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Guest Post: Global Macro Update

Tyler Durden's picture





 

Submitted by Nic Lenoir of ICAP

Certainly today started with a very strong risk appetite, and the ISM release will help carry the momentum with PMI/ISM giving the markets an excuse to shrug disappointing GDP data. It also feels like there is a building consensus that going into the fall elections markets will have a strong bid. It makes sense to expect all sorts of stimulus, stimulus promises, and information spin, given that a populist approach where major equity indices are the benchmark of success for politicians has been the mantra for Western democracies over the past 30 years. Basically monetary expansion and propping of financial assets has been the response to the shocks of the 70s after the end of the fight against inflation, and please keep in mind when thinking about this issue that credit expansion and monetary expansion are very different from rates policy, though both have been used to achieve the same goals over the past few decades. In that sense comments by Mr. Greenspan that a rally in equities would be more beneficial to the economy than anything else is very revealing, if not incriminating in my opinion...

Technically even though in the medium and long term I remain bearish, I have been bullish for the near term. I do not think the current increase in risk appetite will carry as far as the elections. We had a violation to the downside at 1,083.50 for the S&P future on Friday (I had 1,087.50/1,085 as key support) but if we are willing to consider this an irregular wave 4 then the updated upside target inferred from the sub-structure of the rally since 1,050 is 1,025.75. We have also already discussed using the attached daily chart that 1,026/1,046 is a huge cluster of resistances, so for the short term we will watch the pattern evolution of the move from 1,083.50 in conjunction with the key resistances coming up in order to pick the top before our medium-term bearish picture kicks in. Watch the 1.0130 support in USDCAD and the 127.10 support in Bund futures as they could well coincide with the highs for equity indices.

Let's keep an eye on VIX to support this analysis. As highlighted several times in the past reversal patterns outside the bollinger bands for the Vix have been key turning points for the equity markets, with the pattern observed in April the best testament to this trading pattern. We see that the bollinger bands for the VIX have been converging as VIX's volatility (do not cross eyes) has abated. This is a necessary step in the process of forming a bullish volatility/bearish equity market reversal.

On the flip side we keep an eye on the Nikkei. We keep focusing as always on our 9,090 support above which we are consolidating, and until broken indicates that we have considerable upside (close to 10% from here). USD 3M Libor versus 3M Euribor are also indicating that EURUSD is undervalued by over 10 big figures here, and a rally in EURUSD would typically be associated with a rising stock market.

Gold has held our intermediary support (trend support of wave 3) in Elliott) and looks like it has completed a bearish impulse from the highs (see 180-minute chart). We can therefore expect a corrective rally before the next bearish impulse which should take us below 1,150 and possibly down to 1,044 where fundamental traders will get an excellent buying opportunity. The corrective rally in the near term is coherent with our short-term bullish outlook in equities (the top could be reached soon at this pace).

Beyond those directional calls there is an interesting relative value opportunity building up in EURGBP. As can be seen on the chart which compares the rate spread between 2Y swaps in EUR and GBP and the EURGBP currency pair, we recently have had a quite unusual divergence between Fixed Income and FX. If the Elliott Wave analysis proposed in the charts EURGBP Daily and 180 is accurate, 0.8182/0.8202 could be a good buy level for EURGBP, and for people who prefer to remain market neutral buying short sterling puts could be a great way to play the convergence without directional market exposure. We had already recommended buying a couple weeks ago short sterling puts against selling Eurodollar puts as both skews were extremely high yet USD rates are in our opinion going to stay floored a lot longer, and are less at risk of a sovereign scare triggering a bond sell-off. The market timing also seems pretty good to be selling UK Fixed Income, so the relative value play is very attractive here.


Good luck trading,

Nic

 


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Mon, 08/02/2010 - 11:50 | Link to Comment Chemba
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vix has already violated the bollinger bands hourly

Mon, 08/02/2010 - 12:52 | Link to Comment ATG
ATG's picture

Yes. Lower 3 SD Hourly BB also.

Maybe all over but the shouting as VIX ramps up.

Can we eat or plant bonds or equities?

Can we hunt with them?

Mon, 08/02/2010 - 11:58 | Link to Comment jdrose1985
jdrose1985's picture

rally in equities would be more beneficial to the economy than anything else is very revealing, if not incriminating in my opinion...

It struck me last night that the world could be literally falling apart. So long as TPTB can refer to the Dow as above 10k, nobody would even notice.

