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A Burned Goldman Says To Hell With European Trade Recos
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A Burned Goldman Says To Hell With European Trade Recos

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A Burned Goldman Says To Hell With European Trade Recos

After being mocked and humiliated (repeatedly) by various blogs, not to mention losing a ton of money (for the clients, not the Goldman traders on the other side of the firm's clients) on his most recent horrendous EURUSD reco, Goldman's Tom Stolper has had enough (as a reminder, precisely the same thing happened at precisely the same time last year - sometimes even a broken clock is never right). And not only him, but all of Goldman appears to be withdrawing from making any future recos on Europe. To wit: "The lack of predictability in Euro-zone policy developments and the high degree of volatility it has created for markets have made it particularly challenging to recommend trades around that theme. Over time, our attempts to actively trade Euro-zone-related developments have had varying degrees of success. Our long EUR/$ trade recommendation was the latest to fall victim to this broader market uncertainty. We initiated the trade under the assumption that reduced political tensions in the Euro-zone ten days ago would also help the EUR move higher, given the significant degree of negative sentiment for the currency. Despite positive developments in Italy, Greece and Spain, however, market tensions have broadened. We therefore closed the trade yesterday at close to 1.34, as we thought that further deterioration in price action was likely." This is truly sad news: it means that the one sure source of (inverse) alpha in the past 2 years, Goldman's FX "advice", has been silenced, and if anything has now turned outright bearish on Europe - and all it took was 2 weeks for Goldman's expert strategists to completely invert their opinion. Oh well, nobody ever said trading was supposed to be easy...

Full note:




Our Trading Stance: An Effort To Avoid Direct Exposure to the Euro-zone



The lack of predictability in Euro-zone policy developments and the high degree of volatility it has created for markets have made it particularly challenging to recommend trades around that theme. Over time, our attempts to actively trade Euro-zone-related developments have had varying degrees of success. Our long EUR/$ trade recommendation was the latest to fall victim to this broader market uncertainty. We initiated the trade under the assumption that reduced political tensions in the Euro-zone ten days ago would also help the EUR move higher, given the significant degree of negative sentiment for the currency. Despite positive developments in Italy, Greece and Spain, however, market tensions have broadened. We therefore closed the trade yesterday at close to 1.34, as we thought that further deterioration in price action was likely.



The difficulty of recommending trades directly linked to Euro-zone sovereign risk has compelled us to seek trade ideas with as little exposure to Euro-zone volatility as possible and focused around parallel macro themes and developments. In FX space, we recommended long exposure in the MYR and SGD against both the USD and EUR, a trade that in the past had limited exposure to risk sentiment and that was predicated on the MYR and SGD having undershot their fundamentals due to extreme market tensions in October. We also recommended long RUB vs HUF because we expected energy prices to remain resilient and the HUF to be challenged by significant external vulnerability, as discussed in yesterday’s Daily.



In rates, we attempted to position ourselves for more easing in EM economies by receiving 2yr rates in Mexico, where our forecasts were the furthest below the forwards. Finally, in equities space we were recommending a long Wavefront US GDP growth basket until yesterday, in an attempt to benefit from improving US data. We have also recommended long HSCEI vs SPX positions in order to capitalize on the potential for more easing in China.



But Euro-zone Risk Dominates & Our Trading Stance is Becoming More Negative



In reality the escalation and the severity of Euro-zone tensions have been such that the price action across most assets was dominated by the deterioration in risk sentiment. As a result, most of our recommendations have not reflected the macro themes that they were meant to capture, but rather have come under pressure due to risk aversion.



In FX, our long MYR and SGD basket has been trading a few basis points above the stop, even though the EUR has depreciated and has partly worked as a hedge to the overall position. We continue to like the rationale behind the trade and the levels for these currencies. However, it is worth keeping in mind that broader and deeper tensions in the Euro-zone are likely to lead the recommendation closer to our stop. More bearish price action meant that RUB/HUF came under pressure as well for a short period, but it recovered some of the lost ground yesterday. The choice of the pair was such that the recommendation is broadly uncorrelated to risk sentiment. We continue to expect the HUF to remain more vulnerable than the RUB and we believe there is more upside from current levels. The key risk to this trade is if Hungary agrees with the IMF on negotiations for emergency funding in the near term, which would lead to a partial recovery in the HUF.



In rates, after an initial move lower in Mexican 2yr swaps, the market has eroded most of the tentative profits as outflows boosted risk premia in local fixed income. We forecast monetary easing in Mexico, which should ultimately offset the build-up of risk premia in local fixed income unless FX outflows become so disruptive that the central bank decides to postpone easing in order to avoid an intensification of such disruptive flows.



Our equities recommendations have also seen significant shifts over the last few days. On Tuesday we closed our long Wavefront US growth basket recommendation with a potential loss. Although US growth data continues to surprise in a broadly positive way, the pricing of better growth news in the US equity market has not improved. The transmission of Euro-zone concerns has dominated other factors here too. Our long HSCEI vs SPX trade has also come under significant pressure and is trading close to our stops, and our macro-equity team are reviewing the balance of risks at the moment, which has clearly deteriorated.



With most of our pro-cyclical trades closed out, our bias has gradually turned more negative on balance considering that our credit strategy team continues to recommend short positions on the iTraxx Europe Crossover index since the end of the October rally (the position was opened on November 7). We are not far from the target of 850bp (the market is hovering closer to 840 at the moment) but there is risk of further widening.

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