Thursday, June 21, 2012

Four Events and No Funeral

The FOMC - Twist but no QE has not had the effect that we felt many were expecting. Running into the event it felt as though many were thinking that the QE3 trade had been fully priced in over the previous 48 hours and that anything other than a liquidity barf would result in general equity selling together with UST and USD buying and all sorts of commodity linked selling. Well the Big B is still playing a cunning game as Mr Market asks "Is that a Bazooka in your pocket, or are you just glad to see me?"  Holding off and revising down growth and labour forecasts has effectively just rolled down market expectations to next month, yet given the FED some optionality. Ammo for the Twist is running low with probably only room to maintain the current 45Bln per month for the remainder of the year would leave them bereft of 0/3yr to sell. So for now why not play the waiting game as our parents said to us at Christmas, the waiting and expectation is as important as the present itself.

G-20 yesterday. Much press coverage and the multitude of comments are along the lines of "damp squib", but "The Daily Mash" take was probably the best. But to TMM the propensity of Eurocentric comments combined with a hints of intent that are naturally against German policy, sweetened with the obvious concession to Mangler of the "No softening for Greece" clause, actually leaves us less despondent than we normally are after a bout of G20 consensusness. The interesting flow of headlines today has our noses twitching,

*SCHAEUBLE SAYS EFSF CAN BUY IN SECONDARY MARKET &USE LEVERAGING  - Now whilst this is nothing new, Wolfie talking about it now is interesting.  




Greek Elections -  Whowuddathoughtiit! A government! But we are all well aware that Greek government is modelled on unstable large atomic isotopes and no doubt will soon spit out a few neutrons and split in an explosive fission event. But for the time being we are back with a body willing to lie commit to ongoing austerity programs to the EU whilst doing their best to wriggle out of them. Basically Greek issues should be back burnered for now.

Spanish auctions - Done and dusted. Not cancelled as some were suggesting at the beginning of the week and though the debate on sustainability of prices paid will rattle on surely for the NOW it is another risk behind us. Suddenly Spanish bonds look bid and there is a squeeze on leveraged positions as the locals are back in buying. Spain to the Back burner for now? Well lets get the stress tests results out of the way tonight, but we think it will be hard to shock a market that at the beginning of the week was running for the bunkers.

Where does that leave us? Well TMM are pretty happy as their Monday short term trades of long Spain short Bunds has bolstered the reserves. Considering the reasons we put this on, how far it has moved and the original short term nature we are taking profit on that one.

But if something is afoot post G20 and the news flow does see an increase in stories of policy response, then the chances of Euro blowing up diminish and the chances of a snap relief rally increase. Lack of policy response and coordinated action has been our biggest concern recently. So this is where we look towards the biggest toilet that everyone has been flushing their Euros down - Eur/chf.

If you don't want Euro then exchanging them at an artificially held price for CHF seems like a free way of getting optionality for a euro blow up. And indeed we were on that trade, but with a few key events behind us we have now lifted it. We are now even mulling the other side and wondering what exactly would happen if everyone else started to do the same. The World may be on the offer at the moment but that doesn't mean it has to be forever. A lift in mood as policy response becomes a bit more tangible, a drying up of eur/chf selling, SNB stop buying, SNB stop recycling  and their offer in eur/haven goes results in Euro gets another lift. And when if EURCHF does start to move there are an awful lot of positions short. Does the SNB come in and sell eur/chf straight away? Doubt it very much. So that leaves us with a payoff of (whilst the peg holds) of a couple of points downside against quite a lot of upside with a marginal bit of carry to boot. Of course the risk is it blows up but over the next 2 weeks we see the news flow getting better rather than worse (that was Monday). So that leaves us with a "flat to down a couple of tics" vs the chance of a decent "didn't expect that" spike up.

And finally. If the Euro is a sell vs chf on the ultimate blow up trade, then wouldn't you expect Xau/Eur to be rallying too and not going falling knife?


Anonymous said...

C says'
At childbirth it is a little known fact,but each child is given an invisible stamp on its' buttcheek. Those belonging to the worlds' optimists (godbless their little cotton socks) get a bright orange stamp bearing the thumbs up logo. I know this because I possess the necessary scanning equipment for recognising this invisible godprint.
Which is a longwinded way of saying only such a trait could lead to interpreting the latest Euro waffle and equate same to be anything other than what it is. Namely, prattle masquerading has communication with yet again, highly questionable attribution.

With BB gone for a month I'd rather be a bit short equity for the next couple of weeks Eurocrats ,or not.

CV said...

Agreed C,

With no stimulus forthcoming we are about to see how much momentum the market has going into a slowing economy. My guess is, not much!

Commodities are getting the cold steel treatment today with Gold and Oil particularly painful to watch.

1350 on Spoos was always way too high for a Fed merely engaged in some yield curve wonkery with no real effect on the money supply.

The bunker looks nice and warm at this point as european policy makers can only disappoint and apart from them, well ... there is a long time to the next FOMC.


Leftback said...

Spoos were overdue for a sell-off. Happy to not be involved at all in the US equity market, other than a painful setback in energy and gold miners. But there's the rub, because even after the June FOMC, the "QE3/reflation trade" is always out there, just one more Fed meeting away.

It will be especially interesting to see the European markets tomorrow, especially Spain and Italy, where bond yields seem to be the most important indicator, and they seem to have moderated after yet another successfully non-apocalyptic auction.

Commodities are still the tail on the Chinese dog. Once that Chinese PMI printed, we were always going to see lower oil and copper prices. We will continue to watch Shanghai and Hang Seng price action, as an upturn off the bottom in those indices always seems to precede more positive action elsewhere.

Chinese inflation is falling fast now, and there is a real prospect of a relay race in aggressive monetary easing, beginning in Beijing and Tokyo, then passing the baton to Frankfurt before Bernanke runs the anchor leg in Washington.

Leftback said...

More details on China PMIs from the Pink Blog:

China PMIs

Anonymous said...

C says'
personally I am trying to tune out a lot of this political crap. My focus is energy/comms being depressed by whatever means takes your fancy. This should if it goes far enough give us the reset button to optimise the combination of central bank policy with consumer disposable income and broad sector input cost levels.
Put those 3 together and we might actually have something that doesn't need to turnaround based upon "prattle".

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