Monday, June 25, 2007

The Sith Lord Cometh

All hail our new ruler! Those of us residing in the UK now live under the leadership of the long-suffering but now-ascendant Chancellor Palpatine.

The UK press is now speculating that Palpatine will call an election next year to cement his place as Emperor. While the grinning Chancellor is all sweetness and light at the moment, one wonders what surprises the wily Sith Lord and his apprenctices may have in store for the UK. 'Stealth taxes' are a fairly reasonable assumption.

Sterling has marked the Chancellor's assumption with another visit above the Deuce this morning, though how durable that proves to be remains to be seen. It's interesting to note, however, that a higher power seems to have voted on the Chancellor's ascendance, and it's not exactly a ringing endorsement:


Equally stormy, of course, is the structured credit market, as the Bear Stearns hedge fund debacle rolls on. The latest news is that Bear will 'bail out' the less toxic of the two funds while leaving the other, highly leveraged, fund to wither and die. Concerns over forced sales of crappy securities held as collateral remain very much in place, as reflected in the ABX indices below.
The left-hand chart shows the Markit AA ABX index, while that on the right shows the A index. Suffice to say that charts of all indices rated lower than A look very, very similar.
This week could well prove eventful, starting with existing and new home sales today and tomorrow, respectively. The Fed announcement could also prove crucial; recall that last May-June's sell-off in risk assets was exacerbated by continued hawkishness from Bernanke and co from mid-May until the end of June. As such, anyone hoping for a Bernanke put on structured credit may well prove disappointed.
Those looking for more in-depth coverage of the Bear saga would do well to have a look at Naked Capitalism.
Finally, this weekend's BIS annual report offered a warning to carry traders, calling the yen's decline 'anomalous' and reminding readers of what happened in 1998. I'm sorry, but the level of hypocrisy here is just stunning. In addition to running its own asset management business, the BIS pimps, I mean brokers, deals for a number of FX reserve managers. Among the widely-reported strategies that the BIS executes are naked selling of FX implied volatility (a carry trade by any other name) and, you got it, buying USD/JPY. If the BIS is really worried about coupon clipping, maybe they should start DK'ing deals that don't fit with their moral compass and start having a go at some of their customers, among whom number the world's biggest carry traders.






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