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15 января, 17:26

Keeping It Simple...Bund vs. UST Rates after the EUR rally

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As the US continues to slog through a winter marked by one sub-zero reading after another, let’s do some KISS trading--keep it simple, stupid. Last week the short USD theme went from sideshow to the main stage of the market’s three ring circus. As noted here, the BoJ woke up to the possibility that the economy is perking up quite nicely, and higher global interest rates caused the YCC flows to dry up, leading to news of a “stealth taper”. Well, if you’re strategy is to buy bonds at a certain yield, and nobody shows up to sell them there, you don’t have much to do! So while I wouldn’t put much stock in the BoJ’s pseudo-announcement that they will be buying fewer long end bonds, nor the flatlining balance sheet--the turn in sentiment and momentum is significant. JPY has finally joined the party, and I think we’ll see correlations to G7 FX increase to historic norms until Kuroda and Co. give us a signal about where the asset-purchase scheme is going next. KISS: stay short USD/JPY, scandies and selected EMFX until further notice…And rates….the UST selloff stalled out last week, despite some very good retail sales and CPI data out on Friday. Maybe the higher rates theme is running out of steam? I think that’s a strong possibility--as I noted last week, I think there is more downside than upside for US economic data, even if that doesn’t mean a reversal in Spoos or UST yields. Let's stick with the theme above--a resurgence in economic growth, investment and outright optimism in countries where the word of the decade has been “malaise”.  Sure, euro-area inflation came out week again, but you can’t ignore this jump in PMI. And look who shows up at the top of the table: France and three of the four PIGS! This resurgence is broad-based, and dragging along countries with significant excess capacity. The ECB is starting to make some rumblings about how they can retool their asset purchase program. There are a number of things they can do--but easing up on buying duration seems like a good place to start. EUR-strength will be a consideration--but if this move doesn’t continue towards 1.25 I don’t think it will be a factor. There still seems like too much complacency in the rates market. You can see in this pic how the correlation to 10y UST has been very strong lately--interesting to note that the correlation early in the year was pretty weak, but is 65% over the past three months. Yet we saw a big move higher in bund yields late last week driven by the minutes from the last ECB meeting. bunds underperformed UST...which went hand in hand with the strengthening EUR. Given the fundamentals and 10y bund yields still trading inside the highs of last summer, I think yields can continue to move higher from here. I’d be careful with the bund/UST spread since there is a beta component there (if you trade dv-neutral, your long ust/short bund trade can get barbequed on a global move higher in rates) but what I see in the chart here is a spread too cheap given the underlying fundamentals:  there is still value in the market pricing in some combination of higher European rates and monetary tightening.  Then there are articles like this one, which highlights GMO’s Jeremy Grantham abandoning his value-based principles and thinking about just how far this “melt-up” rally in stocks can continue. I won’t go into any detail here other than to say this market won’t die of over-valuation. Something will break it. We just don’t know when or why.    

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12 января, 07:47

Should the Fed Change It's Inflation Target? Please, Stick to the Weather

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Unless you like in a desert or arctic tundra, it is probably a cultural norm to make small talk about the weather. And eventually, it will come back to the forecast. Weathermen can get tomorrow’s temperature right (most of the time), maybe predict if there will be rain or snow two days out, and maybe get a general idea of what the weather will be like five days down the road. While forecasting has improved over the past few decades, it is a complex system: medium-term forecasting is still largely educated guesswork at best. Yet we persist in maintaining the myth of inflation targeting. Do central bankers have any better idea of what inflation will be a year for now? Do they even know how to measure it accurately? Has the craft of forecasting inflation a year forward improved over the last thirty years? Consumers in Mexico, and countless other countries just in the last twelve months, can answer with a resounding, “no”.  And even the monetary chieftains did know how to forecast inflation, would they know what buttons to push to move it to their “target” without unleashing a series of potentially catastrophic unintended consequences? This issue stepped to the fore on Monday when the great monetary minds of the world converged on Washington DC for the Brookings Institution Central Banker Jamboree. The title of the event was, “Should the Fed stick with the 2 percent inflation target or rethink it?” San Francisco Fed President John Williams was on the tape in the WSJ supporting price level targeting, which is the idea that if you undershoot the inflation target, no worries...you can just make it up later. A previous speech he had this to say about price level targeting: “In a nutshell, the big advantage of this approach is that any surges or drops in the inflation rate need to be made up in the future. This assures that, over the medium term, inflation stays on track, even if policymakers have a very imperfect understanding of the levels of natural rates or other structural changes affecting the economy.” But what if they have a very imperfect understanding of inflation? What if they are measuring, just to pull a random example, the annual change in US personal consumption expenditures, but low interest rates are driving crazy amounts of borrowed money into a wide variety of assets, both real and imagined? Would the Fed still be madly shoveling fuel into the QE blast furnace?Yet the central bankers of the world look at the world, stroke their beards, furrow their brows, and think about how they can solve this problem--and manipulate the price of money so they can get it just right. In a 20 trillion dollar economy comprised of a system so complex it can scarcely be measured. And then there’s the “look through”. How many times have we heard the Fed--or any central bank of your choosing--is going to “look though” this spike in oil prices, or the fall in telecommunication prices, or the rise in medical costs, or the transitory pass through inflation from the depreciation of the currency? As if on queue, after the price level targeting trial balloon took to the skies on Monday, the BIS published a working paper with this clickbait headline: “Global Factors and Trend Inflation.” The paper seeks to quantify how much foreign factors--mainly commodity prices--impact domestic inflation in an handful of inflation-targeting countries and Asian exporters. Here are the results: Put another way, with a couple of exceptions, foreign shocks drive 20-40% of inflation depending on which country you’re talking about. While these shocks have less of an impact on “trend inflation”--or the long-term inflation average we might expect to see priced in breakeven prices--they are a huge, and completely exogenous, factor for domestic monetary policy within any predictable growth and inflation forecast horizon.The authors of the paper see this as a victory for inflation targeting: price shocks hit short-term inflation, but have little impact on the trend. So you can ignore them.  I find it disconcerting--how confident can you be in a trend when 20-40% is indisputably a random variable beyond your control? And doesn’t this approach implicitly assume the random variable of foreign shocks is 1) random, and 2) mean-reverting? Both of those assumptions are tenuous at best. Yet 2% inflation, or 2% annualized over time immemorial, or some other number chosen from on high, is the right number to manage to. John Taylor got into the mix later in the week as his Taylor Rule got batted around like mouse in a village of feral cats.   And it bordered on the sensible: “First, there is a danger in the way that the numerical inflation target has come to be used in practice. It seems that even if the actual inflation rate is only a bit below the 2% inflation target—say 1.5% or 1.63%—there is a tendency for people to call for the central bank to press the accelerator all the way to the floor. This is not good monetary policy; it is not consistent with any policy rule I know, and it could create excesses or even bubbles in financial markets….”Price stability and financial stability. That is a better recipe for keeping the Fed from blowing bubbles rather than anything I’ve heard from John Williams, Ben Bernanke or even the “screw it, let’s just raise the inflation target for a while” argument made by Larry Summers.Look, I’m an economist by training. I respect what these guys do, and I admire their quest to improve monetary policy.  I’m also a trader who sought to make a living with a 60% hit rate on my predictions and forecasts. Macro trading, weather forecasting and central bankers will always have gods and liars that claim or promise a higher hit ratio than that. But being “right” a lot is really, really hard.  As Nobel Prize Laureate Richard Feynman once said, “I might be quite wrong, maybe they do know all this ... but I don't think I'm wrong, you see I have the advantage of having found out how difficult it is to really know something. How careful you have to be about checking the experiments, how easy it is to make mistakes and fool yourself. I know what it means to know something. And therefore, I see how they get their information and I can't believe that they know it.”We should take it easy on the weathermen and the economists. They are seeking to quench the very human need for control. Central bankers are doing the job we ask of them--maybe we just put to much on them. Like with most things in life, a little humility can go a long way.  Take Taylor’s advice and manage around rules, not numbers.

