More Central Banker Brass Balls

It's interesting that the BoJ , ECB and now Fed policy adjustments are following similar patterns.

BoJ - We had the first mad rush after the first messages of policy change which pushed USD/JPY to 103 and the Nikkei to 16k. Then a couple of months later came an element of doubt as to the speeed or commitment to change and we saw a wash out. Then confidence returned and jpy renewed its general weakening.

ECB - Easing was on the cards until Draghi was "accidently" hawkish at the beginning of June seeing a  move driving euro higher until he came back in July with an overtly dovish statement with forward guidance as a strong affirmation.

US - Tapering has been on the cards for a while with the market spending the last couple of months adjusting to it. But then last night Bernanke and the minutes introduced the element of doubt into the timing. The response has been everything you would expect on throwing a hand grenade into a crowded room. It was definately a crowded room but was it really a hand grenade? The tapering trade is still in play, its just a matter of timing and the economy. As TMM have said many times, the central bankers are not going to undo any boost in confidence they have already achieved by choking off liquidity too early.  All that happened last night is that Ben gave guidance that the US10yr at 2.80% is too high after previously suggesting that 2.10% is too low. To that extent we expect him to sound hawkish or dovish at either extreme to maintain a range.

If we were to have learned from the ECB and BoJ and the oscillation of expectation around reality then the Bernanke event should not really have been a huge surprise. What was more of a surprise was just how fast market pricing in FX swung to "no tapering". There is blood down "Change Alley" this morning. But the one common theme of all these central bank steerings is the play in the market. On announcement short and medium and long term players all get on board. A full bus. Then comes the element of doubt and the short players are stopped out, the middle term are dubious leaving the long term better levels to get in on the big trade. This leaves the short term players behind and once again running after it. Basically, a positional wash of shorter term positions as "5 minute macro "get taken out of the 3 year macro trade. Don't you love enforced trading discipline?

With that in mind TMM fade the usd drop.

Back to the ECB. After the dovish Draghi was backed by the introduction of forward guidance suggesting no rate rises for a good while yet it looked finally as though we knew where we stood and we were going to have a July free of European issues . But then, in true "European Unity" style, Darth Weidmann came out with this

ECB WEIDMANN: FWD GUIDANCE WON'T STOP RTE HIKE IF INFL PRESSURES.

And with that the European wallpaper splits open again revealing thee huge cracks beneath. What is the point of issuing forward guidance that effectively says  "We won't raise rates" if then one of the schizophrenic voices in your head says "unless we do". They are still not speaking with one voice. The ECB cannot function as a single entity when the Bundeathstar constantly decides to go native - it needs to be castrated. We have suggested in the past that as a quid pro quo for the French signing up to fiscal rules should be that the Germans agree that the National Central Banks become mere branches of the ECB ie no longer have national ownership. That is one way to give the Bundethstar "the snip" it needs.

What do we do from here? As hinted at in yesterdays quiz, TMM were looking to lighten up their loads in equities having worn the dip and doffed their cap to Mr Bradleys Siderograph (which, however nutty, nailed the turn in equities and the USD). We have lightened more on this spike this morning. As for new trades we are buying USD/JPY again. looking for 103. It's Abe's turn to "do what's right".

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abee crombie
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July 11, 2013 at 1:35 PM ×

it seems like the beard wanted to remind the markets of tapering in May/June to discourage the "leverage risk trades" though I am not sure exactly what they are (HY and IG spreads are tight but not pre2007 yet)

Anyways he proceeded to melt EM, FX and all thing rates related. But he didnt want long rates to jump by "that much" as TMM commented, and the beard stressed last night that if financial conditions are too tight they can readjust.

But the cat is out of the bag. Tapering will occur at somepoint soon. The question is, where should the 10year be when that happens? 3, 3.5% 4%? I dunno but while the FX market has rallied hard on this, Mr ZB (30yr) aint buying it. The beard is either really optimistic about US housing and growth or he is f-ed , IMO, and any further long end rate increases will start to hurt housing noticeably

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Anonymous
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July 11, 2013 at 3:29 PM ×

C says
There is an inherent conflict in what Bernanke says's and does.
Much was made of him (and Carney to come) talking more, becoming more transparent, giving guidance etc.
The problem is if you actually do that ,and it really works then what get is an increasingly crowded trade that at some point becomes badly illiquid.
Now you can say you are going to do that ,but really it is clear that Bagehot is still the flavour of the day. That at some point you are going to want to unsettle markets before they become uncomfortably crowded.
I think he isn't doing too badly at it so far.

