4% in 3 days .. still thinking about that.

Is there enough new in the last week to change everything? Or are we really just in the correction we were looking for and this move is based on positions? Be they Pension funds moving back to long bonds from equities (as they match liabilities as they get closer to being fuller funded) or is this just a sweep of panicky profit taking with a good story attached. We’ll go for the later.

The story of the withdrawal of QE and its support for EM currencies is real but we are back to speed again, 4% in US stocks in three days does seem a lot. This pull back has taken much less time to do the sort of moves we were hoping for, so we have started (bravely or foolishly) buying back and are looking for a Turnaround Tuesday if Monday afternoon hasn’t beaten us to it. To be more daring, if this is a correction in 2014 consensus trades with nearly all of them taking a beating EXCEPT for EM, then perhaps a healthy recovery bounce could do more dirty work in bouncing EM harder leaving that surviving consensus trade bleeding, just when it looked as though something was working on the books.

Following on from that, if we are thinking that 4% in 3 days is enough then it may be worth extending a Kevlar clad hand to catch the falling Turkish scimitar. Though we believe that Turkish coastal resorts have nowhere near devalued enough to see coffee and property prices return to below “HOW MUCH? Are you serious?”levels, this sell off has gone pretty tabloid. Even France’s Hollande has gone over to talk to them. Can it get worse than that?

Back soon

___

Post Script
But didn’t think this soon – A big thanks to AAPL for once again really annoying us. Note to AAPL “Yes, it’s about time you fell off your high alter to yourself, but did you really have to do it right now? THANKS A PANT LOAD”.

January 20, 2014

Hope – The Narcotic.

Filed under: Forex Strategies — Tags: , — admin @ 4:43 pm

China is back at the top of the Financial Market’s Pez dispenser of worries. But before we go any further its probably worth explaining our PEZ dispenser of worries hteory.

It was the product of trying to work out why an aged parent would fret so much about the simple journey around the London orbital M25 every time they would be coming to visit, to the point that journeys would be delayed by days just to make sure that the traffic situation wasn’t a threat (which was ironic as anyone who knows the M25 will know that they based Tuco’s character in “Breaking Bad” upon it).

But the answer was simple. He had nothing else in life to worry about. IF you imagine that all your worries in life are piled up in order there s always the one at the one at the top getting maximum worry attention, the ones further down just don’t seem important, until that is, the top one is removed at which point number 2 worry is as worrying as number one was. In other words your worries are stacked like the PEZ sweets in that plastic clown headed dispenser and no matter how many you take off the top there is always one at the top and this one always gets maximum attention.

Why raise it? Well perhaps because we start today with China being top of the worry pile again and having had most other worries removed (temporarily at least) it is receiving maximum attention. But we are back to the old conundrum of China. What do we believe and what do we not believe. Chinese economics seems to work like the NDF market. There is the offshore market – what we think is going on, the onshore market, what is really going on punctuated with the odd Fix where the offshore market finds out how wrong it is.

Following on from the last post about consensus we really should have included the China and the expectation of troubles ahead via credit. But without better clarity on what is going on there we feel you can’t start applying analysis to the 1/nth degree of fineness when there is just so much mist swirling around it that crystal ball.

Which leads us on to another belief that the opacity of information of an investment is directly related to its volatility. Not because the rare reality checks of truth whip it back to normals, merely because without substance there is no proof of error in theory so the percentage of hope to reality in its performance rises dramatically. Or more concisely, in the words of Henri Frederic Amiel “Uncertainty is the refuge of hope”. This can be seen with the likes of Bitcoin. Any prediction of true value is as valid as the next and so hope is never destroyed by reality. Its also seen in environmental arguments, health products, homeopathy and religion. The more obscure the reality the easier it is to peddle as a dream.

Equity analysts seem to completely miss this function of hope or expectation when they look at a stock. Their expectations are back modelled from past company performance rather than looking at the big world around it and factoring in a hope through opacity function. A dollar bill is worth a dollar (though some would argue that it isn’t anymore) but a share in a biotech start up or a film investment is massively geared on hope. High P/Es isn’t it?. Which then leads us to suggest that P/Es are the representation of hope but by heck where do you pin down what is normal because we tie ourselves up in a hope derivative of hope.

