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TMM don't really have much else to say, other than that the EU Stress Test results appear to already be out of date given that they do not include the scenario of a Greek restructuring, yet the Eurocrats have already moved on to discussing how to execute such a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!