Spicy Market Conditions: Will Risk Appetite Continue?

It’s a busy day today and Macro Man is pressed for time (an early morning visit to the physiotherapist put him behind schedule), so today’s post will be necessarily brief. Suffice to say things have gotten a bit spicier in the last 24 hours; while it need not derail the risk asset love-in, that doesn’t mean that the fenders won’t get scraped along the way.

First, an apology is in order: Jean Claude Trichet (JCT) was admirably restrained when it came to the euro yesterday, passing up the chance to have a good old moan. (A less charitable commentator might suggest that he folded like a deck chair or choked like a chicken, but Macro Man thinks that would be churlish.) Of course, JCT couldn’t pass up a chance to pat himself on the back for maintaining anchored price expectations, which he did with well-practiced aplomb.

Still, his lack of complaint set the stage for a nice pop in EUR/USD, which duly followed after a bit of short-term profit-taking. Still, there are some cracks emerging in the warm salt-water bath of uber-abundant liquidity that we’ve all enjoyed recently. EONIA rates are starting to tick up; given the large negative spread to policy rates, this has encouraged further liquidation in what has been an extremely crowded euribor carry trade.

In the US, meanwhile, yesterday’s long bond auction showed that dealers are finally appearing to gag a little bit on the smorgasbord of supply that’s been on offer from the Treasury. The auction took on a distinctly weaker tone than recent editions; combined with a headline from Bernanke admitting that rates may have to rise at some point in the future (duh!), this has helped catalyze a reversal in US fixed income markets as well.

Said reversal has thus far been orderly, and it’s also probably overdue. While the December 2010 eurodollar has made new highs in reent weeks, its momentum has not done so…a divergence that usually signals a tired trend.

So all of this has given the dollar a bit of a boost; after all, in a world of rising rates, the world’s nonpareil funding currency should catch a bit of a short-covering bid. Nevertheless, all of this looks more like position liquidation than a legitimate reversal. Another recently tough-talking CB, the BOK, left rates unchanged a delivered a pretty innocuous statement to boot.

And guess what? The Kospi, the erstwhile mangy dog on Macro Man’s equity screen, had a cracking day. The canary in the coal mine has sprung back to life! So while rumblings over stuff like reverse repos from the Fed may cause further jitters, it’ll take more than a ten tick sell-off in the reds to entice Macro Man back to a short-risk “investment” strategy (as opposed to a short-term trade.)

Spicy markets are good to trade; however, bitter experience has taught Macro Man that if you try and eat the whole hog, so to speak, all you generally get left with is a bad case of indigestion.

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