But hope is an important part of the psychology of markets. And it should really be allocated a value as it is peddled mercilessly by those that want to enslave “I can’t give you what you want but I can give you hope that I can” and those who want to avoid admission of failure. Why take a stop loss when you have hope? – Just ask the lot who just move the date of expectation after the non-appearance of an apocalypse.

Hope may be a wonderful narcotic but in the wrong hands it can do as much damage as good.

 “We must accept finite disappointment, but never lose infinite hope.” Martin Luther King

Or perhaps it is better applied to the business model peddled out on X-factor and other talent shows because without the hope side being near infinite the average outcome of hope and disappointment would not achieve breakeven. We would suggest that MLK was very much on the management side of the game, because if you believe this yourself you will most likely end up in tears.

“Youth is easily deceived because it is quick to hope” Aristotle

The basis of internships in Investment banks, law firms or any other huge institution. Selling the dream lottery ticket of success for the price of 120 hour weeks on very little pay is in effect the new American slavery. At least slavery had the decency to own up to the reality of future years of unpaid servitude. Unfortunately we can also see this is in education policy where huge sums are borrowed to pay for educations that are hoped to lead to gainful employment.

“It is only hope which is real and reality is a bitterness and a deceit”.William Makepeace Thackeray

An investment bank intern.

“I hope that I may always desire more than I can accomplish”. Michelangelo

Investment banks are full of Michelangelos and that isn’t necessarily a good thing.

I simply can’t build my hopes on a foundation of confusion, misery and death… I think… peace and tranquillity will return again.”
Anne Frank

Zero Hedge – please read.

“Expecting something for nothing is the most popular form of hope”. Arnold H. Glasow

So true for many investments and social policies we are lost as where to start.

———

But we would like to end with our own

“Hope is the overdraft on reality” Team Macro Man.

January 16, 2014

2014 – Consensus without Conviction.

Filed under: Forex Strategies — Tags: , , , — admin @ 4:42 pm

2013 was the year that got away. Equities got away with leaving everyone behind. The Euro got away leaving bear blood on FX street. And The Fed did their best to make sure everyone ended up with losses in their short-end books despite getting the general move right. But the big trades of “Long nikkei, short yen”,”Long DM vs EM” and “long Euro things” have all gently been working their dividend magic. Unless you were in FX, where life as normal conspired towards the unexpected.

2013 was similar to 2012 in that it was another “no show” year for the disasternistas. Leaving fat tails, when illuminated by the light of outcome, looking positively anorexic. Still, as we know, disasternistas appear to have deep pockets and will no doubt be selling their grandmothers and mortgaging the kids (having already sold everything else to buy on the plethora of never ending dips) to buy more gold and of course, now bitcoins

The outlook for 2014 is not enthralling us with wild pizzazz as we stare out at it from the bow of January. Reading through the top trades for 2014 that are sent out by the big houses we are struck by the lack of excitement or conviction in many of them. Many could be photocopies of last year’s (especially usd/jpy nikkei) but the overall urgency just doesn’t seem to be there. Why? Our first question was – has the regulatory environment that has scared the bejezzus out of all forms of official communication led to houses having to couch their views in such a non-committal way that it shows up in non-committal research? Perhaps, but we still think that their really isn’t that much conviction.

That doesn’t mean that there isn’t consensus, but consensus without conviction is as fragile as the gossamer of a French President’s personal commitments.

So what is consensus? Perhaps –

The old favorite USDJPY and the Nikkei Abe trade.
Emerging Markets are going further down.
DM equities are going further up, but they are going to correct first.
US will continue to Taper (to the point that US curves are pricing in rate hikes ahead of guidance)
Inflation is dead.
Commodities will flatline.
France is a mess.

What’s new? Well there isn’t much new in there so with little new to get excited about and invoking our “consensus without conviction” clause we are tempted to look at a not so much rule as general observation about how trading years start. To generalise, December is the quiet month where folks read up and decide on the trades to start the year with. They start putting them on in small size over a glass of sherry between Christmas and New Year but then start to throw more at it as January gets underway. As prices start to move conviction builds and positions are added to (note that it is only price that is adding to conviction rather than new arguement). Come the 19th Jan, (don’t ask why we pick that) things start to wobble and prices reverse. Come mid Febraury and things are getting properly shaken down and a new set of rules are being drawn up for the trading year (normally more gloomy and involving a dump in something somewhere around mid March. Now we know this is completely unscientific and if you go and look at charts you probably won’t see it in the recent years, but we posit that this is because this time is different as it’s more like the old times when there isn’t an obvious panic, there isn’t an obvious tail risk and there really isn’t, as we said, any conviction.

