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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.


  1. FT:

    @washedup 5:27 pm

    Exactly my favorite scenario (60% weighting I would say); some serious slowing down in the US economy over Q2 and Q3 and a FED capitulation by late Q3 early Q4 which will bring the last (in this cycle) up leg in US equities (12 to 18 months)

    I can envision a 15 to 20% correction at some point before that; US stocks show some serious distribution and although I doubt the payroll will be a catalyst, at some point all the blue eyed islanders will leave in a mad stampede;

    EEM should nicely take it on the chin as well

    Comment by Anonymous — April 2, 2015 @ 5:25 pm

  2. I am a 1 handle this time – 190k – a spot normally reserved for LB!
    I think payrolls are about to downshift lower next few months, the fed will hike anyway, and the dollar is going through a minor US growth scare which will eventually be digested, adopted, and finally, celebrated as the catalyst for another surge up in equities, possibly the last but who knows.

    Comment by washedup — April 2, 2015 @ 5:57 pm

  3. It's an interesting point MM but payrolls seem to have not mattered for so long it seems an unlikely catalyst. The fed has moved the goalposts sufficiently that even with an unexpectedly strong report it's not clear to me at least that it will meaningfully change '15 hike prospects.

    The whole '15 hike seems so far off from reality. The fed has been consistent in their language about letting a host of economic indicators guide policy, a shift from U6 targeting. In this environment with persistently weak data the fed would lose a lot of credibility to hike.

    I'm going to take 222 – 1SD off mean.

    Comment by Mr. T — April 2, 2015 @ 6:41 pm

  4. You are not alone in thinking about room for disappointment on Friday with the NFP:



    Comment by Martin T. — April 2, 2015 @ 7:05 pm

  5. abee – agree with valuations being too stretched on eurostoxx – if the dollar could temporarily correct, as I think it might, its not clear to me why european stocks should rally a bunch from here when the whole premise behind the bullish case is a weakened (some would say over-weakened) euro.

    Comment by washedup — April 2, 2015 @ 7:43 pm

  6. Actually futures markets will be open (except Eurex) along with FX. But for sure it will be thin

    Looking at the Europe trade, which has been the best one so far this year, the SX5E/SPX historical spread has lots of room to run (just on a price basis, but that is probably bc EU banks suck) but if I look at DAX/SPX, which seems to be more mean reverting (at least since 07) we are at dangerous levels.

    Im still a fan of the trade but looking for a good entry

    Comment by abee crombie — April 2, 2015 @ 8:05 pm

  7. Interesting thought on EEM – why so?

    Comment by Anonymous — April 2, 2015 @ 8:47 pm

  8. FT:

    I wonder how he could get past the "I'm not a robot" thingy….

    As to staying on the sidelines….I think EEM is asking for the long patrol to intervene.

    Comment by Anonymous — April 2, 2015 @ 9:35 pm

  9. This comment has been removed by a blog administrator.

    Comment by Stuart Spindlow — April 2, 2015 @ 10:11 pm

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