G7 Cold War. No clear sign.


First some house keeping. EUR/GBP closed favourably but we weren't nimble enough when it dipped in eur/jpy and had to take a hit. And once again we will hit ourselves over the head with the wooden plaque on our desks engraved with the words "JPY will remain difficult  DO NOT TOUCH". Serves us right.

If the markets are a marathon race and each asset class is a runner then it looks as though FX has made a break and taken the lead with other asset classes now following behind. We see equity indices back to trading via currency values rather than in lock step, FTSE and GBP/USD, Nikkei/ jpy ( obviously), SPX/USD and so on. Old fashioned stuff. Of course having FX back at the fore is great for FX traders, but only up to a point. We are worried that FX has spent so long following other markets it may have forgotten how to do its own navigation and is likely to get lost or at least confused as to which way to go.

The market response to the G7 statement yesterday was, to us,  a clear example of a market desperate for direction, looking for a sign and yet struggling to make its mind up as to what the sign said. TMM believe that expecting any clear statement from the G7 on any policy is foolish. TMM have lived through many G7 statement events and each time we have seen a market try and pick the bones out of a statement that, by its very nature, has to couch compromise and noncommittal flexibility within a wrapper of perceptual agreement.

"We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate."

Which as a sign of direction to the FX markets is as good as this




But the point we note is that "remain oriented towards meeting our respective domestic objectives using domestic instruments" does not preclude manipulation of FX as, apart from direct intervention, the tools currently being employed to manipulate FX are those very "domestic instruments". So in a way they are saying they will not directly intervene (will let the markets set the level), but they will all individually be pulling the relevant domestic levers to make the market move the way they want. In other words the FX wars are going to be fought like the Cold War. No nukes, lots of public smiles but a lot dirt, manipulation and the odd assassination behind the scenes.

This morning's statement from Mervyn King backs this up as it is clear he is going "George Smiley" on us.

Where does that leave us? Well we wonder how long the equity market will let the fickle and dithery FX market lead the way and, having got bored of waiting for something clear cut, will continue on their own path. Having had a couple of weeks of range without the correction that we were worried about we are now to get back on the train we got off. But with a US holiday ahead we will probably wait and give ourselves a couple more days.
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Anonymous
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February 13, 2013 at 2:22 PM ×

"Structurally long equities, hedged with structural commodity shorts."

http://markdow.tumblr.com/day/2013/02/13

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Leftback
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February 13, 2013 at 6:57 PM ×

Gasoline price rising again for Joe Sixpack. The threshold for consumer slowdown used to be $3.80-4.00 but that was before the payroll tax change. That range may be lower now.

US Gas Prices Rising

Consider the fact that Josephine Sixpack charged Christmas on the credit card, and you can see that the "gas tax" added to the payroll tax increase is probably going to limit consumer largesse in the US this winter.

Of course it's not really a problem b/c of all the great stocks that the Sixpacks own*, they can always sell some of their shares of LNKD and PHM to buy gas, and then they can "like" the market on their FB page.

Brent rising in tandem with $gaso is also a flashing red light for European economies, many of which are already under serious duress.

Demand destruction dead ahead? We think so.

* Irony.

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Anonymous
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February 14, 2013 at 11:20 AM ×

C Says'
Moneyflow.Don't like being a seller when it's expected to be flowing against me.Likewise earnings data.So for me to get interested in seeling the so called great rotation I wanted to run into the middle of the month and option expiry picking a time that has been more user friendly in the past.It probably won't hinder to have some Euro elections in front and the US sequestration crap.
Macro though credit spreads and utilities have been a good guide to topping signal for greater fool activity so watching them not for the dips and rallies ,but for a wider shaping of risk behaviour is on the list.
Loose monetary policy has worked well pushing people into risk.The question being though have we now seen the greater fools flushed in?
The next question is when does QE transmission no longer lead to a positive when fiscal policy goes contraction?
As for Europe still to early for buy and hold per se IMO. Profit taking is more likely to create worthwhile corrections (not dips) I would have thought.

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abee crombie
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February 14, 2013 at 1:25 PM ×

when all the macro crowd wants to get long equities I get a little nervous. Its a bigger market than most, and retail is still slow to buy in. Add in valuations that only seem good on a relative basis and I get a little worried.

We are on the 5th wave up here in the Spoo's. Can it go on longer, sure. But finding deals in this market is getting harder and paying 15x for a 5% nominal growth isnt my idea of a great investment

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Leftback
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February 14, 2013 at 4:46 PM ×

Whisper quiet trading the last few days. EURUSD has definitely turned south, and our beloved consensus risk barometer EURJPY may now be following suit. Lots and lots of JPY and Treasury shorts out there, so if a few people start to feel yennish it might upset the apple cart for a while.

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Leftback
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February 14, 2013 at 5:48 PM ×

Schatz at +18 today is already suggesting an ECB rate cut is in our future. 2y German yields may now be retracing a large move from -8 up to +30 bps. A 50% fib retracement of that would lead us down to that area of resistance around 9-12 bps.

Schatz 0.18

Cor, guv, that's serious macro, innit?

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Leftback
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February 14, 2013 at 7:36 PM ×

Andy Xie on the strong dollar that he forecasts for 2013, and its consequences. He sees DX breaking above 82 in a few months. The section in which he discusses the BRICs, EM dollar-denominated debt and EM central banks is especially worth reading.

Strong Dollar - Andy Xie

Note that he isn’t talking about a strong economy, or a strong recovery in the US. USD strength will result from the fact that USD will be among the less weak of world currencies this year as Europe and Japan are forced to easy money policies and the global slowdown retards the commodity currencies.

To use the Japanese analogy, in the decades after the real estate bubble, the yen didn't fall during the years that JGB yields sank into the 1-2% range at the long end, it got stronger. If the US follows this model to some extent, then we can expect low Treasury yields for years but the dollar will be relatively strong. Of course it follows from the inverse SPX/USD relationship that a stronger dollar is not bullish for US equities for the rest of the year.

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Anonymous
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February 15, 2013 at 7:20 PM ×

Yikes, nasty announcement by WMT. Bull market in something. What it is I have no idea.

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