Mon, 08/02/2010 - 12:40 | Link to Comment Battleaxe
Battleaxe's picture

This house has been falling down for years. Instead of fixing the roof, repairing the foundation and replacing the rotten wood, they've just been painting over the problems for years. The thick buildup of paint is all that is holding the place together. Now that it's obvious to everyone that the increasingly frequent paint jobs aren't fixing the problem, they've decided to install vinyl siding.

Mon, 08/02/2010 - 13:11 | Link to Comment dark pools of soros
dark pools of soros's picture

look out of your bunker, there are MASSES of people who are clueless and who rather just label all things financial as 'i don't need to worry about' just like they do for everything besides the narrow focus they can spare...  these people just want to live their life and will ignore it to the end

Mon, 08/02/2010 - 11:58 | Link to Comment unwashedmass
unwashedmass's picture

couldn't agree with you more about Greenspan's comment. Clearly, it doesn't matter if the rigging is as blatant as a 90 foot high neon sign.....these guys are going to ram this market higher than a kite before the election.

scary, tho, when you think what happens the day after election day. personally, i'm moving all my cash out now.....

this is all way too dicey and fake for my blood.

Mon, 08/02/2010 - 12:23 | Link to Comment bmusic
bmusic's picture

Step 1 - A higher stock market indicates confidence

Step 2 - Confidence ends recessions/depressions

Step 3 - The end of recessions/depression mean a higher stock market. Return to Step 1.

 

It seems like he's onto something.  Nowhere in this  solution to you hear anything about economic data or fundamentals. 

Mon, 08/02/2010 - 12:45 | Link to Comment Young
Young's picture

But who's gonna buy it (the market), I still don't understand. And what if the baby boomers where lured in yet again by Dow 20.000, the government would have to pay even more of the pensions once it blows up in their face yet again - I don't understand the Greenspan fuckers logic. Clearly senile...

Mon, 08/02/2010 - 12:54 | Link to Comment ATG
ATG's picture

Behaviorists, led by a guy named BF Skinner, who worked with pigeons, believed they could cure all ills with behavior population control.

Still waiting on that one too.

Mon, 08/02/2010 - 12:02 | Link to Comment HarryWanger
HarryWanger's picture

Regarding Greenspan, the equity idea of a rally being beneficial to the economy has been his mantra now for a few months. Every time he shows up somewhere he repeats that same line about equities. Nothing new.

As far as the markets go, I'd be inclined to be pretty bullish far into the "medium" term as in decent movement higher over the next 18 months. We've made it through all the near term "horror" without a collapse or even near collapse. I believe it's been delayed, not taken off the table, at least 18 months though.

Mon, 08/02/2010 - 12:07 | Link to Comment HelluvaEngineer
HelluvaEngineer's picture

Did you just get your crystal ball tuned up or something?

Mon, 08/02/2010 - 12:09 | Link to Comment jdrose1985
jdrose1985's picture

dude are you fucking kidding me. I knew you'd be back around but i really underestimated you. I thought you wouldnt be dumb enough to continue posting under the same name after May.

You're a better contrary indicator than Goldman's client desk. For reelz.

Mon, 08/02/2010 - 12:22 | Link to Comment HarryWanger
HarryWanger's picture

Huh? I went short, did very well. Went into cash nearly four weeks ago, where I've remained and now am still waiting a bit. No hurry to rush in until after Friday's jobs number.

Look, we've had mediocre to terrible economic news but some fairly decent earnings. At this point, I think we need some time for the European crisis to really rock, China to show a sustained descent and the US to get past elections and Bush tax cuts before a real turn lower.

Seriously, what's the catalyst now to take us lower near term? Haven't we seen the market shrug off just about everything lately? 

I've been completely transparent about my position. Now, I'm leaning back to being bullish until all the stimulus worldwide runs short and the real crisis ensues. That should be around 2012. 

Mon, 08/02/2010 - 12:29 | Link to Comment PatsPal
PatsPal's picture

Harry, you have the right to change your opinon and I don't blame you. Don't be married to being bearish. I for one am sick and tired of being bearish and losing money everyday. What good is being right and going broke at the same time? My view is that we have all lost and the Central bank has complete control. There is nothing anyone can do but ride along with them. You're other choice is to lose money.

Mon, 08/02/2010 - 12:50 | Link to Comment Young
Young's picture

Who isn't fucking sick of it, I've hoped so much the last couple of days that I could've been confused for a catholic priest hoping for little boy butt...

Mon, 08/02/2010 - 13:38 | Link to Comment jdrose1985
jdrose1985's picture

maybe I've got Harry all wrong. But harry lost his tone of resignation and is back to being bold again since he was mopped up back in may.

