Stuff I Don't Understand...(not an exhaustive list)

Markets had a strong bounce yesterday on derisory volumes. In Europe they ran around 62% and were c 75% in the US. It may be end of quarter but no one was doing anything yesterday. Today the rebalances are happening and there are a few decent program trades out there but cash volumes are still featherlight at 64%. It’s interesting speaking to a few desks at the bulge houses today, they all have decent programs on and they’re all very heavily skewed to buy. You would think this would have the market firmer this morning.

The UK economics didn’t help us however and while the Nationwide house price number was better (although the report notes this was on very light activity), the Q1 GDP figure was revised lower and came in with the worst drop since 1958. Greenshoot that. There’s been talk recently that the UK data has been better and the UK may be the first to exit the recession. I pretty much subscribed to that and certainly feel there is more bad news to come from Europe however, given the recent data out of the UK, I am beginning to question that. Looking at the recent data, GDP –bad, retail sales-bad, public sector borrowing – bad, mortgage approvals – bad…and these we bad vs consensus not just in absolute terms. There hasn’t been much in terms of better numbers, jobless claims came in a bit better a couple of weeks ago and the house price number today and that’s about it. GBP has given back the gains it had made prior to the number but I would’ve thought it would move more.

Even stranger are the commodity moves, no? The Sydney Morning Herald is running a story about China ending their commodity stockpiling. To be fair, this story was out yesterday in the Chinese press. Nevertheless, referring back to MacroMan’s impressive charts, we can see just how above trend Chinese commodity imports have been this year. Still, commodities are up, as are the commodity stocks and the commodity currencies! Go figure. The IEA also cut its forecasts for oil consumption and demand and what happens?? Oil bounces to $73.

While this is all counterintuitive to me, I think the only way I can explain it is through the fact that in essence, these are all the same trades: long oil & commodities in general, long equities, short $, long GBP, long AUD,NZD,CAD. These are all expressing the same view, long risk and much of them really, are in fact, just long China. While risk appetite has waned of late for sure, it has not disappeared (see the VIX for clear evidence of that), and often the favourite themes continue for longer than we’d think and take a long time for reality to kick in. Remember how long the market warned of demand destruction last year before the oil price actually took note and decided to descend from its 120+ levels ... about 4 months. Most things I see and read make me believe this whole move is predicated on unsustainable hope and I’m confident that it will pan out that way. Trying to work out when is decidedly trickier however.