So in true TMM style the trades we are most willing to take are against what we see as consensus, starting next week.

DM equities – This is where we confuse ourselves because our core belief in them runs deep and we continue to see the great rotation provide a North Atlantic Drift style current propelling them gently North.

HFRI Macro Index vs SPX in % performance since start 2013 – Someone ain’t got this trade on.

But having seen the run up we have had so far, married to weak conviction and our own sense of timing we are lightening up looking for a correction next week with the most likely catalyst being that forward valuations are back to 2007 levels and so traditionalists will take some profits. This is most notable in Eurostoxx

 However TMM are scratching their heads and wondering why analysts are using valuations that seem to fail to apply changes to long term discount rates when calculating future earnings. Using current rates it should be 20% lower implying that stocks could be 20% higher.

Talking of timing perhaps we should have a look at the weirdly famous Bradley Siderograph ( courtesy of www.amanita.at) Nothing of note to support our January correction ideas, but look at that! What date is shining through as the turn of the year? If it isn’t our old fave the 16th of July!

But back away from hocus-pocus and on to another consensus risk. This time inflation. There was much fanfare this week as UK inflation finally fell below the 2% target level. After TMM’s constant ire directed at Merve the Swerve it is only fitting that the target is hit after he relinquishes the reins, but that isn’t the point. More important is that inflation expectations continue to be low and this print may drive complacency. The UK has seen many types of inflation over the last 6 years, none of which have been the one that monetary policy should really be directed against.

First came commodity price inflation, which was effectively a tax on consumption. Then came taxation inflation with austerity seeing hikes in VAT, cuts in taxation allowances and hikes in top end rates.
Then came oligopoly inflation – hikes in prices of utilities and other services that couldn’t be substituted such as Public transport costs, utilities, tolls, insurance premiums. All effectively taxes to subsidise deficits and to fund upgrades to failing infrastructure. OK, these were all countered by low interest rates which unfortunately never really impacted the public as higher bank margins or unwillingness to lend hampered any pass through.

The type of inflation that has remained benign through all of this has been wage inflation, no great surprise. But TMM are thinking that whilst the inflation types listed above may well remain dormant, it will be wage inflation that next rears its head. Nothing much suggests it’s coming at the moment other htan  given that unemployment rate of short term unemployed (those who presumably have a better shot at getting another job quickly) is back to the long-term average, but we are hearing apocryphal tales of the supply of cheap semi-skilled labour becoming diminished and wages having to be hiked to retain staff, especially in construction, which really surprised us. We think wage inflation risk may be the greatest surprise of 2014.

Tapering – It looks fully priced to the point of the curve pricing in rate rises in the US ahead of their guidance. when something is fully proceed in it can only go one way. and thats the other way. Yellen is going to be ultra accommodative and any sign of weakness should see asymmetric rates responses in the market.

EM – India may be disaster waiting to happen and Turkey and Brazil may have had a shoeing but plenty of EM fear is hanging on credit and is in effect a derivative of the US tapering/tightening story. As equally as there is asymmetry in tapering risk the same should feed through to a bounce in EM, but to be honest we’re willing to ride out the falling knife trade in EM and wait for something to actually happen. At the moment the list of obvious sells is longer than that of buys.

TMM on Abenomics and Usd/Jpy “Never in the field of human trading has so much been expected by so many of so few”

Usd/jpy seems to be going through a goldilocks phase with everything lined up to go its way.

Abe policy commitment remains
Sightings of inflation corroborating policy success.
Waining confidence in EM sees DM Japan stock benefit.
Price justification (It’s going our way)
Global “risk on” sees Mrs Watanabe happily run carry trades.

Tapering and US rate expectations

But all of the above are vulnerable especially when the trade is so crowded ( Sep 2012 saw the start of the Abenomics yen run)

Even the trusty 2yr US/ JP yield spreads aren’t calling for it higher in fact it’s been a rubbish predictor for a long time.

Which makes Usd/Jpy particularly vulnerable to a pull back.

In summary, we aren’t that bitten by the kick off to 2014 either but we are willing to play the pull back game for the next couple of weeks in order to bring the disasternists back out of their caves and then we can get on and buy the boring carry and risk trades again.

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