You're not transparent Harry. please link to where u said u were going short? Maybe I'm wrong.

best action a bear can take sometimes is no action at all. I'm too dumb to make money in equity la la land in its current form.

Mon, 08/02/2010 - 15:18 | Link to Comment HarryWanger
HarryWanger's picture

May 15th was the day I closed all long positions and initiated SDS. Kept adding, trading in and out as subsequent posts detailed.

http://www.zerohedge.com/article/record-swiss-franc-volatility-300-pips-...

Mon, 08/02/2010 - 16:52 | Link to Comment Fox Moulder
Fox Moulder's picture

I saw the post where he said he was going short. IIRC it was on a massive up day and I made a smartass remark about it.

 

Give the guy some credit.

Mon, 08/02/2010 - 12:38 | Link to Comment Deep
Deep's picture

well lets see

1) leading indicators falling off a cliff

2) estimates way too high for 2nd half of year and next year

3)growth will slow, even the bulls are seeing this

I could go on on, but either the Bond Market is wrong or the Equity Market is wrong, I have to bet with Mr. Bond

 

As well, I am positioned for a slow, long drawn out fundamental downtrend until we finally hit bottom. That is why I short the real way, not these bullshit leveraged ETF's. If you have enough margin, you can sit on these shorts like I have for the last 3 months, and not lose time decay as well as losing the leverage part when you are wrong and the market has to go twice the move just to break even.  Yes i am down a little, but no big deal. I have done my homework and am very confident we will see 850-900 S&P soon. Dont know when, but anyone who thinks they do is an idiot.

 

This day to day stuff is all noise.

 

 

 

 

Mon, 08/02/2010 - 12:38 | Link to Comment old_turk
old_turk's picture

18 months is a loonnnnngggg time in this market Harry. 

 

I'd stick with up into October ... then all hell breaks loose.

 

From a fixed income guy, not really a equities market type, but from a technical point of view ... October is going to be 'dicey'.

Mon, 08/02/2010 - 13:00 | Link to Comment ATG
ATG's picture

And your compelling evidence is....?

On the other side of the ledger,

the W 28 July 2010 towering high

of 182% of opening option transactions

were calls, retesting the 185% on 15 April

2010 just before the 26 April 2010 SPX peak.

http://www.ise.com/WebForm/viewPage.aspx?categoryId=126 

Mon, 08/02/2010 - 12:02 | Link to Comment traderjoe
traderjoe's picture

There's a giant yellow banner (sponsored by Schwab at the top of Marketwatch web page that says "Markets awash in global wave of hope"). 

It's attempting to appear as a new headline. Yikes. 

And then there is this:

http://www.marketwatch.com/story/bernanke-says-states-should-build-bigge...

Basically states should build a bigger rainy day fund. Are you kidding me? Illinois has $5 billion in UNPAID bills. I think we've left the "rainy day" fund opportunity a few years ago...Wow.

Mon, 08/02/2010 - 12:47 | Link to Comment AccreditedEYE
AccreditedEYE's picture

Markets awash in global wave of hope.

Hope has never been a very viable investment strategy for me. To anyone taking it as gospel, good luck with that.  

Mon, 08/02/2010 - 12:08 | Link to Comment RobotTrader
RobotTrader's picture

Market must stop here.

Otherwise, bears are toast.

 

Mon, 08/02/2010 - 13:01 | Link to Comment ATG
ATG's picture

Most bears are toast, precisely why the markets may stop here soon.

Mon, 08/02/2010 - 12:12 | Link to Comment Catullus
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Long: f-bombs

Mon, 08/02/2010 - 12:34 | Link to Comment AccreditedEYE
AccreditedEYE's picture

LMAO!! Amen brother. However, for the life of me, I don't understand how the equity/real estate farce can grab higher bids and gold SELLS off. That's what has my tower in a twist.

Mon, 08/02/2010 - 13:02 | Link to Comment ATG
ATG's picture

Gold telling us something vitally important here:

QE II a myth like investing in hope.

Mon, 08/02/2010 - 13:33 | Link to Comment bmusic
bmusic's picture

Exactly, why actually implement QE2, when the myth of it seems to do the trick (ie Dow 10000+)?

Mon, 08/02/2010 - 12:13 | Link to Comment RobotTrader
RobotTrader's picture

This better turn around real soon.

Otherwise, "General Jim" is history.

Mon, 08/02/2010 - 13:06 | Link to Comment ATG
ATG's picture

Mr Sinclair called for parabolic gold since the 1980 peak.

His TRE still below 2007 highs:

http://stockcharts.com/charts/gallery.html?tre

Trees do not grow to the sky.

