Stressless (Deja Vu Edition)

Friday, July 15, 2011

So the stress tests, Italy and the budgetary farce playing out in the US continue to bubble in the background against the increasing signs that the second half of the year is looking like it will be a good deal stronger than the first half. The trouble with this dichotomy is that, as TMM have experienced to their chagrin, attempting to play this as a decoupling doesn't really work for Italy because it is too big and too unpredictable. At least the Spanish government seem to have some modicum of responsibility and cohesion. Amongst Tuesday's panic, TMM noted that only Italy can help Italy, and without confidence returning to the BTP market in the form of much reduced volatility and spread tightening can we truly signal the all clear. And let's face it... would you trust the global economy with this guy?

As readers will recall, TMM's survey-based ISM model wrong-footed them due to it being based upon the Philly Fed and Empire surveys which, it seems, were distorted by being a long way from Japan (who knew...?). A confirmation of a V-shaped rebound in these over the coming week should cement views of the US recovery, but as above, this is purely dependent upon the Italian situation improving. With such divergent outcomes, it's hard to have too much conviction, and TMM's guts suspect that the pain trade after the weekend is a squeeze higher in Spooz, especially given event risk being cleared. They are too scared (and scarred) to put this on just yet though...

Moving onto other things, TMM's radar has picked up increasing chatter related to the possible imposition of exchange controls in Switzerland, something last tried in the 1970s that (briefly) led to a reversal of the post-Bretton Woods CHF rally.

TMM aren't sure that this is imminent yet, but the extreme strength of the CHF is something they have been pondering for a while. But the fact that this issue is now being discussed could well make the seeming one-way moves a little more balanced. If not, the closer EURCHF gets to parity the more likely it is that the SNB LLC are forced into action give n that they are hurtling towards the point at which they will be forced to ask the politicians for a recapitalisation.

TMM don't really have much else to say, other than that the EU Stress Test results appear to already be out of date given that they do not include the scenario of a Greek restructuring, yet the Eurocrats have already moved on to discussing how to execute such a restructuring. TMM feel like they have been subjected to a more rigorous stress test this past week or so!

Posted by cpmppi at 11:33 AM  


Given bank valuations in late 2007, it's pretty hard to see the stress tests being less effective than markets at assessing the health of the sector. It looks like this version is rigged to overcompensate for the shortcomings of the first, anyway. One German bank has reacted with the Serbian war criminal defence - refusing to recognize the jurisdiction of the court. Expect more of this if they come up with v.3.

Won't it be nice to go back to playing football without wondering from which part of the stands the next beer bottle's going to come flying?

Charles Butler said...
12:46 PM  

Thats it mm... no more bearish?

Empire didnt confirm

ECRI folks still touting a world wide slowdown unrelated to japan

I wont make a call until S&P breaches 1350 or 1250 (pussy)

abee crombie said...
1:36 PM  

I think I'm losing my touch in deciphering double dutch these days TMM,anyway,I'll stick with the three makes a trend principle across the board, not just one data point.

Ambo said...
1:40 PM  

Seems to me like ISM is the outlier rather than an indicator of trend. Even the ISM shows growing inventories relative to sales, which is a leading indicator of a decline in the overall index. SocGen featured this prominently in some of its research last week.

PPM said...
2:17 PM  

Sterling looks technically set to do some bouncing to me too across most of the sterling crosses
Good post, I agree about the pain trade, the debt ceiling thing is the only thing that makes me nervous

Nic said...
2:42 PM  

It looks like retest of dec lows and 1170/50 area in general. Fiscal tightening in Europe and then in US - and background noise for trades that still work (bonds/usdjpy etc) makes it likely more IMHO. Things are seriously toppy - looking at oil, copper etc. On swissie, prob trade is long gold/chf not to re-invent the wheel here. alex

Anonymous said...
3:25 PM  

PS: think spoose game is now politics. and hence Ben will support new QE once debt deal is done.

Anonymous said...
3:28 PM  

Silly season just around the corner now, TMM. Surely if anything big is going to happen it will be pushed off until after Labor Day. Europe about to go on their hols en masse.... no crises while we are en vacances !!!