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08 января, 20:15

I Can't Shake This Feeling....More on USD/JPY

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Maybe it's just always been too far afield for me, but I think the Japanese yen is the death star of macro trading. There are a vast number of variables that don’t really apply to other FX markets, and your positions exists at the pleasure of the BoJ, which has the power to open fire with this “fully armed and operational battle station” to destroy whatever planet you are living and trading on. And if that’s not enough, it is the funding currency of all funding currencies. So go ahead, spit into that gale force wind. But I just can’t shake JPY...and the possibility it makes a big move stronger this year. In the comment section from last week’s post Johno asked the big question for JPY in 2018: One question concerning USDJPY I may have posed before is what happens if we get inflation >1% in Japan. Some argue that YCC will remain, or slowly adjust, pushing real rates down and with it the currency. Others argue markets will look forward, anticipating removal of YCC, higher rates, and pushing the currency stronger.I’m in the latter camp. Here’s why. There are a confluence of factors that are push the yen towards strengthening. The economy is picking up in a way that hasn’t occurred in many, many years. I can bombard you with charts on this one, but I found this one to be particularly telling. Credit growth is picking up, and rising significantly while it is flatlining or decelerating in Europe and the United States. That says to me that there are good investment opportunities in Japan, and now that there are signs global growth might support an increase in export capacity, businesses (both foreign and domestic) are starting to take advantage of that. That might be the beginning of a turn from a very large industrial battleship. The Yen is cheap. Really cheap. MacroTourist started me thinking along this line a few weeks ago, and I guess I’ll just put my spin on what he said:JPY has been left behind by every other DM currency in the great USD-fire sale of 2017:Including against KRW, which has appreciated markedly as the BoK has taken its foot off the intervention pedal, and amazingly, moved to finally hike rates. Tough to envision a break of 9.00 here now that the Korean government is calling time on the strong won.That’s nominal rates...but real rates, or purchasing power parity valuation, show an even more attractive picture. USD is roughly 20% rich to JPY on a PPP basis.  And as I have noted in the past (repeatedly, I’m afraid) the BIS real effective exchange rates shows the yen skulking at the bottom of the table for DM FX: All this, despite the fact there is little evidence of a breakdown in the relative productivity of the Japanese and US economies: Right...so some mysterious force….the dark side, the light side….we don’t know which...is sandbagging the yen. What could it be? Yep, it’s this. I could argue until I’m blue in the face that a chart like that can’t go on forever--but maybe it could! This gets back to the crux of Johno’s point--will the BoJ keep the pedal to the metal, or will the market price in an easing of this reality TV episode of “The World’s Most Extreme Central Bankers”?  If you poke around the street and “fintwit”, various forces will argue that there is already a “stealth taper” from the BoJ. If you look at their total assets, that might be true, but without any official word from Kuroda and Co., it is hard for me to trade on that. Many will point to the correlation between stocks and JPY. This correlation raced towards 1 when Abenomics took off in 2013.  That correlation has broken down lately as optimism on the economy and foreign and domestic flows have led the Nikkei to outperform USD/JPY. Will this relationship mean revert? I guess it could, one of two ways: 1) FTQ….stocks could take a big dump on any number of risk factors. The newly high-beta Nikkei cools off while USD/JPY grinds lower, or 2) Kuroda pulls out the Draghi card and says he’s still going to do “whatever it takes” to reinflate the economy, and the YCC target isn’t going anywhere. The former is a random variable (and positive for long JPY anyway)...the later is possible, I just don’t see it happening. I think the market will eventually price an easing of the YCC policy more broadly than they do now. Importantly, the odds aren’t “even”...despite accelerating domestic growth, the yen is still the currency traders love to hate. That leads us to the technicals. Locals are starting to reverse a long period of fleeing local markets in favor of foreign bonds...I can’t find a clean data set showing the history here but the potential repatriation inflow from domestic investors that have fled Japan in favor of foreign markets is massive. If this flow even tips towards balance, it would be hugely supportive for JPY. Moving to the dark art of CTFC FX spec positioning...despite signs of life across all sectors of the Japanese economy, the short yen position is at a multi-year extreme: And we remember from 2017 what can happen when the story “flips” in a currency with an extreme and structural short position: Currencies are a zero-sum game (in DM, anyway)....but here the odds aren’t even. You’re getting good terms to take JPY risk here. Lastly, there is the tailwind from the dollar and capital flows. After the combination of dormant domestic demand, the Fukushima earthquake, and high oil and food prices crushed the current account early in this decade, the surplus is back, baby!Just as important, as the American consumer has picked up some speed, the US c/a deficit has started to turn lower again. Historical evidence suggests that the combination of a rising surplus in Japan and a deficit of 2.5% or higher in the US is a negative signal for the dollar. And indeed, as I noted last week and IPA will be glad to tell us again, there is significant air beneath the dollar here, even after the poor performance in 2017. And just as an aside, despite my misgivings last fall, I don’t see the structural support for an acceleration in inflation that will trigger a more aggressive hiking cycle, and subsequent USD appreciation--from the FOMC.  Nor do I buy into the policy-driven growth renaissance in the US. The economic surprise index tells me there is more downside than upside there, too. Putting it all together as we like to say….cheap valuations, attractive positioning, strong fundamentals and potential for positive surprises from both sides of the trade (monetary in Japan, economic in the US) makes for an attractive risk-reward in buying yen. There it is. The first case I’ve ever made to buy yen. Deflector shields are down, blast away. [email protected]

