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April 20, 2015

3 quick bullets

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

* The PBOC dropped the hammer with a 100 bp RRR cut, predictably sending the AUD into raptures (well, relatively speaking) as of the time of writing.   Chinese reserve requirements have historically been a lousy explanatory variable for AUD and other FX on any but the most micro of time frames, and this case should be no different.   It’s important to recognize the sea change that’s occurred in China’s FX reserve holdings- they’re not going up any more.   To be sure, some of the decline has represented a fall in the value of non-USD currencies in the basket (cough, euro, cough), but the sheer scale of the recent falls is highly suggestive of actual sales due to speculative capital flight.  That, in turn, sucks RMB out of the system, and a nice RRR cut is an easy way of putting some liquidity back into the money market by loosening up dead cash on bank balance sheets.  The chart below from Reuters illustrates the volte-face in China’s FX reserves quite nicely.

* So glamour boy Yanis Varoufakis has warned of possible contagion if Greece exist the euro.   Well, duh…one would hope that the Troika (or whatever they’re called now) has at least some idea of what the impact would be and how they might react.   Indeed, given 5 year BTPs last traded hands at a princely yield of 71 bps, once could easily argue that the ECB QE has proacted against a Grexit, mitigating the need for a reaction.  File this one under “man who desperately needs lots of money warns that bad things will happen to people who currently have lots of money if he doesn’t get some.”

* Is it just Macro Man, or has the SPX turned into the equity index version of pre-January 15 EUR/CHF: flat-lining and utterly uninteresting with all the action elsewhere?  It’s a big week for earnings coming up, but it’s hard to say if they will even matter; Friday’s SPX close was more or less identical to the opening price on the last trading day of last year.   Zzzzzz.   While there is of course a saying that you should “never short a quiet market”, there’s an even more interesting one suggesting to sell in May, a month which is just around the corner.   Lazy longs in EUR/CHF got their comeuppance….will the same happen to the Spooz?

April 15, 2015

The ECB protest in 3 pictures

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

1) German citizen realizes that she paid 100.20 for a bond and that she’ll only get 100 back in 5 years

2) Constancio tells her its 100.40 bid now

3) A multi-strat fund offers her a $500 million book because of her bond trading acumen

April 14, 2015

The BOE forecasting model revealed

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

So the big news at the time of writing (9 pm NY time) is an FT story wherein a Greek official says that this time, they are serious about defaulting if the Eurozone doesn’t show them the money.


It’s been what, a good six weeks since the last farce in three acts featuring Greece and the Eurozone; Aristophanes would no doubt be proud.  While this apparently never-ending pas a deux is of course beyond tiresome, given the recent uber-surge in European assets, it’s probably worth taking at least some note.

Indeed, after a number of months of stumbling to get out of their own way, peripheral equities have finally joined the party that the Dax has been enjoying for some time now.   However, when they start handing out “forecaster of the year” awards to Buzz Lightyear when Greece starts to rear its ugly head, and May is just a few weeks away….well discretion would appear to be the better part of valour.

While the euro looks understandably putrid, Macro Man is actually getting more interested in sterling as a potential short candidate.   To be sure, cable has already collapsed from the heady heights of 1.70 in less than a year, and it’s difficult to see another 25 big figure decline over the next 12 months.

That having been said, monetary policy is nonexistent, and even commentary from Carney’s Bank of England seems to derive from a magic 8-ball.

At the same time, it seems rather more likely than not that Mr. Bean Ed Miliband will be the next prime minister, thanks to gerrymandering and a coalition with the SNP.  Things could still change, of course, but it looks to be a very close-run thing, and the uncertainty hardly looks bullish for the currency.   Macro Man isn’t pulling the trigger yet, but if we get a pop in cable back towards 1.50 over the next week or so, it will be hard not to.  Hey, even Mark Carney agrees!

