Daily Note – The Luis Suarez trade

SuarezSummary

Oil pushes higher as concerns over a wider Middle East conflict grow

Turkey: CBRT cuts base rate by 75bps

United Kingdom: Carney playing games with the market could lead him down the road to ruin

United States: Consumer confidence up as home sales rebound

 

Good morning,

The rush of blood to the head is a strange thing. Watching Luis Suarez last night, I was thinking WTF! Its 80 minutes into the game, you are winning one-nil, Italy are down to 10 men, 100 million people are watching and you could win this tournament for your country and then the madness arrives and you sink your gnashers into an opponent and the whole world sees you!

This type of craziness can only be explained by well-paid psychologists, but it does happen every now and then.

The rush of blood to the head is something we should all avoid while investing too. You know the trade you put on without thinking, in a moment of madness when you are either flowing something up or down and you commit too much capital and then, once you’ve done it, you realize it’s the wrong trade, but you are committed.

From now on, globalmacro360 is going to identify what I will call the “Luis Suarez trade”. It’s the one that I will fess up to as having not being driven by anything more than the madness of the moment. It is the one we all regret and if we could play it all again one more time, we’d never have touched it.

I’m sure you can play this game and know exactly what it means. Let it be an exercise in caution. We are going to put a big poster of the Uruguayan striker in the office, with the caption – “Are you sure you want to do this?”

Now what’s going on in the much less interesting world of markets?

Equities dropped yesterday and are weak again this morning in Europe. Negative headlines from Iraq seem to have been the catalysts. We suspect it has more to do with some profit taking ahead of Q2 earnings in the US next month. Volatility moved higher with the VIX up +1.15 to 12.13.

The Russian RUB puts in another solid performance up 1.15% yesterday as Russian stocks turn positive YTD (see chart below)

Figure 1: Russian Stock Market YTD %

Russia 25 June

Everything else was relatively unchanged but we did see some profit taking in GBP.

As we told you on our twitter handle @globalmacro360, we made a couple of small portfolio adjustments in the last 24 hours. We took some small profits in our 5 Year note position while adding to our S&P 500 put investment.

Oil pushes higher as concerns over a wider Middle East conflict grow

Hopes that ISIS expansion had peaked have been shattered. The insurgents took over Turaibil and Walid – towns on the Jordanian border. This move further threatens the integrity of the existing borders of the Middle East, which is the main objective of ISIS.

Oil, while not moving aggressively higher, has failed to come back at all in recent days. (See chart below)

Figure 2: Brent Crude $

Daily Note 25th June 2014 - Fig 2 Brent Crude

Yesterday John Kerry touched ground in Irbil, Kurdistan to meet with the regional government’s president, Massoud Barzani. The UN set the death toll in Iraq at 1075 since the crisis began.

Kerry seemed much more relaxed with Barzani than he was with Iraqi PM, Nouri al-Maliki earlier in the day.

It would seem that everyone, whether they’re from Washington, Kurdistan or Iraq, is agreed that Nouri Al-Maliki has to go before this “new reality” facing Iraq can be tackled. The question is can they convince Iran of this? Iran matters.

Turkey: CBRT cuts base rate by 75bps. 

Table 1 25 June

The other country that matters in the region now is Turkey. The Turks hold the key in Kurdistan and as such will be crucial to the next moves.

Its central bank cut its base policy rate (1-week repo) by 75bps to 8.75%, slightly more than the 50bps market consensus. The accompanying policy statement was dovish, signaling further “controlled” rate cuts. However, none of this will matter if Yellen is deemed to be behind the curve by bond vigilantes over the summer. If the US long bond starts going up again, the Lira is toast. (See chart below).

Figure 3: Turkish CPI YoY % vs Lira

Daily Note 25th June 2014 - Fig 3 Turkish Lira plus inflation

United Kingdom: Loans for home purchases slow again

Table 2 25 June

Loans for house purchases continued to slow in the UK in May, as the increase in prices slows buyers demand. (See chart below)

Figure 4: United Kingdom House Prices YoY % vs Loans for Home Purchases

Daily Note 25th June 2014 - Fig 4 UK Loans for home purchase + prices

I don’t believe that the UK housing market is slowing down. This is a temporary hiatus. The house price index goes up and up in the UK and then it drops like a stone, they don’t moderate gradually. At least they haven’t since the mid 1970s.

United Kingdom: Carney playing games with the market could lead him down the road to ruin

The Bank of England is behaving like an “unreliable boyfriend” and is using “smoke and mirrors” to keep changing its message on interest rates, MPs have claimed. It’s a nice flowery image, don’t you think, and given the serial infidelity of the British political class it’s probably something they have a fair amount of experience with!

Mark Carney, the Bank’s Governor, appeared to play down speculation of an imminent rate rise yesterday. He stressed that soaring employment and robust UK growth were not matched by higher wages and rising productivity.

This provoked the ire of both Labour and Conservative MPs on the Treasury Select Committee, who reminded Mr Carney that less than two weeks ago he said the Monetary Policy Committee (MPC) could vote to raise rates from a record low of 0.5pc “sooner than markets currently expect”.

I can’t say I’m too impressed with the comments from Mr Carney. He clarified his Mansion House comments as a “personal view” and something not clarified with the MPC ahead of making the remarks.

He then said that the purpose of the comments was “intended to get the market to revise expectations of a rate rise to adjust in line with data”.

GBP has been somewhat weaker since yesterday’s comments. It is back above 80p against the Euro and back below the $1.70 level against the USD.

United States: Consumer confidence up as home sales rebound

Table 3 25 June

New home sales jumped +18.6% in May (vs. consensus +1.4%). Solid gains occurred in the Northeast, South, and West, while sales in the Midwest were roughly unchanged.

Elsewhere Conference Board consumer confidence rose to a new post-recession high of 85.2 in June (vs. consensus 83.5). While confidence has run ahead of retail sales, yesterday’s number would suggest some upside potential to June retail sales figure (see chart below).

Figure 5: United States Consumer Confidence vs Retail Sales YoY %

Daily Note 25th June 2014 - Fig 5 US Consumer Conf + Retail Sales

The net percentage of respondents describing jobs as “plentiful” vs. “hard to get” rose 0.9pt. This suggests the chance of another plus 200,000 employment report for June.

Finally, we had some further slowing in house prices in the US. The 20-city S&P/Case-Shiller home price index rose just 0.19% in April (vs. consensus +0.8%), after rising 1.25% in March. This is the slowest rate of growth since February 2012.

Over the past year, the national index rose 10.8%. However, we anticipate a moderation in the rate of home price gains during the remainder of 2014. It is interesting to look at US house prices against the S&P 500 (See chart below). This chart gives you a real sense of the “wealth effect” that has occurred in the US in recent years.

Figure 6: United States House Prices YoY % vs S&P 500

Daily Note 25th June 2014 - Fig 6 US House Prices + S&P 500

Table 4 25 June

Download a PDF version of the Daily Note here:

Global Macro-Daily note-The Luis Suarez Trade

Disclaimer

The statements, opinions and analyses presented in the articles, newsletters, and other materials appearing on this website are provided as general information and for educational purposes. Opinions, estimates and probabilities expressed herein constitute the judgment of the author as of the date indicated and are subject to change without notice. Nothing contained in this website is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. Prior to making any investment decision, you are advised to consult with your broker, investment advisor or other appropriate tax or financial professional to determine the suitability of any investment. David McWilliams shall not be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided.



Categories: Daily Note