Recap 2-22-12

Main Items:

  • MPC minutes showed that Posen and Miles dissented in favor of a larger QE increase, vs consensus expectations of a unanimous vote.
  • US Existing Home Sales declined to 4.57mm SAAR in Jan vs 4.66 exp and 4.61 prev. The Dec print was revised down to 4.38mm.
  • The UN nuclear agency IAEA has declared its latest inspection visit to Iran a failure. Iran has refused to allow int’l inspectors to observe certain sites within the country. China, India and Japan are planning cuts of at least 10 percent in Iranian crude imports as tightening U.S. sanctions make it difficult to continue doing business. The countries together buy about 45 percent of Iran’s crude exports. – NYT, WSJ, Reuters
  • Portugal is reportedly pushing for better terms with the troika – FT
  • According to a report in Shanghai Securities News, the city of Shanghai has eased some home purchase restrictions to allow a broader pool of buyers to purchase a second property.
  • Ford said it would add ~$3.8B into its pension and is now targeting an ~80% bond allocation over time (as recently as 2006, Ford was targeting a 70% equities allocation). Reuters
  • The Australian gov’t came close to a “crisis” Wed after Kevin Rudd unexpectedly resigned as foreign minister, setting up a possible leadership challenge to PM Julia Gillard as early as next week – WSJ


  • China HSBC Mfg PMI improved to 49.7 in Feb vs 48.8 prev
  • EU PMI for Feb declined a bit:
  1. Composite: declined to 49.7 vs 50.5 exp and 50.4 prev
  2. Mfg: improved to 49 vs 49.4 exp and 48.8 prev
  3. Services: declined to 49.4 vs 50.6 exp and 50.4 prev
  4. Both German and French indices remained above the 50 mark, with German services remaining well above.

French CPI declined to 2.6% YoY in Jan vs 2.7% exp and prev

Upcoming Data:

  • German IFO, US initial Jobless Claims, South Korea Business Survey


Based on the EU PMI prints today, the bulk of the EU growth bounce may be over. And less than a month after the Fed committed to being super dovish, energy prices are have hit new highs on the back of tight supplies and Iranian bellicosity. Finally, the next 3yr LTRO next week, the ECB liquidity spigot will be turned off, at least for now. As a result, the effects of recent strong positive growth surprises, central bank easing, and declining inflation – all growth supportive factors – are fading. While it doesn’t necessarily suggest that a turn in risk assets is imminent, the pace of this pro-risk rally is likely to slow from here. On a rolling 22 day basis, the S&P hasn’t had a negative rate of change since Dec 19th, the longest stretch since a year ago:

As a result, the plan is to spend more time looking at RV type bets. Long EU rates vs short Canadian & Australian rates are themes I’ve written about separately before. In equities space, the rally in Japanese equities on the back of last week’s BoJ action & subsequent Yen depreciation is starting to look overdone, especially given that 10y JGB yields and growth expectations have barely moved. Also, I’ve been an advocate of being short implied vol. While not an RV bet, the very steep implied vol term structure along with the wide differential between implied and realized vol suggest the trade has positive expected value in most scenarios except for a growth scare. (note that FTAlphaville suggests there could be a short squeeze in TVIX)

If any readers have additional ideas, feel free to share!

