Dissonance in the Markets

If Macro Man scratches his head any harder this morning, his thick mop of (graying) hair may soon develop an unfortunate bald patch. The news is coming thick and fast, and markets don't seem sure of how to react. Consider:

• Ireland guarantees all domestic bank liabilities....
• ...prompting France to propose a Europe-wide bail-out solution (aka "Le Tarp")...
• ...which led the Germans to shout "Das ist nicht gut!!!
• Meanwhile, the world's largest SIV (remember them?) blows up....
• ...but hey, the Senate has passed the TARP!

Different markets seem to be reacting in different ways. While Asia took Spoos lower, European equities have roared higher (again) today. The FTSE future is now up more than 10% since Monday's low. By way of comparison, Spoos are only up about half that much.

Perhaps the FTSE is being supported by rate-cut expectations; sell-side BOE rate forecasts are falling more often than the rain in Britain. Dec short sterling is now back at its recent highs, and is now pricing 3 month LIBOR a whopping 80 bps (!!!) above the expected fixing today. Perhaps the bid is down to expectations that the ECB may turn dovish today (and we all know that Merv takes his orders from Frankfurt these days); then again, if that were the case, why the hell are Schatz down on the day.

But riddle me this, Batman. If the world is such a shiny, happy place, why has EMFX gotten caned this morning? It's been a while since Macro Man can remember USD/TRY and major equity indices both showing up more than a percent on the day.

And insofar as the euro has represented a vote on both risk appetite and European policy, its further collapse today to new yearly lows (and very close to long term support) suggests that all is not right in Paradise. What gives?

So in summary:

a) Equities are having a party....

b) ...perhaps as a result of the prospect of easier ECB policy....

c) ...yet 2 year German govvys are lower on the day....

d) ....and EMFX is trading in a risk averse fashion...

e) ...and the euro is saying everything's a mess.

Macro Man's had to punch shift F9 on his keyboard, because this market truly isn't getting easier. For a guy like Macro Man that likes to construct a portfolio on non- or negatively-correlated assets, this is a very challenging environment indeed. Perhaps today's ECB press conference will clear up this market dissonance...but with US payrolls and the House TARP vote tomorrow, Macro Man ain't holding his breath.

Comments

[Smarty_Pants]

When life gets you down, try

Format C:

2008 Oct 02 11:14 AM

[dieuwer]

a) Equities are having a party....

b) ...because money printing is proping them up.

c) ...therefore, the 2 year German govvys are lower on the day.because the bondmarket suspect that in the coming years hyperinflation will be le jeu du jour.

d) ....but in the short term there are still credit problems and thus EMFX is trading in a risk averse fashion.

e) ...Additionally, the euro is declining vis-avis the dollar because the mess in the US might be less than the mess in Euroland.

2008 Oct 02 02:10 PM