Mon, 08/02/2010 - 12:18 | Link to Comment RobotTrader
RobotTrader's picture

Looks like more REIT breakouts...

Mon, 08/02/2010 - 13:06 | Link to Comment Young
Young's picture

Agree... I don't agree with Nic's targets, if they go that high they'll go higher. It's now or never.

Mon, 08/02/2010 - 12:24 | Link to Comment firstdivision
firstdivision's picture

The market is having a problem with maintaining this mornings momentum. Late day sell off?

Mon, 08/02/2010 - 12:29 | Link to Comment HitTheFan
HitTheFan's picture

I think this tape looks very similar to the days just before the 'flash crash'.

 

It would not surprise me to see it happen again today, or in a day or two.

All the big money will head for the exits at the same time, leaving mugs holding the rubbish.

Any time now, I called it first!!

Mon, 08/02/2010 - 17:06 | Link to Comment ThreeTrees
ThreeTrees's picture

Of late I've been thinking the same thing.  The movements on the EUR/JPY are piling into support/resistance triangles, the same divergence from 4 months ago is forming on the MACD as well as Stochastics, ATR is near its pre flash-crash lows as would be expected with the decreasing range of movement in the technical wedge...

Price rides the 20 EMA up to resistance until it drops.  When I draw the resistance and support lines I can't help but think Elliote Wave is on to something.  It's eerily fractal.  But then I'm a noob so what do I know.

Maybe not Flashcrash 2, but maybe good for a decent correction?

Mon, 08/02/2010 - 12:49 | Link to Comment PatsPal
PatsPal's picture

Nah. I have been hearing that dribble for a long time. Market will just keep going higher and higher and higher. In two years my house will be back up to its ultimate high. Obama will be wearing a crown of jewels and the people will be debt slaves once again.

Mon, 08/02/2010 - 13:13 | Link to Comment ATG
ATG's picture

You mean Barry Soetero Saebarkah who got Educational Aid as a foreign national with the CT social security et al?

http://www.scribd.com/doc/35163631/Stanley-Ann-Dunham-Obama-Soetoro-Pass...

Mon, 08/02/2010 - 12:51 | Link to Comment TooBearish
TooBearish's picture

High asset prices have and will continue to be a core of FED policy short at your peril...global liquidity is ramping

Mon, 08/02/2010 - 13:14 | Link to Comment ATG
ATG's picture

"global liquidity is ramping"

So why is gold dropping, eh TB?

Mon, 08/02/2010 - 13:33 | Link to Comment TooBearish
TooBearish's picture

Paper gold is being "managed"  by the price fixers, call JPM if you have issues, seasonality is working against GC, yet I am ecouraged we are 30 bucks off last weeks low....

Mon, 08/02/2010 - 12:56 | Link to Comment Young
Young's picture

The bulls are clearly in charge, there's no fire power on the downside at all. Correction, the HFT-bulls...

Mon, 08/02/2010 - 13:16 | Link to Comment ATG
ATG's picture

"The bulls are clearly in charge, there's no fire power on the downside at all."

So why is red volume heavier than green volume?

BX Doll can cheerlead all he wants, but Elvis has left the market...

Mon, 08/02/2010 - 13:24 | Link to Comment AccreditedEYE
AccreditedEYE's picture

I think you mean BLK Doll.

Mon, 08/02/2010 - 13:41 | Link to Comment Young
Young's picture

I don't care if your red bars are bigger than your green... Look at the price action: market starts to sell off, loses steam, bulls knocks price back with one order - there is no follow through on the downside. That's what I meant.

Mon, 08/02/2010 - 13:37 | Link to Comment bmusic
bmusic's picture

Somedays I think the HFTs are setting themselves up for the Big Plunge, I just don't know what the catalyst will be light the fuse.

Mon, 08/02/2010 - 13:23 | Link to Comment Chemba
Mon, 08/02/2010 - 13:54 | Link to Comment Young
Young's picture

There goes aapl, rest of the market doesn't care, even if it's 20% of Nasdaq 100

Mon, 08/02/2010 - 14:25 | Link to Comment newstreet
newstreet's picture

I guess I'm toast.

Mon, 08/02/2010 - 18:17 | Link to Comment JonTurk
JonTurk's picture

Nic is turning crazy like a spin doctor.. what a typical sell side daze :))

my eyes on S&P 1140 (61.8 fibo retracement of the whole move down from april top), will be a big surprize for the overexcited bulls after head-faking the swing top @ 1131

just thinking that they won't push QE2 button in hey-days... need some bloodbath in the markets for the excuse

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