There is theory and then there is price. At the end of the day those of us who trade in the markets have our performance judged against price, not intellectual peer group review. No matter how bad you see Japan, Europe, global monetary policy, commodities, China et al, nor how well your intellectual case is argued, if you are running short positions because of them in the main indices then the scoreboard isn’t looking too pretty.
Whilst SPX had been oscillating around 2050 my attention had been drawn to more exciting things, namely Japan. My last post was looking for a turn in Nikkei and JPY and we have been amply rewarded with Nikkei now 7% higher on last weeks lows and USD/JPY slowly grinding back up through 109. But the lack of commentary associated with the rises has me feeling that we have a setup much like the lows in SPX in February that saw the moves higher start with accompanied reasoning of 'just stops’ which then became ‘this shouldnt be happening' to finally end with a 'this is mad, it'll happen one day' grumpy squaring or pushing of losses from the short term book to the long term book. Until we see the weight of opinion move from 105 USDJPY expectations and associated Nikkei dumps, we still have plenty of room for pain on the up side. Meanwhile this is the worst type of reversal for bears, one that just happened without intervention or big news to pin it on, leaving the theory unchanged but the price hurting. Theory 0 - Price 1
But this has become a really potent move higher in everything 'risk' .
Oil flew over the past few days but is now stabilising ahead of oil supply talks.
European banking worries are up 7% with European Bank index SPX7 up over 5% with Deutsche Bank shares up 7%.
FTSE - has finally broken up through 6230 breaching the 100pt range its been in for the past month
Copper - Screamed higher yesterday and is still running.
US stocks are just under the start of month highs
Credit and EM? Just fine thank you.
The European bank scenario has been drawing much attention recently and the debt load of Italy in particular. Europe is a slow burn disaster I agree, but the game is, as ever, timing and regional disruption. Debt and its distribution around the zone is of course the problem but as long as ECB throw everything they can at the problem, ie keep lending to the regional subprime, then we can't yet see that implosion. Economic ‘OKness' will mean that bears could get ground out of the position. It's very much like carry creep where we have that saw tooth price action of creep and dump. European banks may be in a mess but the likes of Dax is approaching recent highs again. I’d rather play a Eurocrisis by waiting for it to happen rather than trying to catch a top and be beholden to disaster happening now rather than next year.
So yes, Europe has pile of problems right now and holding Euro is pretty risky. General stopping of positions along with the fall in USD in general may well, in my mind, be coming to at least a temporary end. I would be happily selling EUR, especially against USD which has seen a position squeeze and with the next phase of the Fed expectation oscillator swinginging towards 'higher' again after Yellen has convinced everyone that she is willing to be behind the curve. Selling Eur/Usd here, waiting for the 1.1000 magnet to do its work again, is the plan.
I know that Italy is the junk du jour but we must keep an eye on Greek seasonality and the farcical act on stage as the EU try to keep the PR positive as we head into a UK brexit referendum. If I were the Greeks I'd be pushing the limit with demands as Greek trouble, or Italian come to that, before the Brexit vote could really swing the vote.
I note that the IMF are now out warning of Brexit being a major threat to the global economy and this is being used as further reason to vote to stay. But if Brexit really is that great a threat, isn't that incentive enough for the rest of the World to renew trade agreements along the lines of existing EU ones as fast as possible to defuse that threat. On one hand the EU us threatening that trade agreements won't be renewed as UK shouldn't get special treatment but then say its UKs fault if they exit and the lack of trade agreements messes with global economic security and destabilises the EU. I have had it pointed out to me that there hasn’t been a case of a trade agreement ever being swiftly agreed and EU bureaucracy is the slowest on the planet, but one thing we do know is that when it comes to the wire and the life of the EU is on the line, then they can act. We have seen it with Greece and numerous country debt problems, but only when the existence of the EU is at stake. So if a Brexit really is a death scenario for the EU and the economic world, it wouldn’t be beyond the wit of the powers in charge to whip out the photocopiers are replicate existing trade agreements as they stand through EU membership. This is more a game of chicken.
The snap higher yesterday in everything occurred at a time of day we have often seen things take off namely 3.30pm London (10.30am New York). Back in March there were a few such cases which drove right through the day leaving me wondering which model type accounts are triggering this as there when these 3.30 lift offs occurs, no macro or data reasoning to pin it on. Another nasty ‘that shouldn’t happen’ in the macro player’s hand book.
The skill is to to be able to trade against your core long term view and not be clouded by a dogmatic long term view, even if it does turn out to be reality. In the end we will all be dead but that doesn’t mean we buy coffins and dutifully lie inside them waiting for the day to arrive. There is fun to be had in the meantime.