So Is This It?

Last Friday I mentioned a piece about big call spread trades going through on the VIX. July 45/55 call spreads to be precise. It stood out because it was clearly calling for a big market fall, not only that, but a market fall pretty quicksmart too. Who knows if this punter knew something but the timing pretty much bottom ticked the VIX which rallied 10% yesterday and 15% over the last few days.
Equity markets suffered their biggest fall in a couple of months but the reaction is slightly muted this morn. Volumes are at c80% with the defensives again providing the majority of the support. EStoxx closed below the 200 day MAV but SPX didn’t and it makes sense I think that people are reticent to really follow through on the downside until that happens. Oh and we’ve had some good news too, which probably doesn’t’ do any harm, ZEW came in better and the UK inflation numbers came in ahead too. Which is erm, good news right?? Then we get to have rate hikes which stifle growth. High inflation and high unemployment can co-exist. Dr Phillips was disproved…and this is called stagflation…and if that’s a cause for celebration, then we really are delusional. Anyway, I digress, CPI came in at 2.2% YoY vs est of 2%. RPI was ahead too. Sterling caught a bid on the back of this as the Inflationistas point towards rate hikes sooner than previously anticipated. However, look at the trend of these numbers, and also how the actual has come in versus the forecast number over the past X months…this is the lowest CPI print we’ve seen since Jan 08 and typically the actual comes in higher than expected. It’s getting a bit more traction today however.

The Dollar is falling foul of a Russian 180. Despite Kudrin commenting yesterday about not seeking an alternative to the Dollar, Medvedev has turned around today and showed him who’s Boss by calling for…an alternative to the Dollar! Resource stocks are on the fall today but resource currencies are enjoying a bounce. EURGBP continues its trend downwards as Eurozone issues mount and yesterday’s comments from Papademos about banks in the area facing further losses of up to EUR283bn certainly hasn’t helped.

I’m more convinced we’re at a potential turning point in the market here and especially so if the SPX can break through its 200 day and I still like the defensives on this basis. We’ve been near enough to here before though so you can’t discount the wild rally for not much reason but I think we’ve exhausted the uptrend and the path of least resistance is down as reality hits home.

Bouncing Bonds and Lurking Bears

US govies didn't have a friend in the world until last Thursday's 30yr auction. The rallied hard on the back of its success and this has followed on today. The Greenback too is continuing upwards. Given this heady mix, ordinarily you’d expect equities to be off on a day like this; and they are… although in light of the positive, if somewhat (very) premature talk of exit strategies coming from the G8 meeting over the weekend, you’d certainly have a decent case for seeing a market in the blue today, especially given the market’s propensity for blinkered Green Shootery. However US assets are getting their bid from Russian comments about it being too early to talk of an alternative reserve currency to the dollar and it looks like the $ strength is causing the equity sell off as the resource and energy names retreat for obvious reasons. Markets have been flat-lining for a few weeks now and we’re expecting a break, one way or the other. Today’s move is providing fuel to the bear fire although it should be noted that we’re still within the recent range, albeit at the lower end…so support could well be met but a break down towards the 2400 level in the Estoxx would certainly give me more confidence in the sustainability of running a short. Given the market wariness of a possible sharp move one way or another, it is not surprising to see that sector performance has had a defensive bent to it over the last few days and this continues today, while all sectors are down, the foodies, tobaccos, telco and pharma are holding up better than their cyclical, resource related and financial brethren.

TomTom provided the relative excitement on Friday, jumping 20% on talk of Apple taking a stake via a capital raising. The rumour was half true. Unfortunately, not the half anyone who bought it on Friday wanted. Another company taking advantage of the rally, and who can blame them? Could be good timing too as there’s a bit more impetus to the bear camp today with a Barron’s article getting quite a bit of press, saying we’ve come too far, too fast and Forbes running a story noting Sheila Bair is still cautious on the banks and expects further failures. Remember though, it’s expiry this week and low volumes in expiry weeks can lead to exaggerated and unexplained intraday moves.