April 10, 2015

A bit doo-lally

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

Macro Man isn’t quite sure what to make of things these days.   Since the poor, illiquid payroll data, the USD has surged back, with punters evidently having seen the downdraft as a buying opportunity.

Curiously, the DXY retracement has not been matched by any sort of move in US rates; EDZ5, for example, is still pretty close to its highs of the year (albeit a few ticks off of last Friday’s levels.)

Macro Man frankly didn’t see that much in the Fed minutes to justify the rebound in the dollar, insofar as he has always assumed that the Fed is keeping their options open  as much as possible.   Perhaps others in the market needed a reminder of that fact.   Moreover, it’s worth remembering that FX is always a story of relative rather than absolute relationships, and for better or for worse the $ still looks like the best game in  town- particularly if the economy picks up steam in the current quarter, as your author expects.  He suddenly feels rather underexposed to the theme, such is the vehemence of the dollar recovery this week.

No doubt there will always be some observers who will feel that the Fed’s hands are tied by goings-on elsewhere.  Forget the idea that Europe might enjoy an upside growth surprise (which would surely give back some of what the strong dollar taketh away) or that Asian stocks are going a bit crazy.   Indeed, China appears to be using the equity market as a policy tool to goose domestic demand, and as a few of you have noted, things have gone a bit doo-lally.  

Of course, nothing could ever go wrong with assuming ad infinitum asset market growth, and the Federal Reserve needs to keep uber-easy monetary conditions out of a sense of solidarity with those economies stumbling through weak growth.  Or so, no doubt, some commenter called “搞笑的钱” will no doubt tell us…..

April 7, 2015

The day after

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

Sometimes, being left to ones own devices isn’t such a bad thing, as Macro Man found yesterday.   He started with a nice 55 mile bike ride, soaking up the sun and scenery of a glorious New England spring day (while avoiding the myriad of potholes littering the roads.)  He then made delivery on a Christmas present to Mrs. Macro, taking her into New York to see a great show from one of their favourite bands.  Oh, and while they were there, his alma mater managed to reel in some sporting hardware (the replay of which he plans to watch after finishing this post.)

Superstitious/dovish/equity bullish readers may wish to recall that the Fed has never raised rates in years in which Duke has won the NCAA basketball tournament (1991, 1992, 2001, 2010, and of course thus far this year.)  Of course, over the past 30 years, there haven’t actually been that many in which the Fed has hiked rates, so the correlation is as spurious as they come.

Nevertheless, the will they/won’t they debate has evolved from “foregone conclusion” to “well, I could envisage a scenario where they don’t.”  To be sure, June is almost certainly off the table, as there are just not enough datapoints between now and that meeting to meaningfully confirm that the recent bout of weak activity is indeed ephemeral.

Macro Man remains of the view that lift-off will occur later this year, and suspects that the bar for raising rates is probably lower than many think.  A hospital patient suffering from critical injuries or a virulent illness is placed into intensive care; once the acute phase of the threat to the patient’s health has passed, he is moved to a normal treatment protocol without the bells and whistles of the ICU.

After six years in intensive care, the time has surely come for Dr. Yellen and co. to shift the patient down the hall.   After all, you never know when you’ll need space in the ICU.  Macro Man speaks as someone who got off the Oxycontins within 24 hours of each of his ACL surgeries; obviously, some patients do not find it so easy to wean themselves from opiate-based painkillers, ironically developing new health problems from the treatment of old ones.

Similarly, over the last quarter-century, easy Fed monetary policy has been a sort of gateway drug for misallocations of capital, sowing the seeds for each successive iteration of financial crisis.  As some commenters have pointed out recently, corporate debt issuance has been roaring thus far this year in what looks to be largely an exercise in balance sheet leveraging to goose EPS.  That’s not necessarily a bad thing, a priori, if conducted within reason and from a healthy starting point.   Unfortunately, economic actors are not known for acting within reason when the tantalizing allure of financial leverage rears its head.

