Is it May Day or Mayday?

May Day.  May 1 is “celebrated in many countries as a traditional springtime festival or as an international day honoring workers.”  Mayday is “internationally recognised as an SOS distress signal.”  We have a little bit of both, as labor has become more vocal in fighting for a larger wedge of the pie in terms of wages, while financial markets are beginning to show signs of stress.

“The mayday callsign originated in 1923 by Frederick Stanley Mockford (1897–1962), a senior radio officer at Croydon Airport in London. He was asked to think of a word that would indicate distress and would easily be understood by all pilots and ground staff in an emergency.  Since much of the traffic at the time was between Croydon and Le Bourget Airport in Paris, he proposed the word ‘mayday’ from the French word ‘m’aidez’. “


The SPX encountered two large tumbles in the past year, both sparked by overt central authority announcements which also corresponded with large foreign exchange moves.  In August, China devalued, and in short order SPX declined 11% from around 2100 to 1870.  In December, the Fed hiked, and by Feb 11, the SPX had declined 12%, from 2080 to 1830.  We started this week near the same level as the last two times, around 2090, going into both the FOMC and BoJ meetings.  Though both meetings resulted in inaction, the market expected easing out of the BoJ, and the Nikkei dropped 4.5% on the week with other global markets falling in sympathy.  I don’t know if this is the start of another 10+% drop in SPX, but additional announcements and factors would argue for a risk-off posture.  And of course, the old adage “Sell in May and go away” highlights the seasonal aspect of our current time frame.

In terms of the FOMC, many commentators think the Fed left the door open for a June hike.  The market assigns low probabilities to that scenario, in spite of various Fed officials suggesting the short end curve may be too complacent.  Snippets from the first sentences of the last three Fed statements indicate uneven growth in spite of improved labor market conditions.  In January, “…even as economic growth slowed late last year”.  In March, “…economic activity has been expanding at a moderate pace…” And a downgrade this week, “…economic activity appears to have slowed”.  So, if the Fed is data dependent, decelerating growth does not argue for additional hikes.  Perhaps the labor market does, but everyone knows payrolls have been solid for quite some time, with another 200k NFP expected Friday.  The Atlanta Fed’s initial GDPNow forecast (released Friday) for Q2 is 1.8%.  Recall that within a few weeks Q1 was systematically revised lower to the final of 0.6.  The NY Fed’s Nowcast for Q2 is just +0.8.  (A bit ironic since Atlanta was the supposed pessimistic one).

The BoJ was of course, more interesting in terms of market impact.  Many analysts have observed that stimulus measures from global central banks are losing their effectiveness, yet the market still clamors for more (and positions that way) leading to the dislocating moves seen at the end of last week.  Dollar/yen sank to 106.38 and stocks displayed symptoms of drug withdrawal.  From Doug Noland (link at bottom)  ”Japan’s Topix Bank Index [this week] sank 8.6%, increasing 2016 losses to 29.3%. It’s worth noting that financial stocks were under pressure globally again this week. Hong Kong’s Hang Seng Financials were down 2.8% (down 11.3% y-t-d), and European bank stocks fell 2.7% (down 16.7%)… In the US, “…the Securities Broker/Dealer index was (ominously) slammed 5.5%.”   Remember, the Herculean efforts made in 2008 were expressly instituted to save the financial architecture, and fissures are currently growing in that sector, globally.

An article last week in the Financial Times (again, noted by Doug Noland) warns that ‘China’s bond market is on edge’ and that “pledge style repos – short term, bond backed loans” have become hugely important in financing.  “A sharp worsening in market sentiment could force those borrowers into fire sales if their loans are called or cannot be rolled over.” As intimated at the start of this missive, and brought into sharper focus by the Fed itself, risks to US markets can be sparked by international events.

Starting off this week we have China’s mfg PMI, weaker than expected at 50.1.  From BBG “The manufacturing purchasing managers index stood at 50.1 last month, the nation’s statistics agency said Sunday, compared with 50.2 in March and a median estimate of 50.3 in a Bloomberg News survey of economists. The non-manufacturing PMI was at 53.5, compared with 53.8 in March”.  The Financial Times summed it up, “Pullback raises questions over impact of fiscal stimulus and lending binge”.   On Monday US ISM is expected 51.5 from 51.8.

Interestingly, the US Treasury on Friday released its FX Policy Report (link at bottom), and created a new “Monitoring List” that includes these economies: China, Japan, Korea, Taiwan and Germany.  All on double secret probation to not manipulate their currencies.  Or, as it says in the report, “…to avoid persistent exchange rate misalignments, refrain from competitive exchange rate devaluations, and not target exchange rates for competitive purposes.”  Or else.  Sort of an ‘America First’ policy.  Probably just a coincidence, but on the same day China denied access to Hong Kong’s ports by a US fleet.  “While U.S. warships frequently visit Hong Kong, port calls have been canceled at times of diplomatic strain between the two Asia-Pacific powers.”  Pure coincidence.

In any case, it appears as if the US, through both a dovish Yellen and suddenly important Jack Lew (remember him? He’s the Treasury Sec’y), want to make sure it’s the US that tilts its currency weaker, thereby strengthening oil and other commodities, giving emerging markets breathing room, and engendering inflationary impulses (fingers crossed).   As shown on the chart below, the Dollar Index is at an important support level.  And $/yen is exactly at its 38% retracement from its 2011 low of 75.35 to the high last year of 125.68.  (50% is 100.51).  My sentiment would be to cover short dollar positions on a technical basis.

DXY April 2016


Note however, that while commodities have rallied, the curve just doesn’t seem all that enthusiastic about the potential of inflation supported steepening.  The chart below overlays 2/10 treasury spread on the Bloomberg Commodity Index.  BCOM green and 2/10 in white.




bcom vs 2_10 April 2016


Even the increasing prospect of President Trump pumping up infrastructure and military spending doesn’t seem to have an effect.  Yet.  As some might say, Mayday mayday mayday.

Posted on May 1, 2016 at 12:09 pm by alexmanzara · Permalink
In: Eurodollar Options

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