It's all going a bit Europe again, even to the extent that China has borrowed a leaf from the European lesson book and pushed back schedules for important announcements. Namely a new leadership. The announcement is interestingly now after that of the US. Could they really have two sets ready and prepared depending on US outcome? Nah of course not, though "Here's one I prepared earlier" would be amusing they appear to be struggling to produce just one fully baked item.
But back to Europe - Hollande's new income tax schedule has done its bit for London property prices. They are going to have to extend South Kensington all the way to Croydon to cope with the influx from France.
Spanish RPI - How much? We wondered if the high RPI was due to Greek Economics (if your sales halve you need to double prices to stand still), but it's probably just their VAT hike feeding through.
Spanish rumours appear to have done a whole economic cycle in one afternoon. Bank report will be rubbish SELL SELL ! But that means they will go for a bail out BUY BUY! But then they'll have more austerity SELL SELL! But austerity will reduce government borrowing BUY BUY ! But also reduce tax revenue SELL SELL! Oh look its 3pm SIESTA SIESTA. And finally . "Quick Juan, we cannot make el numero look like we have cooked ze booooks to match the ahhem "expected" 60bio, make it look "real"", "Hokay, Hokay.. How is 59.3bio?", "Ha! Brilliant! Envoke spurious accuracy and add some decimals! They will never guess it is not real!" Right oh, at this point TMM will rehash an old joke and ask "Is it true that Jim Kerr, leader of the Simple Minds, was originally christened "Juan" and works for the Oliver Wyman Group where he got the idea for the name of his band?"
Month end - Can you hear us above the noise? You can? Well turn it up to Quarter End too then and then try picking out the signal from the noise.
We tend to believe that there really is a general ongoing sea change since QE, but our concerns expressed last week were first, there was too much confidence priced in for Spain and the process for it to reach a more stable outcome. Yes, tail risk has been sliced off by Dr. Aghi , but there is still plenty of rattle room for stress in the rest of the probability bell. Second, everyone had too swiftly piled into the inflation trade. But in the last week we have had brick chucking in Madrid and Athens to refocus the mind and we have had a raft of US data culminating in todays sub 50 Chicago PMI reminding all that inflation may be a little further down the line than spiv-monkeys can hold on to their positions for. We happily got out of Euro and equity index stuff last week and have been using today to take profit on some speculative short term shorts as well. However, we are in a few minds as to how to play this dip from here.
So when is a dip just a dip and when is it a limb shearing Japanese sushi filleting knife in a Doppler shifting descent? Well its normally the latter just after we buy it, that's when.
Plan a) The "It's just a natural shallow dip" - Brick chucking really hasn't done that much to dent price action in Europe and under the old rules, we would all be a dither about Spain and yelling that we are all doomed. Is this a sign that people haven't woken up to the doom and so we have further to fall? Or that it is well known and price has that imbedded and so it is actually all rather supportive? Plan a) relies on the latter. We think that short term has been flushed out on this pull back and have also detected a turn in mood from the medium term players. The equity selling of today has been pretty well flagged as part of month trend reversals for month end portfolio rebalancings, however having price falls into the weekend leaves the press corps, lead by Ambrose Evans-Pritchard, free rein to go into knitting mode stitching all bad news stories to the falls as past, present and future justifications. This should leave the market nicely spooked for Monday and we have a classic Monday sell-off followed by a "buy back Tuesday". As it happens Tuesday is lining up nicely for a load of soothsayer buy signals in risk in general. So Plan (a) is to buy risk things on Tuesday.
Plan b) "It's a bigger dip". We are being infected by the same nerves that are making sentiment swing negative elsewhere re our original premise last week that too much is priced in. There are some key worries that the core and periphery think they have agreed to different things when it comes to soveriegn / bank feedback loop and though this subject has been discussed over the past few weeks it doesn't feel like the market is pricing as if they know that Spain and Ireland are still on the hook for their own banks. We also see some other risk indicators rolling over. Hmmm
Plan c) "Lets get sectoral" - High Yield vs Equities, High yield has a high yield for a reason and don't you forget it. We prefer Equities over High Yield. Europe vs the rest of risk. If we are looking for a general swing higher in risk as post QE trends resume (having washed out the short term and confused the medium term) then perhaps we should hedge out our europen concerns against long risk. Short Eur/Aud again? Or more generally hedge out explosion risk against long term trend grinds. VIX is still ticking along in "not much concern" land and is cheap (though we hate the term) as a cover trade. We have been looking at playing the Vix curve too. Maybe more on that soon.
Which one to follow? We will start with plan (a) but hold an option to go plan b) if there is horrendous news on Monday. Plan (c) will be implemented if things are calm enough for us to do some finessing.
Team Macro Man wish you a very welcome 2 day break.