Oh, dear. It looks like that most fearsome of beasts, “five minute macro”, has made an unwelcome return. How else to explain the frenetic “risk on, risk off” swings that can most charitably be described as “erratic” and more realistically as “impossible”?
The “Great Fall of China” story was good for a few hours of juice yesterday, but even a poor five-year UST auction and tepid Beige Book couldn’t propel stocks outside of their established ranges. Indeed, looking at 24-hour price action in S&P futures this week is pretty telling: there have been a few peaks and a few more valleys, but broadly speaking they’re unched on the week. If only Macro Man could say the same about his P/L….
These kinds of markets are always tricky for Macro Man; short-term trading is not his forte, and he finds that cross asset correlations tend to weaken during periods of extreme noise. This, in turn, tempts him to layer additional, usually stupid, trades onto his portfolio. It’s just as well that he’s flying off soon and will disengage from micro-term price action.
Still, there are a couple of interesting developments that are worth keeping an eye on. The euro has traded very poorly indeed over the last 48 hours and seems to have broken its uptrend line against the dollar. Heck, even GS has stopped out of their research long. What’s peculiar about this move is the degree to which central banks have been sellers of euros.
It became clear a few weeks ago that they had ended a dollar selling program, and have since been content to play the range….in many cases trying to extract a pitifully small return from their punting. But all the while, money flows into these markets, with the CBs mopping up the flow (and accruing dollars.) If past behaviour is any guide, at some point the switch will flip for these bozos and they’ll start buying EUR/USD more aggressively, and we’ll get a pop higher, as was the case in May and June. In the meantime, FX will probably move in the direction that costs the most people the most amount of money.
Somewhat more interesting has been the development in fixed income markets. This week’s two- and five-year auctions in the US have gone very poorly indeed; if today’s seven-year auction makes it a hat trick, then there could be a bit of carnage. The eurodollar carry trade, having had a shocking setback after the payroll data in June, has subsequently recouped all those losses (and, in some cases, more.)
Yet it’s all starting to roll over again…..much as it did, frankly, in the two weeks before the June downdraft. The chart of EDU0, pictured below, is pretty emblematic of the meaty part of the strip, and it looks pretty bearish from Macro Man’s perch.
What odds that another seasonal adjustment-driven “improvement” in claims and a bad auction hat-trick generate a CTA puke-a-thon? Enquiring minds want to know.
Regardless, Macro Man cannot shake the feeling that markets are increasingly resembling a coiled spring. Tomorrow’s US GDP print and, crucially, next week’s payroll data could provide enough of a “signal” to push markets quite a long way in one direction or another.
Frankly, Macro Man’s at the point where he doesn’t care which way it all pans out, as long as it spells the end of five-minute macro.