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02 января, 18:44

Welcome to 2018....What's next for USD?

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The financial community returned today from its December slumber to whack the dollar. After finally posting a year of above expectations growth, and three hikes from the FOMC, the currency is again the one the one traders love to hate.   I don’t have a decent way to illustrate this, but I think it is fair to say short USD is a consensus trade going into the new year. Fundamentally, it makes sense. I believe we are seeing a phase of increased industrial activity after a LONG cycle of destocking and creative destruction of global excess capacity. As such, US manufacturing PMI has been moving higher consistently throughout the last year. But that’s nothing compared to the resurgence in other advanced economies, which is a combination of the rebirth of growth in Europe--led by Germany, but far more evenly spread than any other time this decade--but also from Japan, where the economy is showing some signs of life that haven’t been seen in this trading lifetime. On valuation, despite the dollar’s poor 2017, it is still well above the 2013-2014 levels. This poorly formatted chart blends these two ideas together--the significant short position from spec accounts on the LHS, and the TWI on the RHS...Still plenty of space for traders to get paid here. Drilling into the technical data a little further--there is a significant dispersion in trading positions, despite the short USD bias.  On a 3yr z-score, GBP and RUB are at significantly stretched long positions, while years of high rates and over-valuation has finally caught up to NZD. Similarly, AUD seems to be suffering from weak local data and some reluctance to bet on China keeping the machine cranking at full speed. (And I can’t help but notice BRL at a 3yr short extreme while MXN whistles along at the middle of the range, but we’ll save that for another post!)And then there is JPY. I’ve alluded to this before but really never got excited about it...the yen has confounded me for years because it is just so tough to get a clear shot on what to expect from the authorities there. Yeah, I get it...Abe and the BoJ are incentivized to let the yen stay cheap and keep the monetary petal to the medal. But that has a limit when recent performance looks like this. Combine that with the short position in the market and attractive risk-off dynamics...and yeah, long JPY  makes some sense here, at least to converge with regional performance, if not for a more structural appreciation if the BoJ shows any signs of raising interest rate targeting or easing QE programs at large. For all the bearish views on the dollar, it is amazing that there is such a negative view of rates. Sure, the view on the dollar is driven by global growth, which presumably should lead to higher global interest rates. But the  short view--if not positions--still seem largely confined to UST.That’s pretty amazing when you look at this chart...despite the move towards 2.5% last week there is still a reluctance to break out to higher yields...and vol continues to skulk around in the gutter. Short positioning amid strong fundamentals and historically low vol….Someday, somewhere, someone is going to make money on a long vol position. I just don’t know when.

22 декабря 2017, 07:32

Cryptos and the Fixed Income Selloff

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So I wrote about cryptocurrencies back in September when it seemed clear that we were in the midst of a bubble. I guess I should have relayed what Soros says about bubbles. "When I see a bubble, I buy it." Now that Goldman Sachs is setting up a cryptocurrency trading desk, it is worth revisiting the topic. If the squid is setting up a desk, it means their customers are asking for it, and of course, because they think they can make a buck there. How will they do it? Will they launch a facility to borrow and lend? The GS crypto-repo desk?  Looking back, how does my piece on bitcoin from September hold up three months and many billions of dollars later? I carried on for a while about how it doesn't look or act like a real currency. That's more even more true now than it was then. The volatility and appreciation in these "currencies" has wiped out any advantage for a seller to accept them as payment, even for pirates and drug lords. Are they really more like equities? That's what I have been told about ripple and etherium. Sure, ok...I actually understand the ripple business model but I don't see how it translates into buying their coins, or tokens or whatever they are. But I get it from a certain bubblicious standpoint. Yet there are still millions, if not billions of people in this world that live in (or have recent memories of) autocratic regimes that have a habit of seizing control of the monetary system to serve their own purposes. That's the core market here, and one that people in the US and (western) Europe don't quite understand. So good luck crypto-traders and Goldman...I'm sure you're on the vanguard of a monetary revolution that finally takes back the monetary system from the rich and powerful. It is worth remembering that the total sum of cryptocurrency inflows in 2017 is roughly $500bn. Source: Coinmarketcap.comAnd the sum of global equity mutual fund and ETF inflows? $411bn through November 29. And the cryptocurrency number is completely unlevered….Just stop and think about those numbers before you write this trend off completely. In other news...are bond yields finally starting to break down? Well….doesn’t look like it to me...I was on the record saying there had to be a large buyer of long end UST, especially in TIPS, throughout most of November and early December. Looks like that is cleaned up here and bond yields are getting sucked higher as one would have expected given the moves in underlying fundamentals and the advancement, and eventual passage of the US  tax reform package. And sorry to point this out, but there were more than one commentor (and trader) out there arguing that Trump could never pull off a tax reform after stumbling from one political disaster to another for most of 2017. Yet here we are. As for the long bond….call me when we break 3%. That’s going to put a wrap on Team Macro Man until after Christmas...I’ll be in front of a laptop all next week so I should have the chance to go a little deeper on the above topics and potential 2018 risk events. I wish I was talented enough to rhyme “Twas a Night Before Christmas” into a summary of 2017 macro events...if you are...I beg of you, please send it to me at the TMM2 address. With that, Merry Christmas!  [email protected]

