This note was originally published at 8am on May 04, 2015 for Hedgeye subscribers.
“To be a good General, you must know mathematics.”
If macro markets haven’t been confusing you as of late, give me a buzz. This 5’9 General needs to know the math that gave you clarity!
Napoleon went on to say that mathematics “serve to direct your thinking in a thousand circumstances” (Napoleon, pg 11). And in attempting to risk manage Global Macro markets, it’s tough to disagree with that.
The math simply gets tougher when correlations start to break-down. While they are not collapsing across durations (yet), correlations between the US Dollar, Rates, and Equities definitely don’t look like USD vs. Commodities do. That’s new. Welcome to a new week.
Back to the Global Macro Grind…
I’ll get into the point about correlations in a minute, but first let’s look at the FX move, in context:
- US Dollar Index dropped another -1.7% on the week, taking its 1mth correction to -2.9%, but still +5.6% YTD
- Euros (vs. USD) got squeezed +3.0% wk-over-wk, taking its 1mth rally to +4.1%, but still -7.4% YTD
- Canadian Dollar inched up another +0.2% on the week, taking its 1mth bounce to +3.8% (still -4.4% YTD)
In other words, whether it was priced in what became the most Consensus Macro FX position (short Burning Euros post the drop to $1.05 vs. USD in March) and/or a Commodity Currency like CAN/USD, that was one heck of a 1-month move.
The impact on macro markets, however, was not homogenous from a correlation perspective:
- CRB Commodities Index +1.7% last wk = +5.5% 1-month, but -0.9% YTD
- Oil (WTI) up another +3.5% last wk = +14.3% 1-month = +6.3% YTD
- Gold 0.0% last week = down -2.8% in the last month to -0.9% YTD
- UST 10yr Yield = +20 basis points last wk to 2.11% = down -6 basis points YTD
It’s pretty easy to argue that Gold doesn’t work when Bond Yields rise as market #history suggests that the absolute return of Gold then has to compete with higher yields. It’s harder to argue why USD and Bond Yields moved in the opposite direction.
So let’s go there and put the US 10yr Treasury Bond Yield move in the context of Global Yields:
- Germany’s 10yr Yield was +22 basis points (bps) on the wk to +0.36%
- Netherland’s 10yr Yield was +22bps wk-over-wk to +0.52%
- Austria’s 10yr Yield = +23bps wk-over-wk to +0.50%
- Belgium’s 10yr Yield = +22bps wk-over-wk to +0.65%
- Canada’s 10yr Yield = +22bps wk-over-wk to 1.66%
- Australia’s 10yr Yield = +15bps wk-over-wk to 2.68%
Not only was that a completely correlated move across bonds markets (un-correlated to the USD Down move), it was the biggest week-over-week percentage gain in Global Yields, ever.
And while I’m sure the next thing an absolutist will say is “but it’s from a low level”, that doesn’t matter when most of the institutionalized world runs money and chases returns, on a relative basis!
Yes, math majors who specialize in mean reversion history will also keenly note that “ever” is a long time. And for that reason alone I think it’s fair to say that US Bond Yields weren’t charging to lower-highs on bullish US economic data.
To the contrary, actually, the ISM report for the US that was reported on Friday was still plenty slow at 51.5 APR vs. the same in MAR (and it didn’t snow in April). Moreover, the employment component of the ISM slowed to sub 50 at 48.3.
That makes this week’s US jobs report all the more important as almost everyone I talk to thinks that the non-farm payrolls recover month-over-month (even though almost none of the Global Macro data did!).
Just to add some Consensus Macro color to where the crowd is positioned coming into this week, here’s the most recent CFTC (non-Commercial) futures and options positioning:
- Russell 2000 net SHORT position at its lowest level of 2015 at -5,486 contracts (6mth avg -25,989)
- 10YR (US) Treasury net SHORT position at its lowest level of 2015 at -115,917 contracts (6mth avg -158,559)
- Crude Oil net LONG position tracking around its highest level of 2015 at +371,486 contracts (6mth avg +306,931)
This tells me (partly) why the Russell 2000 was the dog of the US major indices last week (many covered shorts high and are now too long small/mid caps lower) and what Bond Bears really think (i.e. they don’t think rates go up a lot from here).
As for people who are in the business of being bullish on Oil. There are many. There are also many, many, more Americans whose confidence and real-spending power slows alongside rising gas prices and a general confusion about markets vs. economic reality.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.86-2.12%
Oil (WTI) 54.62-60.15
Best of luck out there this week,