Treading Water

The market has been a bit of a non event so far this month. We’ve had a 4% trading range on the Eurostoxx and we’re smack in the middle of that range at the moment. Lack of conviction in the imminent sustainability of the rally has beset the bulls and volumes are low as a result. Even the AAII Bull index has ticked down .
The retail sales number yesterday initially buoyed the markets until the devil in the detail was outed and it was clear the beat came from gas, up 3.6% with necessities robust and the higher ticket consumer items continuing to lag. This lack of conviction is manifesting itself in the defensive outperformance today. The pharmas are strong, MS had an upbeat note yesterday, UBS has a big push on AZN today, Liberum are touting Roche and the Telcos are a good market too. That said, the pharma volume and move is particularly impressive so if anyone has a better reason (DXY rally maybe?), I’d love to hear it.

The equity market’s insistence on trending sideways has not spread to other asset classes and yesterday saw a big bond rally. The 10yr traded just about the 4% level intraday, but rallied back hard post the successfully $11bn 30yr auction which came in 4.72% (vs consensus of 4.8%) with a bid/cover ratio of 2.68 (vs 2.14 at the previous auction). While the market has been rife with talk of increasing inflation expectations, and for sure this has contributed to the bond move, the data have not corroborated this, as yet anyway. I subscribe to the school of thought that a substantial amount of the move has been asset allocation out of safe and into risky and certainly the pickup in individual investor appetite for equity mutual funds has been impressive.

Anecdotally, I saw a piece today talking about heavy July 45/55 call spread buying on the VIX which is presently at 28. Somebody thinks there's a big dirtnap around the corner that's for sure.

Chinese Whispers

Asia caught a big bid last night due to press reports that Friday’s May Industrial Production number will come in ahead of estimates…+8.9% YoY vs ests of 7.7% and an April number of 7.3%. Commodities have understandably rallied hard as people hang their hat on the horns of the Chinese Bull run. Remember, as noted before, China power generation is down YoY which doesn’t fit with increased IP.

I mentioned yesterday the strong increase in Iron Ore imports despite flat steel production and have previously doubted China’s ability to lead us out given their export based economy. Today, Macro Man presents some interesting charts showing vast increases in import volumes from China in coal, copper and iron ore, and way above trend from 2003-2008. Interestingly, this is not the case with oil however which is only on trend.

So we see imports up, exports down, and down again in April vs the bounce in March
And South Korea, which releases macro data the quickest just came out with export data for May, showing a fall again…so we may infer exports economies are continuing to suffer.

How then is China holding up so well? Ok it could be data manipulation for sure, but I read an interesting piece from Brad Setser the other day. He posits that while China relied heavily on exports for growth, there was an underlying domestic demand which remained unrequited as the government kept reserve requirements high and loan/deposit ratios low to keep the economy from overheating. So now that exports have fallen, is that pent up domestic investment demand being satisfied as banks are freer to lend? Can it offset the export fall? It’s certainly a theory. I’m not so sure. Most of what I’ve read points to government banks lending to government sponsored projects and then there’s the whole issue of power generation decrease. Still, it’s food for thought and something to keep in mind. We’ll see what IP number is released on Friday although I can’t imagine it will be anything other than bang on the whisper.

Something is Rotten in the State of Last Hour Trading

We have light volumes across Europe again today, 80% or so…as was the case in the US yesterday too…although we did get an uptick in volumes for the mandatory ramping of the index on anything that looks like a bad down day. It is odd the way this continues to happen. There are plenty of conspiracy theories out there, who knows what the reality is but it certainly is strange for a market to move like this, so violently on no news…see the Emini and SPY charts

It is amusing to see the Obama administration come out straight faced, without a hint of irony and urge European Banks to undergo more rigorous stress tests. “Do as I say, not as I do” springs to mind. Banks have stalled in the last couple of weeks and with risk appetite waning, further questions being asked of the European banks and issues such as Latvian devaluation hanging over them, I would think the risk is to the downside.