19 декабря 2017, 19:52

"Blast-off" or "As good as it gets"

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2017 has been a rocket ship type of year, from Bitcoin to FAANG to High Yield, to EM FX, pretty much everything has done well. Even the Deflationists have had a decent year as long they weren't in the front end. The question for 2018 though is can we expect it to continueTo be fair, your author was writing a similar post early in 2017 arguing that this was probably close the the top in economic growth as proxied by the ISM. Clearly I was wrong, so take the rest of this post for what is worth. 1) Spreads. Take a look at HY and BBB spreads. While not outright bearish as there is room for more compression, we are clearly near the expensive part of the range. And of course it makes sense, corporate profits are killing it. But under the hood, a lot of CCC and B bonds are not doing well. Retail, telecom and parts of health care are all under performing. I took all the issuers in the HYG and split them up by ratings, and made an equally weighted equity portfolio for each. You can see HYG - B issuer's stock prices have been ugly. Not a good sign for the bonds going forward. While bond guys might be the smartest, individual names are usually best left to the equity jocks, IMO, until they get to distressed levels. Whereas the BB issuers have doing a quite a bit better and trading more or less in line with HYG  but under-performing the Russell 2000 (though there are some different sector weightings so not sure Russell is the best benchmark)Flag number # 2, corporate earnings have been rising due to synchronized global growth. And while the multiple has expanded, when you have rising earnings, its the fuel to the equity rally. This is an earnings driven market IMO. Figure out where earnings are going, first, and then prices followYou can see the 2017 synchronous global growth story show up a lot of measures, including economic surprises, global PMI, commodity prices, EM FX, earnings revisions and others. But we are pretty much at peak levels for mostFor me, the elephant in the room is China. We know they are slowing heavy fixed asset investment and trying to reign in the housing market in Tier 1 and 2 cities. Supply side reforms are for real and they are having the intended effect of boosting corporate profits. In addition, a tight labor market with wage increases is helping consumer spending and the dynamic transition towards internet businesses. Clearly BABA, Tencent, JD, Weibo and others are doing something right and the Chinese consumer is healthy. But its the industrial and manufacturing sectors that are the cyclical ones to watch, in particular exports. And for 2018, I'm sticking with my guns and assuming China slows down, particularly after Q1. Where I could be wrong is if global growth keeps on chugging along at high levels which spurs capital spending. While the US tax reform is a good reason for companies to open up the check book, I'll wait to see the evidence. But it is possible we see a pickup in global capital spending, particularly since its been so depressed in areas like the EU for the past several years. Consumer and CEO confidence is high, so this is something to watch.Happy Holidays

13 декабря 2017, 07:43

Forget about the FOMC...Let's Talk Banxico

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Today (or yesterday, by the time most of you read this) is the feast day of Our Lady of Guadalupe. It marks the day in 1531 when the apparition of the Virgin Mary appeared before Saint Juan Diego on a mountain outside of what became Mexico City, and led to the conversation of much of the indigenous population to the Catholic faith. This is a foundational event in Mexican cultural history, which is why I love this picture--dozens of young people (and a scrawny stray dog) carrying her image outside of the basilica. This parade--which is replicated throughout the country on this day--is a labor of love, honor, and devotion with just a touch of patriotism. If you’ve never been in Mexico on December 12th, check it out. It’s Christmas and Independence Day rolled into one. You’ll never forget it.  In honor of this great holiday, let’s take a look the upcoming rate-setting decision by Banxico on Thursday.  Unlike the FOMC, which hasn’t surprised anyone with a rate change decision in going on a decade, this one is a toss up.  The market is pricing a roughly 70% probability of a 25bp hike after higher than expected inflation prints in October and November and a coincident depreciation of the peso. I think they are going to stay put at 7%. Here’s why. 1) Growth is stagnant, at best. While there is some drag from the earthquakes in the Q3 numbers, the economy isn’t hitting it out of the park by any stretch of the imagination. One of the main reasons for that is the ongoing tightening of fiscal policy by the government and poor business confidence, which has led to a decrease in private investment as well. The combination of the above investment drawdown, Trump-phobia and Banxico’s 400bp hiking cycle has hit the consumer hard too--household and housing credit growth rates are falling significantly.    Which has also caused a slowdown in retail sales, and hit the bottom line for retailers.That equity rally you’ve been hearing so much about? No habla español. Taken together, this negative view on growth has led the central bank to forecast a continued negative output gap well into the future. 2) Inflation: those calling for a hike rightly point out that inflation has been surprising on the upside--this camp claims Banxico must act to stabilize inflation expectations before they get out of hand. This argument ignores the underlying drivers of inflation that 1) have been impacted by one-off effects and price changes, and 2) with the exception of propane prices, have leveled off since the price shocks early this year.   Headline inflation is indeed still over 6% and has yet to start falling significantly as the central bank predicted during the summer….but this is largely due to a huge increase in propane prices. Similarly, contrary to what many sell-side analysts reported, higher than expected inflation figures over the past couple of months were not due to pass-through effects from the depreciation of the peso, but instead from a modest seasonal increase in retail prices across the board, not one isolated to larger increases in the prices of imported goods. More importantly, underlying inflation gauges have indeed stabilized--core, trimmed mean and median inflation levels have been stable for months, and will soon start to decrease as the base effects from the price shocks of early 2017 roll off.High frequency data also points to a stabilization of price increases--the right hand column of this chart shows the 3m/3m annualized inflation figures...core is 3.57%, as is services...a number that is skewed higher by a seasonal increase in education prices. These figures are well in line with historical norms. 3) Rates are already high. Given the deteriorating consumption, investment and growth figures, there is good evidence the current level of rates is already stifling economic activity. 4) Which leaves us with the peso...has the selloff in MXN really been that big? It’s off 5% over the last six months...in the bottom tier for EMFX over that span but far from a game-changer for monetary policy...especially when you got back around 3% of that in carry. I like to err on the hawkish side in orthodox EM monetary policy debates because so often the question comes back to financial stability and volatility. But in this case the central bank has already done the heavy lifting, and another 25bps is going to do more to hurt domestic investment than it is going to stabilize the currency, which is going to bounce around like a pinball in 2018 as NAFTA and the presidential election take the center stage. Does the selloff in front end US rates and the steepening eurodollar curve change any of that? It should...eventually--if the Fed persists or accelerates hikes next year. But I think Banxico has done enough to buy itself some time. What about the Alejandro Diaz de Leon, the new boss at Banxico? Some say he’ll want to come out swinging with a hike to prove he’s a tough guy. Banxico doesn’t operate that way. They’re smart, data-driven, and painstakingly independent. They’re no more likely to be pushed into a hike now than they are to be pushed into doing PRI a monetary favor before next year’s election. A weakening economy, cratering credit growth, high ex-ante real rates, and stable (and soon to fall) inflation...Doesn’t add up to a hike!