Leftback said...
6:26 PM  

I have always been puzzled by the fact that central banks of strong currencies cannot devalue said currencies nor make money (even other countries' funny money but lots of it) out of their privileged situation. I repeat: privileged. I mean, how difficult is it for SNB LLC after a leg up in the CHF rally to call an FX dealer, ask for a 1-month naked put in EURCHF in EUR 500bn for example and scream "yours"? Then stay on the bid at the strike printing CHF as needed until expiry? Then repeat next month? I really don't get, it's a real question, not a rhetoric one. Someone please enlighten me.

theta said...
7:49 PM  


Wouldnt the problem in your scenario occur when whoever bought all those francs decides to spend them in Switzerland?

Anonymous said...
11:22 PM  

"against the increasing signs that the second half of the year is looking like it will be a good deal stronger than the first half"

Ok some here are sensible to think that ISM is one off inventory-diven fluke but TMM is sticking to the "US decoupling" theme; their trade is to buy US equities sell bonds. We'll see if you can finally make some money after a good number of eally nice calls.

Anonymous said...
4:04 AM  

"Wouldnt the problem in your scenario occur when whoever bought all those francs decides to spend them in Switzerland?"

And the problem with that would be what exactly (given that governments want a weaker currency to make local producers more competitive, ie. sell more)? I don't think that people are buying CHF for their vacations in Switzerland. They see it as a better store of value that alternatives.

Of course, major asset purchases could be subject to a "review" (that would take a minimum of six months before being denied).

Seriously, with unlimited supply and no cost, why not just sell 10bln chunks until the rate has moved five big figures, and then tell the FX dealers they can expect more tomorrow?

Obviously it helps to have a lower interest rate that the currency bought, but with JCT hiking, this issue is taken care of.

Anonymous said...
4:54 AM  


If you start doing that which is I think a unsterilised injection, it is the same as printing money.

The problem is if there is if more money chasing a given level of assets denominated in CHF, it is by nature inflationary.

On a subject of the cost. Paradoxically, if the Swiss Central bank does that on a minor level. It wouldn't have much impact on the exchange rate against the Euro. But done on a large scale, it would destroy the value of the currency.

It is a fine line they have to walk to implemented where they are most likely to get it wrong than right.

My 2c.

Anonymous said...
6:07 AM  


But that's the whole point, to destroy the value of the currency (in these "currency wars" the winner is perhaps counter-intuitively the one with the weakest currency). Everybody seems to think that the Swiss are helpless and they can't do anything to devalue the CHF, which I just can't conceive how on earth can be possible, given the unlimited productive capacity of the money printing press. What's more, what I suggest can earn them some income on top (the premium of the options they sell) while also sending a very strong signal to the market that that's the limit they can't cross. A win-win-win situation.

theta said...
9:44 AM  

@Theta, then Zimbabwe is the clear cut winner for now, with Iceland a close second....

Tulsaguy said...
12:13 PM  

odd thing is, Iceland is a pretty good example of how this can work well(ish).

Nemo Incognito said...
2:04 PM  

"The problem is if there is if more money chasing a given level of assets denominated in CHF, it is by nature inflationary."

Moving from Switzerland to Japan, isn't that what the BOJ is TRYING to do (cause inflation)?

I am not a fan of competitive devaluations (which basically amount to wage, and wealth reductions, given that the price of raw materials are generally set on world markets), and I agree that excessive printing destroys a currency, but I don't get the assertion that Japan or Switzerland is UNABLE to weaken their currency. They can - they are just unwilling to do what it takes.

And given that, in doing this, they would possibly rack up the equivalent of another trillion USD or so in foreign exchange reserves, they would have some ammunition to slow or reverse the process if it got out of hand.

I guess the markets don't take central banks seriously as far as intervention goes (and I hope that some day - as long as I am not on the other side - one of the central banks decides to show punters that they have more than enough supply to meet ANY demand).

Anonymous said...
5:12 PM  

we are discussing the problem of famine and malnutrition in sub-Saharan Africa and you are mentioning the dangers of obesity. You are right but practically off-topic. Switzerland has no obligations in foreign currency, and as Anonymous@5:12pm said in the process of weakening their currency they will accumulate trillions of fx reserves that would serve as ammunition to reverse the process if needed. With my plan (sell puts instead of outright buying fx) they can collect extra yield and therefore extra reserves.

theta said...
4:57 PM  

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