The performance of the Baltic Dry has been a source of optimism for the Gr**n Sh***ers and why not, it’s a leading indicator after all and has enjoyed 400+% rise from the Q408 lows and a 140% odd rise since April. Well firstly, the BDI is based on USD so the dollar fall has helped it but aside from that caveat; I’ve mentioned before talk of China bulk purchasing and stockpiling raw materials and I came across an article today in Maritime Global News. It casts dispersions on the sustainability of the BDI rally, noting Chinese iron ore imports have risen 27% annualised YoY while actual steel output is largely flat YoY.

Away from this we did see some more good news on UK house prices, with the RICS survey coming in better than expected. I saw some guy on CNBC yesterday talking about the UK housing market and saying that XYZ bank was starting to offer 90% mortgages again “which is good.” Erm, isn’t that the exactly the kind of thing that got us into this mess in the first place?

NFP Hangover

The NFPs have really shaken things up. Not so much in equities, not yet anyway. There were huge bond moves as the curve flattened on Friday and has continued to do so today. The better number allied with the Fed’s Lockhart saying we could see rates rising conspired to make short end yields jump 30bps. At the longer ends of the curve, yields are pretty much at pre NFP levels. This has of course given a big fillip to the previously downtrodden dollar and caused the soaring commodities to come back to earth somewhat. Fed Fund futures are pricing in 40% chance of a rate hike by year end.
We’ve had the inflation trade playing out big time recently in spite of the data not really supporting it (see Friday’s NFP detail and the slowdown of wage inflation for one of many examples). Also, as mentioned before, in order for the so called money printing to be inflationary, we’ve got to see a pickup in money velocity. If however this trend continues and we have a flatter curve, that stellar Q1 that the banks had, locking in those fat spreads, will be a thing of the past...see the narrowing we've had already

The Euro is taking a bit of a knock today and the news of Ireland’s debt rating cut by S&P won’t be helping that either.

Equities are reasonably quiet today with volumes running around 80% of the 20 day average and most I’ve spoken to have said they are net sellers, mainly for hedge fund players. The former is hardly a eureka discovery given the market is down but the latter is further evidence of an increasing trend over the last couple of weeks…bears are more comfortable being short than they were a month ago.

Jobs All Round

Well it was all about the NFPs this week and they didn’t disappoint. The whisper was better, the actual was way better. But then the unemployment rate was worse, reaching a 25 year high. The market spiked, $ fell and bonds sold off. We’re on the road to recovery so saddle up and enjoy the ride. Looking through the numbers and they looked reasonably robust. Government jobs weren’t propping this one up, in fact they were down and the unrounded unemployment rate was (only) 9.357. Joe Lavorgna of DB however pointed out something interesting…
” In particular, the weakness in hours and earnings are reason for concern. The length of the workweek declined by 0.1 hour to 33.1 hours, which is the aggregate hour equivalent of an additional loss of about 350k jobs. More importantly, the manufacturing workweek also declined (39.3 hrs vs. 39.5 previously)?this is a negative sign for inventory restocking in the current quarter, because inventory rebuilds have historically been accompanied by a rise in manufacturing hours worked. Average hourly earnings rose 0.1% in the month, lowering the 3- and 6-month rates of change to 1.7% and 2.2%, respectively. In short, wages are rolling over”

So the lower hours compensate for the better number and wage inflation is slowing. The detail certainly seems to have taken some wind out the sails of this move. $ reversed its previous loss and bonds have rallied back somewhat too with the 10yr around 3.83 having been at 3.90 earlier and equities have come back too.

It turns out the GBP sell off yesterday was due to the FX hedging on the Rio capital raising. This makes more sense to me as I was sceptical of the idea that Brown leaving would be taken badly by the market. Hope springs eternal and all that (and indeed hope has proved a pretty good investment strategy in the last few months). Remember the reaction of the market to the news that Geithner was going to be appointed…

Brownian Motion

The markets were ticking along doing not very much. The impressively named UBS Volumintor was talking of 80% ADVs. BOE unch, ditto the ECB (although to be fair the real interest always comes in the press conference anyway) when along comes a rumour that the beleaguered Brown is getting out of Dodge. Markets fell, as did Sterling. I thought they would have firmed given all the bad press he’s been getting. The Sterling move was also attributed to a rumour that JPM had a big sell ticket, c GBP5bn…talk also this was related to the Rio stock sale.