12 декабря 2017, 07:05

Here It Is...Team Macro Man's 2018 Top Trades

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Here it is folks, the 1st annual Team Macro Man Top Trade Ideas for 2018. I love the diversity in the ideas here. Nobody jumped on the short 10y UST bandwagon with Goldman and Apollo….and nobody joined the quant folks at JP Morgan in suggesting trades that are a great conversation starters with the ladies at the Columbia University physics department holiday party. In fact, the ideas are so diverse it is tough to pick out any common themes, but that shouldn’t be too surprising when the most dominant theme of 2017 was probably “low vol”. Another dominant global theme this year has been “synchronized global growth,” which is now leading many strategists to predict widespread monetary tightening in 2018.  The “morning in Europe” and, I’ll add myself, the potential “morning in Japan” themes could be big game changers in 2018. Wages and inflation haven’t picked up much, but if they do, there is more to go for asset markets, FX and rates in both regions. Lastly in the US, despite what I have written here about inflation and curve-flatness, I have a tough time envisioning a increased pace of tightening by the Fed that would cause a significant strengthening of USD, which points to more of the same next year--risk on, flattening, low vol.  Equity markets may have gotten a bit ahead of themselves with the tax reform rally, but that will be a distant memory by next December. This type of “forecasting” begs to be shown up in short order because we simply don’t have a crystal ball that tells us what surprises the world will throw at us in the next twelve months. But what we really want to get at here is not so much the trades but the themes--what will be the game-changers? What is the market not expecting? Keep that in mind before opening the bomb bay doors in the comment section.  With that, take it away TMM! TMM #1: Short JPY vs. g10 basketLong term solution for Japanese debt given growth outlook (it will go up but 10% real ain't likely) is to run inflation hot. Near term global growth picking up and hence global neutral rates going up. Locally growth picking up. BOJ will not move short rates. They might let the curve go. Rates differentials, inflation, deficit and lack of other solutions means they likely let the currency go.TMM #2: Buy IBov/EWZ volI like Ibov (and EWZ) for 2018 but think the vol, is very low in historical terms, specially for a election year. TMM #3: Receive 2y China RatesThere’s no doubt the deleveraging effort is sincere, and no doubt that the debt burden will go up if they force corporates and SOE’s to refinance at higher rates. If the government want a lower debt burden, they need to pull rates down and clamp down on lending. By phasing out guaranteed wealth management products, they drive savers into the arms of government bonds. Buy 2y CGB’s if onshore – rec 2y NDIRS if not. Enter Target 2.75% 2y yields. Stop at 4.50%.TMM #4: Long GE, ATM covered writes (with roll-up) In the eventuality it rallies...much.  Dividend IS covered and jumping on any premium should be better than best Utility trade.TMM #5: Short all manner of Aussie coal/housing retail with ratio spreads or credit spreads.  Not looking for BIG payoff, but "safe" payoff.  TMM #6:  Short EUR  better late than never. ;)TMM #7: Buy Uranium (URA)  Two dominant suppliers co-ordinating major supply cuts to help balance the market, with the Cameco CEO of literally saying “we can actually buy uranium cheaper than we can produce it.”   The industry which has been battered since the 2011 peak (URA was down 80-90% at its bottom) and the cuts were timed just before the 2018-2020 bulge in the long-term utility contract rolls.  Chance for a huge sentiment change with investors, especially if the hereto disciplined utilities that have (rightly) been waiting to renew contracts worry about the market being under-supplied and race each other to renew their contracts.  (see 2006-07 for the last time that happened).TMM #8:  Buy Greece (GREK) or Greek Banks (ALBKY/etc) Everyone's been burned and the French solved the IMF/German impasse - “The Eurogroup formally agreed to a longer-term French plan to link the scale of Greek bond repayments to the country’s economic growth…”.  This means a bunch of catalysts  - banks passing stress tests, exiting the bailout, issuing debt in the public markets, maybe even an Syriza loss in an election - for a country (GDP fell by more than US great depression) and market that's looked at as dead.TMM #9: Buy Argentina EquitiesTeam Macri, baby!   If Macri is Reagan, and Sturzenegger is Volker, where are Argentinean equity prices going?  What about Real Estate and Private Equity?TMM #10: Short TSLATMM #11: Short S&P“A Brisk Trip back to 1854” (quick, to the point...I like it. --ed)TMM #12: buy XOP  unloved, under-owned, misunderstood, pegged to WTI at a perceived ceiling of $50 (which looks more like the floor now), grossly undervalued at current underlying commodity price level. Cuts, cuts, cuts... Biggest beneficiary of upcoming tax cuts for two reasons: direct - 15% haircut off of its current corp tax, indirect - more disposable income in consumers' pockets will translate into longer miles driven and therefore higher demand for gasoline. OPEC output cuts extension is going to drive hungry oil customers around the world towards US producers. Asia is putting huge orders in for US shale and Gulf of Mexico oil.TMM #13: Short Gold/short USD/JPY spread trade TMM #14: Buy EURCHFIt's the only macro trade I've stayed long (via options) for over 4 months now, so it's got that going for it. Thesis is "Morning in Europe" and global growth draws out Swiss capital, pension funds start lifting hedges, etc.. TMM #15: Sell MXN, buy a basket of high yield EMFX: ARS, BRL, RUB Political risk, NAFTA risk, energy prices and high real rates conspire to further subdue investment, consumption and growth in Mexico, while positive local dynamics, strong macro trends and flat-to-higher oil prices support the high-yielders.TMM #16: long USDTWD (or SGD)Betting on slower global growth, particularly in ChinaTMM #17: Long USD/CADIn USD-CAD For expiry One year  Buy 1.2600 USD Calls Sell 1.3400 USD  Calls Approx cost 244 CAD points both in equal amounts. TMM #18: Long AUDNZD A way to express re-flation trade. Terms of trade between the two countries express a commodities skew towards metals & energy - In addition, for the kiwi leg, they basically have a socialist leader who thinks their current low unemployment is still too high and wants a weaker NZD TMM #19: Buy/pay 5s10s breakeven steepener  Equilibrium breakeven spread even in the recent low inflation rate environment has been ~50bps, you can pick up a steepener these days with less than 10bps downside before the breakeven spread becomes inverted for ~40bps upside as a way to capture risks of duration sell-off in the long endTMM #20: Short US High Yield If rates go higher, you win, if Vol goes higher you win, if growth slows down you win. Of course you lose if 2018 is a repeat of 2017 but the carry is a small price to pay. Though it is possible that spreads tighten more and the rate movement does not offset all of the gain.