Sometimes you need to be challenged to ultimately succeed.  If you have too easy a ride for too long, as the Kentucky basketball team did, you can run the risk of failure when faced with the novelty of being under pressure.

April 3, 2015

Dionne Warwick sings the Good Friday Payroll Blues

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April 2, 2015

Treading warily

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

Although the passage of month/quarter end should once again open up the taps for risk-taking, Macro Man (and he imagines a number of others) is treading a bit warily.  For all the ink (or, in this day and age, bytes) spilled over the equity market, the SPX is pretty much unchanged on the year.  To be sure, there’s been stuff to do in single names and sectors bets, but in terms of big-picture index-level risk taking, it’s proven to be a fairly fallow field.

Moreover, the longer the skein of weak (albeit weather-impacted) releases continues, the more bold the market will become in second-guessing the Fed and its presumptive resolve to raise rates this year.  EDZ5 is now back at the highs of the year, and at this juncture Macro Man isn’t particularly inclined to get involved some more.  In the span of a few months, the onus has pretty clearly shifted to the data justifying a hike, rather than justifying standing pat.  Calls for QE4 look more like wishcasts than forecasts, but clearly you don’t need another round of QE to lose money being short fixed income.

This week, of course, sees the release of another payroll report, with the consensus forecasting a still-robust  reading just shy of 250k.   While the ADP has proven to be not particularly useful in real-time forecasting (the correlation to NFP is much higher after all the revisions are in place than at the time of initial release), yesterday’s well below-consensus reading was still noteworthy, insofar as it reinforced a pre-existing narrative.  Ditto for the ISM.

What really gives Macro Man the willies, however, is not the data itself but the liquidity environment in which it will be released.  Readers with sharp memories may recall that the March 2012 payroll figure was released on Good Friday in early April- as this week’s will be.  Stock and futures markets were and will be closed, leaving short-staffed desks to manage as best they can in bonds and GLOBEX.

Three years ago, market consensus was for  a solid number of 201k, down slightly from the previous month’s 227k.  In point of fact, it came in at 120k, way below the lowest forecast in the Bloomberg consensus.   Unsurprisingly, carnage ensued, with the 10y yield gapping lower, a gap which held through the announcement of QE3 later that year.  Macro Man also recalls a particularly nasty gap higher in USD/MXN (he was short), among other dislocations.

With a full quarter’s worth of scuffle from the US economy, no net gains in the SPX, and most short fixed income positions offside, Friday looks like a particularly acute opportunity for a capitulation.  No guarantees of that of course….just a general feeling of uneasiness that it’s not a great time to be taking a lot of risk.   Sounds like a perfect time to tread warily.

April 1, 2015

The Condundrum, Mk. II

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

The number of words that Ben Bernanke has written explaining why market interest rates are so low in his new blog: 2,560

Mentions of “asset purchases”:   0

Mentions of “QE”: 0

Mentions of “regulation”: 0

March 30, 2015

The state of the financial labour market

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

As many risk takers are likely to be concerned with locking down positions and profits into month and quarter end, Macro Man thought he would address an issue that’s near and dear to his heart, the state of the labour market for market professionals.

He spent a few minutes sifting through efinancialcareers, an online job portal that pretty much does what it says on the tin.  First, he looked at openings for portfolio managers:

As you can see, the query generated 290 results, globally.   OK, what about looking for traders?

Hmmm…507 results, but as you can see, a lot of the results are for quant traders because hey, HFT front-running is perfectly legal and what could ever go wrong?  If you sometimes feel like trading these days is like living in The Matrix, you just might be on to something.   A search for C++ yields a whopping 1434 results.

If you apply for one of these roles and are contacted by an “Agent Smith”, watch out!  On a slightly more serious note, perhaps the best piece of advice that Macro Man can give young readers interested in a financial career can be summed up in 3 words.  Learn.  To.  Code.