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Leftback
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July 11, 2013 at 3:31 PM ×

The long bond auction at 1pm will tell us a lot, and don't rule out a further move lower in 30y yields once that is behind us.

The beard realizes that if the 10y gets to 3 or 3.5% then he is f-ed, which is why it won't. As for US housing, the recovery was a mirage anyway, and that will be toast for the rest of the year now.

Looking for a good old-fashioned risk off trade later this year, with good news being good (for earnings) bad news now being bad (for earnings), and equities and bonds returning to their usual inverse relationship, replacing the FOMC QE poker game of "assets up, dollar down" or "assets down, dollar up".

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Leftback
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July 11, 2013 at 4:15 PM ×

Punters fancying some REITs today. AGNC up 5%, MTGE up 5%, the MORT ETF up 3%. Our cheeky longs from yesterday looking good here.

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Leftback
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July 11, 2013 at 4:32 PM ×

Magazine cover announces Death of Hedge Funds. As this is an excellent contrarian indicator, does this mean that HFs will outperform Mutual Funds in the 2nd half? - and by a considerable margin, after the happy-clappy rally concludes? We think so.

Death of Hedge Funds

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Anonymous
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July 11, 2013 at 5:45 PM ×

LB are you swing short XHB here or are their specific names (PHM?) you're targeting?

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abee crombie
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July 11, 2013 at 5:53 PM ×

Interesting C. You are right regarding the paradox of "open communication"

From my little CB watching of Carney and his predecessor, David Dodge, I think the markets will be surprised how quickly he changes communication as well.

But I am still trying to figure out what markets the beard was trying to talk down. 30yr rates? leveraged MBS? FX, HY. Maybe I am blind but spreads look reasonable given corporate b/s. Rates were too low, but that is good for housing. EM Bonds, FX, why should the Fed care? Maybe the beard should just tell us what the yield curve should be and save the markets the trouble

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Leftback
admin
July 11, 2013 at 5:59 PM ×

Not touching any shorts just yet. Just watching the XHB retrace for the time being. XHB 32 would invalidate the current bearish chart read.

It's interesting that the price action in WFC looks bearish. Huge mortgage portfolio there.

Housing Market Index next Tuesday, housing starts on Wednesday next week, New Home Sales 7/24. Hold your fire....

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Leftback
admin
July 11, 2013 at 6:05 PM ×

It's possible The Beard was simply taking a trial run to see how markets would react, and also to see what kind of leveraged nonsense was going on out there. The Taper Caper certainly didn't succeed in targeting any one speculative bubble or asset class.

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Leftback
admin
July 11, 2013 at 7:55 PM ×

REIT stocks melting up today. Just wait until longer term Treasuries and MBS catch a bid. Double bottom possibly in place now for MBB and TLT.

This "pulled feral hog sandwich" isn't half bad.

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abee crombie
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July 11, 2013 at 9:06 PM ×

Well the beard certainly did add fuel to the flaming EM trade. I would argue forcing up rates in Brazil, Indonesia and others. The lagged effect will be to lower growth there and leave them with Stagflation. Brazil especially.The beard would not want to be in Tombini's shoes.

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Leftback
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July 11, 2013 at 9:20 PM ×

Good day's punting over here (haven't said that in a while). Took profits of course, as one does. Everyone hates Brazil. Nobody left to sell?

It will be interesting to watch the bond market this week and next, as punters ponder whether the US economy and jobs market is really going to be as p*ss weak as Bernanke might have been implying yesterday evening. Anyone banking on a big jobs number in the first week of August is smoking some good weed.

Very curious about a few of the European earnings reports ahead. Suspect some of them will be decidedly non-apocalyptic.

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Anonymous
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July 12, 2013 at 12:20 PM ×

Basic metal miners (RIO, VALE, BHP) also had a very happy day, though they seem to have already been on the wrong side of tapering talk and China sustainable growth (slowdown) plan and bared the brunt of all the kicking this year.

EUR/USD was at 1.275 just a while ago, then jumped above 1.31 and now it looks like its wanting to fall again. Generally metals and oil wouldn't like if it resumes this course and probably US equities too.

Perhaps selling some modest ITM calls for Spoos longs a decent idea... what will earnings do? If we believe the long term trend the TTM growth might be turning negative.

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