06 декабря 2017, 07:33

A Call to Arms: Give Us your Best Trade Idea for 2018...Can We Beat Goldman?

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When I posted a retrospective on Goldman Sachs’ 2017 Top Trade ideas, I thought the internet would jump at the chance to whack the squid with a shovel. The MM audience reacted with a collective yawn, as if to say, "hey, take it easy on those guys downtown..." Who knew there was such decorum, humility and understanding out there… Quick point on rates...most interesting thing I saw in the markets this week was the Citibank US rates team alluding to a big long-end UST buy program going through the market from Japanese pension funds. This ties into the point I made about price action implying a distinct flow in the market due to the divergence of the long end of the treasury curve with global breakevens relative to oil prices. Once again today the long end dip got bought in size--this trend isn't going away soon. This Japanese flow also would explain the richening of long end swap spreads. Other commentators have credited the move in spreads to Trump’s easing (or expected easing) of Dodd-Frank regulations--the move seems a little too fast in the long end for that explanation--the reality is probably somewhere in between. There continues to be a ton of demand for long end paper, despite great minds from Goldman Sachs to JP Morgan to Gundlach telling us rates are going higher. All of this ties into today’s post, which I hope turns into a conversation. I have a request of the great Macro Man readers: Send me your Top Trade Idea for 2018. One actionable trade, and 1-3 sentences on why you like it. Post it in the comments or email it to [email protected] I will aggregate the results and post them with names removed early next week. For those looking for some inspiration, I submit the following…In 2017 someone out there coined the term  “The Everything Bubble”, which is meant to imply there is a bubble in, well, everything. If you buy into that, maybe you can get a few ideas from this piece, “What Could Pop The Everything Bubble” by Charles Hugh Smith.And in honor of the Macro Man poetry tradition:At length corruption, like a general flood,Did deluge all; and avarice creeping on,Spread, like a low-born mist, and hid the sun.Statesmen and patriots plied alike the stocks,Peeress and butler shared alike the box;And judges jobbed, and bishops bit the town,And mighty dukes packed cards for half-a-crown:Britain was sunk in lucre’s sordid charms. -Alexander Pope, as quoted in the introduction of the South Sea Bubble Chapter of Extraordinary Popular Delusions and the Madness of Crowds by Charles MackayAnd if you were the kid that cheated on your exams, here are the Goldman Sachs Top Trades for 2018, along with my thoughts on each. Top Trade #1: Position for more Fed hikes and a rebuild of term premium by shorting 10-year US Treasuries.Shawn’s take: I’m with Goldman on this one--global growth synchronization will finally push inflation higher in enough places to get the attention of those that have power-flattened the curve this year. Term premiums aren’t dead, they’re just sleeping. Top Trade #2: Go long EUR/JPY for continued rotation around a flat Dollar.Shawn’s take: i’m the other way on this one--I think Japan is waking up after a long slumber and will continue to benefit from Asian demand. Top Trade #3: Go long the EM growth cycle via the MSCI EM stock market index.Shawn’s take: Compra! EM cycles always last longer than you think...we’re only a year into this one, and no signs this will be any different.  Top Trade #4: Go long inflation risk premium in the Euro area via EUR 5-year 5-year forward inflation.Shawn’s take: Didn’t I just write about this? It is cheating to have the same idea in 2018 as you did in 2017. You just made a small tweak to make it look different. I’m agnostic on this one--as noted I prefer the TIPS version. Top Trade #5: Position for ‘early vs. late’ cycle in EM vs the US by going long the EMBI Global Index against short the US High Yield iBoxx Index.Shawn’s take: Long EM credit vs. Short US HY credit….I like the theme but I don’t see how you make a bundle of money on this trade. Too clever by half.Top Trade #6: Own diversified Asian growth, and the hedge interest rate risk via FX relative value (Long INR, IDR, KRW vs. short SGD and JPY).Shawn’s take: This carries nice, with solid fundamentals throughout and BoK starting a hiking cycle...but a lot baked in here already. Consistent with their global theme, though. Top Trade #7: Go long the global growth and non-oil commodity beta through long BRL, CLP, PEN vs. short USD.Shawn’s take: With an election coming in October and reforms still undone, you need to buy into the Brazil local story in 2018 to like BRL. I do...CLP will be more correlated to the global factor if Piñera wins the election, which he probably will--although the stakes are rising after his opponent recently took to quoting Che Guevara. Goldman thinks CLP will be supported by “what opinion polls suggest is likely to be a market-friendly outcome in the upcoming Chilean Election.” Maybe, maybe not...but the business community will lose its mind if Guillier wins. The risk/reward there is simply the wrong way around. There you have it...There’s probably no way to benchmark this, but what I would like to do this time next year is compare our “Wisdom of Crowds”  approach to Goldman’s ideas and see who comes out on top. So here it is...your chance to put it on the line and step into the ring with the mighty Goldman.  Goldman is Apollo Creed. Macro Man is Rocky. Nobody believes in us but [email protected]

06 декабря 2017, 00:01

Trump Tax Cuts - Will This Make Volatility Great Again?