3 thoughts on “Recap 2-22-12

  1. I definitely have sympathy with the idea of selling equity implied vol as it seems that there is definitely something at work here based on the changes in time spreads along the VIX forward curve. Having gotten a few too many “Vol is cheap!” calls, I wonder if, in fact, there is a large contingency of long-biased participants whom still don’t believe in the strength of the rally and thus are looking to lock in hedges at any level they seem to find attractive – only to then put the hedge on further out the curve then driving up IVs. Thus not sure I buy the short squeeze thesis as much as I lean toward the idea that there are many folks out there who believe prompt VIX at 20 is “cheap” and leads to knee jerk downside hedging.
    In that vein, I’ve actually been very much tempted to put on a, at least partially delta hedged, long vol trade in oil. Seems the big negative skew this last ~year has surprised many and is now starting to subside, IVs are trickling down as well and historical is lower than the past couple decades average. Thought about putting this trade last week with a downside bias although thank God as that trade would have been massacred in this recent rally. Still, with the market focused on what seems to be a binary outcome this year – global slowdown=big selloff, Iran escalates=price spike – I wonder if, as above in the equity space, vol continues to grind lower as fears of either extreme ebb. Having yesterday gone back to GS’s energy piece from Oct ’11 I think they may have actually nailed this one in that it’s not so much supply issues as the market was pricing in such extreme outcomes on the bearish side late last year that even a non-catastrophic short term outlook would lead to a price rally in a relatively tight market.
    Would love to short US Treasuries as to me (and many others I’m sure), that seems the last haven standing that saw a massive capital surge last 12 months as we saw rolling catastrophe after catastrophe. I can’t help but think there is at least a move to 250 bps 10Y if that sector of the curve just plays “catch-up” to the rest of the risk space. But even here – negative carry and the fact that futures may/may not be dear to cash due to increased mortgage hedging at lower duration and the headwind of roll dynamics makes one leery of this route as well.
    Call me crazy but for now I’m happy slowly accumulating a long position in EURCHF. I could be way off with this, but I think the vast majority of players here are seeing through the lens of bigger ECB balance sheet=weaker EUR, whereas the much stronger correlation has been in tail risk expectations (I think Citi FX first noted this?). Makes one think that once fears of calamitous outcomes in the EZ subside at least for now, we may see EUR bolstered, strong haven flows reverse from CHF, and rate differentials come back into play.
    A long note, but wanted to do the best to contribute to the great content we’re treated with on these pages.
    Here’s to very much humbly trolling these markets looking for attractive opportunities..

    1. Thanks for your comment, Matt!

      I haven’t looked at oil vol in a while. You definitely raise up some good points. Perhaps there is a trade on the crude vol surface.

      The 10y has been a frustrating trade for many macro punters this year. Your points are quite pertinent and reinforces the importance of timing for a short. Given that many people appear willing to buy 10’s here because of the Fed commitment last month, perhaps the trigger is a shift in Fed language. With recent increases in oil prices, an increase in spot or forward inflation breakeven levels may be the surprise catalyst that most don’t expect. In any case, being short rates in Canada is in some ways a way to play this theme.

      On a related note, I have heard some arguments that even an increase in inflation expectations won’t do anything to the Fed commitment due to the amount of economic slack out there. I’m not sure if I fully agree. Stable inflation expectations is a key precondition for QE, and I think the FOMC puts a great deal of weight on it, as indicated by frequent references to it in its statements. The Volcker years still have a big impact on Fed.

      You raise some good point on the EURCHF. Indeed, the relaxation of flight to quality flows may well push the cross higher. Similarly, a catastrophic outcome may induce the SNB to ease via an increase of the peg. As a result, it appears to be an attractive way to play both tail risks.


      1. Thanks for the well thought reply. Very much agreed about the difficulty in putting on a short UST trade, I do wonder if the last two days present us with an opportunity for positioning… Although I definitely get the idea of Fed providing a serious bid to the long end, when I hear ‘don’t fight the Fed’ I can’t help but think of the first two iterations of QE wherein yields moved higher soon after as participants moved further out along the risk curve (admittedly simplifying this I’m sure). To me, that may be the true metric of whether the ’14 language shift will prove a success, whether or not long yields move higher along with risk assets. If not, I’d think risk would be tethered to a certain extent, so I’ll be looking for a shift higher in 10Y particularly (along with higher EURCHF) as an indication that the seemingly huge group of real and levered money is finally coming out of hiding and into riskier assets. (And probably trying to get in front of this by assuming that Fed (ECB, et al.) will be successful and UST yields will move higher as a result). All that said I do very much like your idea of short Canadian rates as somewhat of a proxy here. Was looking at even a U/U (Sep ‘12/’13) Eurodollar spread as a way to play this also but with recent print at 17 bps that trade may well have already past.
        But your point about breakevens being a catalyst is a great one and I agree when it comes to Fed weighting to inflation expectations, especially with a probable hit coming from oil to headline to breakevens as you mentioned.
        Could be fantasy but I can’t help but wonder if a 1.25 floor is on the table at SNB, weak export and IP data only helping that cause..Will probably be a bit of burning theater if 1.20 breaks but for now I’m willing to trade it with stops just below.

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