Even more than coding, however, there is one area of finance that is in a roaring, runaway bull market with no end in sight.  Some may call it a bubble, but as you know the authorities always feel uncomfortable identifying bubbles in real time.   Indeed, listen to Yellen’s Congressional testimony and you can see certain members cheering lustily for the trend to continue, nay accelerate.

Step forward Compliance officers, for whom there are a stunning 3093 vacancies!

There you have it folks, financial markets in 2015- where demand for compliance folk outnumbers that for portfolio managers by more than 10-to-1.  The irony, of course, is that in their zeal against too-big-to-fail on the banking side, the authorities have significantly raised the AUM bar for what constitutes a viable business proposition on the fund side.  As a result, in some sectors at least assets have concentrated in huge funds with the built-in compliance infrastructure to satisfy the rampant bull market.

One can only hope that come the next market crisis, they do not prove to be too big to fail.

March 26, 2015

Running in place

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

A 1.5% downday, and the SPX is basically unchanged on the year.   There’s a reason that Macro Man hasn’t written too much about equities recently, and that’s it in a nutshell.  For the first three months of the year, US equities have been a bloke on a treadmill, running at a brisk pace simply to stay in place.

Not that this has come as any great surprise.  In October, Macro Man noted that liquidity factors were the primary explanatory variable for the S&P’s stellar run of performance over the past few years, and with the tap being turned off (in the US at least) there was naturally some reason for concern over future returns.

Indeed, more than a year ago Macro Man performed an analysis of the SPX’s return and vol by Fed policy regime; he thought that he had published it here at some point over the summer, but he’s deuced if he can find it.  Regardless, the analysis suggested a very bullish outlook for US equities as long as the Fed was a net purchaser of assets, and a dim prognosis whilst the Fed did nothing.   He’s taken the liberty of updating the study for the full body of the Fed’s QE Era (Dec 2008- Oct 2014); a summary of the results are below.

As you can see, based on this study, the right question for US equities is not “why aren’t they going anywhere?”, but “why are they doing so well?”  Since the end of October, the SPX has generated an annualized price return of 5.4%, with a vol of just over 13%.  Of course, a number of ancillary factors have also impacted the price- ECB QE, the collapse in energy prices (bad for producers, good for energy consumers), and of course, the shifting sands of Fed policy expectations.

There are, of course, limits to this type of analysis, given the paucity of truly independent samples.  Even going back several decades delivers little more than a handful of policy cycles, which is really an insufficient number from which to draw strong statistical inferences.  For what it’s worth, a year ago Macro Man also performed a study on SPX performance by orthodox Fed policy regime, splitting the cohort into the first 6 months of tightening/easing, subsequent tightening/easing, and on hold (defined as no policy moves for the last 6 months.)  The results are set out below.

On the face of it, this might suggest that a rate hike might be the best thing to ever happen to the US equity market, but correlation does not of course imply causality.  One might posit, for example, that early-stage and subsequent tightening cycles are driven by robust economic activity, which would naturally prove supportive of stock prices.  The lower returns from on hold and easing, meanwhile, would reflect the weak underlying economic conditions justifying those policy stances.

In the current environment, the expansion is already somewhat long in the tooth when measured by the calendar (though not by the credit cycle), and earnings have had a lot of “unnatural” support baked into the cake thanks to uber-accommodative policy over the last six years.  This is unlike any of the scenarios captured in the data set above.

Current and future financial conditions in the US look set to be tighter than those of the past several years, so it seems natural to expect equity performance to be worse (and, cough cough, macro performance to be better.)  That being said, Macro Man’s model is still somewhat bullish of the SPX, which informs a moderately long strategic position even as he is agnostic tactically.  He is following developments in the model and the market from afar, however, and is ready to change his stance when and if circumstances warrant.

In the meantime, there’s always the DAX, though it certainly looks like at least a good chunk of the easy money’s been made in that one for the time being….

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