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A quick Public Service Announcement:Seems like yesterday when we Trump was elected and equities were off to the races - prompting one of the biggest market surprises we've witnessed in a long time.The market formulated these two simple equations:Trump = bad for stocks, good for volatilityHilary = Good for stocks, bad for volatility Oops...Believe it or not, yours truly did not buy this concept and was a major advocate at my previous firm that Trump would be good for stocks.My belief spawned from the possibility of:-Deregulation-Government spending-Tax cutsPlus - the belief in a Trump disaster was prevalent. Oops again... Turns out that Trump being president has not led to the end of the world as we know it (yet). After the election, markets have been ripping with a fervor unseen for years. Renowned hedge fund managers who had spoken out regarding the market from the short side have either been consistently wrong/stop out (best case scenario) or carried out in body bags reminiscent of the tech bubble of the 2000's (worst case scenario).However, their logic was sound - the Trump presidency thus far has been marred by firings of his own cabinet, lack of progress in terms of failed bills and initiatives, and controversial racial undertones of his various social policies.But it didn't matter.Fast forward to yesterday!Now, we finally have something concretely positive from the Donald. The Trump tax bill has been passed by the House and the Senate. Good news right? Hold on a second.Trying to tie the corresponding price action to the actual news - we actually had a reversal of risks of sorts after the weekend gap. Surprised? Maybe don't be. This might be a situation where everybody is "in" from the long side.The move was nothing huge but then again, large drawdowns usually start as nothing huge with everyone caught offsides. The long end of the curve continues to get bid as the curve continues to flatten. Definitely, something to keep an eye on if you're swimming neck deep in US equities for your portfolio.Well, have a good day yall. Btw, be sure to be on the lookout for a very interesting post coming from the Shawn for the TMM Top Trades of 2018!

04 декабря 2017, 08:00

Back-trading: Let's Unpack The Goldman Sachs Top Trades for 2017

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Don’t ever let anyone tell you this business isn’t hard. If it wasn’t, everyone would do it. Making investment decisions with millions of dollars is not only hard work, it is by definition stressful.I remember a colleague once saying he took pride in making money for the school teachers and pensioners that were the main investors in the fund. That's laudable, yet it works both ways--when you go through the inevitable slump where you lose money on a seemingly unending basis, you get this feeling in the pit of your stomach that you’re letting down the teachers, letting down your family, and hmmm, maybe both of them are going to hire someone else for the job if you don’t get your act together.As much fun as it is to look at someone else’s investment recommendations and laugh at their ineptness with the benefit of hindsight, I sympathize. It’s not easy to put yourself on the line and publish your top six trades for 2017 as the folks at Goldman Sachs so kindly did last November. While you might read a little snarkiness in the following piece, it is with the utmost professional respect!With those disclaimers out of the way, let’s go into the time machine, back to the days when the US had just elected a fresh faced new president had just been elected and the country was brimming with hope and optimism.Alright, maybe not so much. Trump voters were gloating, Hillary supporters were weeping, and bond investors were running around like their pants were on fire. British voters were some combination of all three. And the Germans were tut-tutting. With that context..on your marks, get set….Top Trade #1: Transatlantic economic divergences and political risks Long US$ equally weighted against EUR and GBP, with a basket indexed to 100, a target of 110 and a stop at 95. Annual carry on this basket is 1.3%.Uff. Not off to a great start here. Stop City. I’ll say this….the stop at 95 was good trading discipline. What went wrong? The idea was two fold: 1) The US economy would continue to grow strongly, and 2) The European economy would stagnate, which would combine with political risk on the continent and in Britain to torpedo EUR and GBP. Amazingly, they got #1 right….and they weren’t wrong about political risk in the UK...but that didn’t matter when the economy started to grow. This caught the entire currency market off guard, which had grown so accustomed to using EUR as a funding currency it didn’t occur to them that Europe still possessed 1) a business cycle and 2) an amazingly efficient German export machine.  Top Trade #2: RMB weakening: Long $/CNY Long $/CNY via the 12-month NDF, currently at 7.07, for an initial target of 7.30 with a stop at 6.75.Ouch. Stop City again. But that Stop discipline REALLY worked this time! Putting in that stop ticket to sell usd/cny at 6.75 felt so, so bad….but it was so, so good. Sometimes the best trade you make is the stop loss! Here was the thesis, in a nutshell:"The fundamental dilemma of China’s currency regime is that, in an environment of a rising dollar, keeping the CFETS basket stable requires $/CNY to move higher meaningfully, which carries the risk that capital outflows re-escalate," the team writes. "Our base case is one where the $/CNY fix continues to grind higher, driven by domestic pressures and in the context of a stronger dollar."What went wrong? 1) The dollar didn’t rise. In fact, quite the opposite. 2) They assumed a risk that capital outflows could, and would re-escalate owing to domestic pressures. Wrong again...local capital outflows subsided notably and there was zero pressure on FX reserves all year. Interesting to note here they missed the most ubiquitous China theme of 2017: Stability in anticipation of the 19th National Congress of the Communist Party in October. For most of Q2 and Q3, you couldn’t swing a dead cat without hitting three analysts telling you the government was doing everything in its power to maintain control over markets and vol until the Congress was behind them. That didn’t even bear a mention...the lesson: narratives can change quickly, even when news doesn’t.    Top Trade #3: Earning the ‘good carry’ in EM, hedging the China (and CNY) risk Long an equally-weighted basket of BRL, RUB, INR, ZAR versus short an equally-weighted basket of KRW and SGD, with an entry level of 100, total return target of 114 and stops at 93. The expected return, including approximately 7% carry (on an annual basis) and 7% price return, is around 14%.Here’s one that worked...the basket didn’t quite reach the 114 target but we’ll take it! The story here is all of these currencies did reasonably well...so while successful this is more of a beta story rather than alpha. INR and RUB could be considered “good carry” in 2017, as India benefited from strong growth and improved productivity and RUB took advantage of the weak USD and higher oil prices.  BRL and ZAR turned in decent performances, thanks in no small part to hefty carry, but they left you with more than one sleepless night. The core theme was right--long high-beta EMFX funded by low-beta/low-rate Asian exporters. Nice trade. So let’s not split hairs here...we’ll chalk this one up as a W!Top Trade #4: Long EM equities with insulated exposure to growth Long Brazil, India and Poland equities (BOVESPA, NIFTY, WIG) FX-unhedged, with an entry level of 100, for a target return of 120 and a stop of 90.Nothing to even discuss here--this trade crushed it out of the park. The chart above uses the iShares ETFs for each country as a proxy for the local index FX-unhedged.  Great work, Goldman Equity Guy! Top Trade #5: The ‘reflation’ theme extends and broadens Long US 10-year US TIPS ‘break-even’ inflation at an entry level of 1.90%, with an initial target of 2.30% and stop at 1.60%, and long Euro 10-year inflation via swaps at an entry level of 1.25%, with a target of 1.60% and a stop at 1.00%.We’ll give credit on this one too...I mean really, paying inflation in 2017!?! You had already missed the “easy money” in this trade after inflation breakevens ground higher from historic lows in mid-2016.  Then the US election bear steepened global curves and moved BEIs materially higher. Then Goldman comes out and says “don’t stop now...we’re just getting started...” On a theme that hadn’t worked consistently in at least a decade. I’ll give full points for degrees of difficulty here--In 10y TIPS….paying at 1.90% was a momentum trade last November that looked absurd by the summer as one inflation print after another came in below expectations. But it has come back to within spitting distance of the entry point as some big investors have paid up for inflation protection in size, as we discussed here last week. The 10y EUR swap trade hasn’t quite gotten to to the 1.60% but we may get there by year end...and even if we don’t, a 30bps move is a spicy pickup in that space. Was stronger growth part of the elixir? Not really, but sometimes the trade works for the wrong reason, and we don’t argue. Top Trade #6: Long equity-like ‘carry’ with little duration risk through dividends: Long EURO STOXX 50 2018 dividends Long EURO STOXX 50 2018 dividends (BBG: DEDZ8 Index) equity-like ‘carry’ with little duration risk; target 125, now at 112 (12% unfunded return), stop at 105.I’m not sure what this one means. Dividends probably had a good year, thanks to continued low rates, strong profit growth, and good equity returns.  If someone wants to send me the DEDZ8 chart, I’ll post it, but I’m just going to say it probably had a decent run and move on with my life.So there it is...two dead wrong, “why, oh why did I do that” stop losses (#1, #2).  two doubles into the gap (#3, and #6 which I’m willing to amend this upon further evidence), a clean single (#5), and a three-run bomb to deep center (#4).  Make no mistake...what you see above a pretty good slugging average, especially coming off of 2016 when these guys got carried out of four trades before January was over. Can they do it again in 2018? Stay tuned, we’ll go through Goldman’s top ideas for 2018 tomorrow.

