Global Macro Update

By Nic Lenoir of ICAP

The first constatation looking at the EW count is that the downside moves are not complete. We finished this morning pre-open wave 3 for the S&P future and the Dax and subsequently bounced. I had given intraday sell level at 1,080/1,088 in the S&P, for the now this has held or close enough. It seems there could be a possibility to make an excess up to 1,093 on Monday but the top of this bounce could well be in already. People who sold the rebound should target 1,013/1,017 on the downside. This would coincide with both the wave 5 downside extension and the C = A if we assume that since the tops we are simply doing an ABC correction before resuming the bull trend. It is not my view, but I do think we wil bounce once we get to 1,013/1,017, possibly to retest the 200-dma. For now we focus on staying short with a stop on a daily close above the 200-dma. We see a similar price action for the Dax. We may rally a little bit more up to 5,880 but after that we should go test 5,600/5,510 at the minimum.

In FX markets we see a very similar pattern with an incomplete bearish impulse in AUDUSD and AUDJPY. For AUDUSD I see the bounce reaching at most 0.8570/0.8600 and the subsequent sell-off could take possibly all the way to 0.7742.

Similarly I added the 10Y US treasury future chart. As long as we do not close on day below 120-30 the next target is 123-03. In that sense the flattening of the curve should continue unabatted. We had recommended selling 2/10 on the bounce to retest the neckline of the H&S at 266, and it feels we could keep moving as low as 230. As long as we remain in a de-risking environment more pressure on the curve is to be expected with 1Y1Y fwd rates already at historic lows.

The German ratification of the $1Tr package today is a small positive for risk, but overall not a real game changer by any stretch as the questions regarding the sustainability of the Eurozone in its present state remain unanswered (well actually the obvious answer is that it is not sustainable without massive currency debasement and supra-national socialization of debt supported by quantitative easing). We think this issue has now taken a backseat however to the possible ramifications of the financial reform. Balance sheet constraints will lead to more re-risking. And beyond that the possible changes Washington is considering making to swap markets could also seriously impair the functioning of the fixed income markets. I find it fascinating that we have heard in the past few weeks how it voice broking of swaps and over the counter markets leads to customer front running and unfair practices, and we have heard many complaints following the flash crash about electronic trading and high frequency trading. The irony is that in terms of market structures it's either one or the other. If you ban both you don't have a market. Investors who long the days where they could place their equity orders on the floor of the NYSE and think they never got front-ran that way are simply dilusional (at best), and conversely it is true that the disclosure of two much information on orders in the current market structure allows sophisticated programs to fron-run orders too. That being said you have to pick you poison, because if you reject both you have nothing left. People will always need scapegoats as to why the market goes down, but interestingly enough front-running of orders when the market goes up never seems to be an issue. There is certainly a happy medium with a desirable very liquid electronic market and voice brokers for block size orders for large institutionals. Revising how much disclosure algorithms can get on executed order so front-running is not facilitated is certainly important, but people should not try to reinvent the wheel simply because nobody has been policing the current structure for 30 years.

The OTC market this morning was very dislocated on top of the natural state of recent panic because there were rumors flying around about high margins required by prime brokers. Make no mistake the fixed income market is not ready to move onto screen fully tomorrow. A lot of basis swaps and many more trades don't have electronic substitute that can be traded on exchanges. The deleveraging process could be made a lot more chaotic if people start rushing to unwind positions because they fear there won't be a market to do so soon...

Have a great weekend,

Nic

Comments

[stormsailor]

i agree i sold my short about 15 minutes after we opened.  and put it back on 3 minutes till close.

i had the same ranges in mind.  and we went out on the high of the day.  i wanted to be in position in case of bad news over the weekend

[M31Capital]

Dont fight the Fed in the short term, there was manipulation today by the banks.  If your short index futures you should of taken profits today.  If your wrong you can always sell them again.  I am looking for a brief retracement to the ES 200-dma and above to the 50% retracement from the start of the second leg down.  From there maybe 950.  If you stay short and we get the slow hft meltup again your stuck with big losses.  

[Grand Supercycle]

The March 2009 lows won't hold.

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