"Disciplined Systematic Global Macro Views" focuses on current economic and finance issues, changes in market structure and the hedge fund industry as well as how to be a better decision-maker in the global macro investment space.
It seems that the optimists found good even with the economic numbers today. GDP was revised down in the first quarter by -6.4%. Much worse than the -5.5% posted before. The second quarter was down only 1% instead f the expected 1.5%. The thought is that there is momentum in GDP after a bad first quarter. However if you look a personal consumption we were down -1.2% over double what was expected. This is going to be the driver for a strong recovery. Chicago PMI was up sightly but not like some of the big moves in other countries. The NAPM Milwaukee was down below 50 to 45.
The numbers suggest that the US is in slow growth even with all of the stimulus. This is reflected in the relative performance of the US stock market against equities in other countries. US is a laggard versus emerging markets and similar to Europe for large cap stocks.
The dollar was weaker based on new risk taking. We continue to move back and forth between risk seeking and risk avoidance in currency trading.
The global confidence by country shows more clearly what we already know. The advanced economies are in a malaise. The only countries which are showing a flat rise in confidence are the United States, France and Germany. The only regions which are below average are the United Sates, Japan and Europe with the addition of some selected countries like Taiwan and South Korea who were affected by steep declines in exports. Most of Asia is positive and getting more optimistic.
No wonder the recovery is occurring in the developed world. This is still the place to be for longer-term currency plays.
I wrote an entry on the the CFTC yesterday questioning the comments of a CFC commissioner. Now I have to side with the regulators given the evidence that was presented on the "self-regulation" of traders by the NYMEX futures exchange. The NYMEX has the authority to set accountability levels for trading positions in the energy markets.
Accountability levels are based on reporting levels set by the exchange. These rules include hard caps on the number of contracts that can be held on the three days before expiration of a contract and accountability levels which if exceeded could lead to the exchange asking for a freeze or a reduction in positions. Given these rules, there would be the expectation that few traders would exceed the accountability standards. While not a hard cap, traders would be put on notice that the exchange was monitoring these positions closely. Monitoring is important and should be a requirement for ensuring a well functioning market. Of course, some would argue that this is an infringement on the freedom of traders but the exchange has a responsibility to see that the markets are fair and orderly and that means that no one person can have an excessive amount of the open interest in a contract. The issue is what is the number of contracts that would be excessive. NYMEX set the number of contracts at 10,000 in a single contract month.
The CFTC noted that 43 traders exceeded the limit of 10,000 contracts in a single month in the last year. The average amount that these traders exceeded the standard was substantial. This was not an issue of a few contract above the limit for a few days. What should we think of the exchange for allowing this excess over their levels and not taking any action clear action. The logic is questionable when everyone has been watching this issue closely since the spike in oil prices last year.
NYMEX argues that these were set conservatively because they were just accountability standards and that hard limits would be higher. This still begs the question of why have these accountability limits if they would not take any action to stop or review in detail the behavior of traders. Market participants clearly did not believe there would be any repercussions based on exceeding the accountability standards.
The result of lax accountability is what we are now seeing, a regulator who will now ask for control of this process. After focusing on the idea that the exchanges should be best able to regulate their activities, the exchanges blew their freedom and they should pay for the consequences.
The sad part of this saga is that the link between excesses in position sizes and price manipulation may not be able to be clearly made. Hard position limits are now being discussed at levels that would be much tighter then imagined just a few weeks ago. There is little evidence for anyone to tell what is the appropriate level of position limits and we may not be able to get to this key question in the current environment.
Richmond Fed manufacturing survey exploded on the upside. This move since the beginning of the year has been largest reversal since the introduction of the survey. There was nothing like it in the previous recession. At this rate, we will hit new highs in another month or two. This also beat the market expectations.
Now, this was not viewed as important as the Conference Board consumer confidence numbers which actually fell this month, but we believe this is something to watch closely. We are not looking for green shoots but there is clear evidence that businesses are getting more comfortable with the environment. The PMI surveys around the world are showing the same pattern. What is interesting about the Richmond survey is that it is a mix of shipments (33%), new orders(40%) and employment (27%).
This is not just a feel good survey. Combine this with the better Case Shiller numbers and we might say there is reason for more risk taking around the globe.