29 ноября 2017, 21:30

Long-end US Rates Continue to Outperform--Worth a Fade Here.

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On Monday, I brought up what 2018 could bring from the Fed, and the possibility that the FOMC might have to react to higher headline inflation, even if it is being driven by higher commodity prices. This is likely to have been a factor in the 20bp selloff in the front end of the us curve since early September….but the long end has been solid as a rock, leading to an epic flattening. Back in October, I also posted that there has been a strong correlation between EUR and US inflation premiums, and the lack of a breakdown in that correlation illustrated that additional supply and potentially higher growth and inflation resulting from the proposed US tax reform hadn’t been priced in. Well, I was right, that correlation was about to break down….it just broke down in the opposite direction. Don't let anyone tell you making money in these markets is easy. Since late September, 5y5y EUR inflation swaps have moved roughly 15bps higher, while the US CPI inflation swap has done nothing. This increase in EUR inflation expectations has been driven by the increase in oil prices...Yet the US inflation swap has ignored the oil move completely.Is there a trade here? Let’s look under the hood. A simple regression analysis shows US breaks are too low. And the diversions here have been linked to macro events--the Brexit shock in mid-2016, US election in late-2016 and USD strength/ECB tapering move in April 2017. I’ll save some space and a couple more charts and just say the real rate and nominal rate regression components are skewed in opposite directions, which is what leaves the inflation breakeven component looking roughly 10bps too rich in the US. Oil is higher, labor markets are tight, and we have more evidence that transitory factors on core inflation might lighten up next year, although not totally mean revert. These should all be supportive of paying 5y5y US breaks. What else might push us inflation, and thus long-term inflation premiums, higher? USD has been choppy, but import prices have been rising. I nicked this chart from JP Morgan showing there is a lagged relationship between higher import prices and an increase in core goods CPI. The smart guys at JPM think this will contribute to higher inflation next year. Then there is the factor that I alluded to back in October: Supply. If Trump’s tax reform passes there will be more bonds and more duration for the market take down. The fiscal stimulus will also be inflationary at the margin--perhaps not a big impact on headline figures but certainly supportive--something the market has ignored completely. Backing up to the global picture, 2018 will be another year where a ton of bonds will need to find a home...and central banks are closing their doors. The big buyers will again be central banks, commercial banks and pension funds...But the supply/demand balance in that chart assumes retail demand equal to the estimated $900bn in inflows for this year.  That would be an extremely surprising event in the context of the current macro fundamentals. Even a small downtick in retail flows is going to be a painful event for global fixed income curves. And while I don’t have higher frequency data, inflows over the past two months have been very strong. Moreover, the richening of long end swap spreads amidst the rally in oil, advancing tax reform plans, and stability of long end breakevens argues there has been a very big buyer in the long end soaking up natural sellers of duration.  It all adds up to long-end US rates simply looking too rich. One might be able to write that off to Treasury’s plans to issue more short-term bonds, or the Dudley’s ”r* lower/flattening forever” speech that I alluded to on Monday. But it all seems a little too perfect. Long end US term premiums and inflation expectations are simply too low given the macro factors that supports them.