The resources sector was under pressure anyway with a big sell off in CAD, NZD & AUD overnight but the Rios chat clearly hasn’t helped. Never fear however, the panacea for all market wobbles as we know is a less bad macro number. Enter the continuing claims, a mere 6,735k, and that combined with the words from Trichet, which were reasonably sanguine (albeit with the caveat that 1% rates are not necessarily the lows), and the markets feel stable enough.

Interesting to note that equities rallied sharply in the last 30 mins or so yesterday as the Plunge Protection Team buyers came in and the market bounced off its 200 day MAV. See Estoxx below but the chart is the same for the SPX.
With the imminent NFPs tomorrow will this level be held? Most other assets which have broken through the 200 day have not looked back since; see DXY, GBP, the 10yr etc etc. One cross I’m looking at is EURGBP…I’m bearish on it and have been for a long time as I’ve mentioned before…but that is testing its 200 day post all the Brown hoo-ha. It will be interesting to see if the GBP momentum continues.

Sheikh Shakes the Market

I didn’t get around to penning anything yesterday. A combination of being busy and also a little bereft of inspiration. No matter, a couple of things of note over the last few days. As the $ weakness continues, it’s pretty clear FX is driving the markets at the moment. It’s the commodities and commodity stocks that are trading well as the banks have taken a back seat in the last few weeks. Equities are feeling a bit heavy this morning and it’s not that surprising; the BARC placing yesterday, Gamesa (and MS now owning 5%, ouch), MS, JPM, you name it they’re raising money. Sheikh Mansour’s come under a bit of stick for selling Barclays when the market thought he was a long term investor. To be fair, he has made 70% on it, which is be a pretty good return for a long term investment, let alone a few months and ultimately, investors are in things for the return, not the time frame. If the return comes quicker than expected, and you exit, does that make you any less serious an investor?

There are some headlines out from China saying a quick rebound is becoming less likely. I’m not sure when it was ever that likely but the miners are taking a bit of a breather on the back of this. I’ve mentioned before my doubts about a China led recovery and have talked about things like lower power usage, lack of credit availability to non government sponsored projects etc. I was talking to a mate the other day who’s just come back from 3 months in Beijing (just to give his thoughts some credence, he was out there working in the metal markets, not trying to find himself or anything soulful or worthwhile like that). Now this is anecdotal for sure but he was of the opinion that credit for the man in the street is still very hard to get and you can see how much slower things are over there by virtue of the fact there is far less air pollution than there used to be. I tried to dig out some data on this, the Air Pollution Index (API) but it seemed to only be accessible on a daily basis and then I got bored frankly. Who would have thought accurate Chinese data would be hard to come by??

This last piece is interesting, if not necessarily instructive and was picked up on by David Rosenberg. On Monday, equities rallied 2.5%. On that same day, the VIX rallied almost 4%. This is very odd. The VIX index has historically fallen over 95% of the time that the market rises. Even stranger, at no time in the last seven years did a 2%-plus surge in the S&P 500 coincide with an increase in vol … until Monday. For some good thoughts from Rosenberg, you can see them here…

Frank T.J. Mackey says...

“…Respect the Market”

Low volumes, main stream media cheerleading, data manipulation, these figures aren’t actually good, this is all going to end in tears. V shaped, U shaped, L shaped. Whatever you want to say or believe, this market only knows one way at the moment and it isn’t South.

A better set of numbers today, PI up (although saving at its highest level since the data series began in ’59). ISM a touch ahead too. The beat coming from prices paid. These two adding fuel to the inflation fire and we’ve seen treasuries sell off since. To be fair, order backlog and new orders increased. But then to be equally fair, they’re still below 50, so not growing.

Macro Man noted there’s a good chance of the market closing above the 200 DMA today. What next. Well everything that has traded through it’s 200 DMA of late has carried on storming through. I would bet against equities doing the same. That’s not to say that I don’t agree with a lot of what’s in the first paragraph or the caveats of the second…I’m just cognisant of the (admittedly adapted) words of Frank.