Markets hit the panic button

Oh dear.

Today's retail sales release has prompted a wave of ugly price action, as markets reach for the panic button that they haven't used since way back in...err.....October of last year.

Is the reaction justified?  Who's to say- people trade for a variety of reasons, since utility functions are not completely aligned across all segments of economic actors.   That, as they say, is what makes a market.

From Macro Man's perch, however, the uber-squeeze-du-jour in fixed income is reaching levels where it starts becoming very interesting indeed to take the other side.  To be sure, the December sales numbers were poor and disappointing, no matter how you slice them.  That having been said, disappointments of this nature are far from unprecedented, and indeed the underlying trend in core sales still appears to be on a reasonable track.   The chart below shows Macro Man's preferred method of tracking economic momentum, showing the 3m/3m annualized rate of change in headline and ex autos/gas sales.  As you can see, the headline figure has swung down to levels which are weak but seem to have happened every 10 months or so over the last few years.   The core figure, meanwhile, sits at 4.9%- above its average since the start of 2010.


Now clearly, a month or two more of poor numbers will make this chart look very different.   If and when that happens, Macro Man reserves the right to change his mind.  Until it does, however, your author will respect the vagaries and random nature of high frequency economic data and expect a mean reversion in months to come.   And that, ladies and gentlemen, means that today's squeeze-o-rama rally in rates is meant to be faded.   And so, after a month or so on the sidelines, Macro Man has done just that, taking the other side of his longstanding EDZ5 contract as it flirted with all-time contract highs at 99.35.

FX, meanwhile, is following Macro Man's roadmap almost to a T, with the dollar remaining firm against the euro while sagging badly against the yen.  The collapse in EUR/JPY already this year has been little short of astonishing; it's wiped out all of the the post-BOJ rally and a little more.



On an exclusive basis, Macro Man can reveal the contents of a recent meeting between the BOJ and ECB.  Pay particular attention to the second verse:



If USD/JPY were to break last month's panic lows  just above 115.50, things could get very ugly indeed.

As for stocks, Macro Man took the opportunity this morning (with the assistance of a kind reader who knows who he is) to refresh the medium-term equity model that he has run for the last seven years.  As long-time readers will recall, the model purports to forecast the total return of the SPX over the ensuing 12 months.   Although the exact number of the forecast is not expected to be exactly right, the shape of the forecast profile, particularly in relation to underlying volatility, is what is truly important.

As the chart below indicates, if anything the underlying story for stocks has improved over the last few months.  Certainly fixed income is giving little competition- the dividend yield of the SPX is now higher that on 10 year Treasuries!


Suffice to say that there appears little reason for equities to hit that panic button, at least based on the factors that this model captures (which have worked very well for your author over a long out-of-sample period.)

Whether weak sales and low oil is sufficient reason for rates and FX markets to do remains to be seen....but colour Macro Man sceptical at this juncture.




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Anonymous
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January 14, 2015 at 3:32 PM ×

Great post as usual. Just wanna add one point to retail sales: I am expecting that retail sales is to get another hit when tax season formally opens next week and people then know their post ACA tax liabilities for the first time.

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Anonymous
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January 14, 2015 at 4:12 PM ×

Im not so sure -guess hats what makes ma market. copper oil rates al looking at lower growth - sox earnings revisions are happening at a very fast clip + sentiment and positioning was very long to start year. even now, people are more safari dog missing bounce that a correction ( put call ratios low, vix call buying very muted)
looking for further downside to test oct lows in spy
european markets trading goo but might see post ecb

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Polemic
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January 14, 2015 at 6:25 PM ×

Agree MM.

though I think the rates part will be last to move. USD down, equities pause and EM bounce first.

he only thing not to crap out today was oil. Not what you d call a bounce though.

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Nico G
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January 14, 2015 at 6:33 PM ×

taking one step back here:

if 6 years is deemed ridiculously short how long is this bull leg actually expected to be

8 years
14 years total?

you could trade down to 1500 and still be in a bull market

folks who got long in the late stage of this rally need to really ponder their timeframe if they don't get out now, they could be stuck for two years you know, that famous short term January punt turned multi year 'investment'

my gut impression is that collapsing oil was the latest, providential argument for the sell side, to lure in the last wave of retail 'oh you know cheap oil is a game changer consumers will love it' when everyone should have been immensely cautious as wall street managed to squeeze another casino bonus for les cronies

spoos went up an Everest wall of worry throughout the muddle through of the economy and while oil stayed artificially pegged to $100 if anything, they will trade down when US economy finally 'got better' to make that ultimate point, in case folks still believes US stocks followed the economy

US stocks are just a bubble like anything else, $100 oil meant nothing unless everyone bought it, so is 2000 spoos just go with the flow and do not fight the lemmings on the way down not until 1700, but 1500 is best

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Nico G
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January 14, 2015 at 6:39 PM ×

PS: this is only one opinion of course, but i am worried to see so many seasoned traders being so bullish here from 36,000ft it feels too late

meanwhile in Europe the triple fail at 3150 is duly noted on stoxx. I am feeling very uneasy here, since market has decided that there would be QE

QE ain't that simple in Europe and it is terribly dangerous to think that markets would dictate anything to a mostly socialist mentality

good luck

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Macro Man
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January 14, 2015 at 7:02 PM ×

Nico, who here said anything as foolish as what the "appropriate" length of a bull market is?

More generally, out of curiosity, what do you think drives medium-term equity prices? Because you seem to anchor on exclusively bearish factors; while this may serve you well in Europe, I really wonder what you're hoping to accomplish by railing against Spooz.

From my perch, the factors I look at which have historically worked very well are all pointing to continued equity strength, at least in the US. While there are obviously other factors which can drive prices, particularly in the short run, I am comfortable looking at those that have worked so well for me in the past.

The fact is, there is a surplus of private sector savings in the US. It is not normally distributed; it is heavily skewed towards towards those most likely to purchase financial assets. The competition from fixed income, both govvys and credit, does not look particularly fierce at current pricing.

When the facts change, I'll change my mind- and I expect my model to capture that shift in the landscape. In the interim, I prefer to fade markets where there is a much more substantial valuation argument for going the other way. After all, they don;t give out extra basis points for degree of difficulty.

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Anonymous
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January 14, 2015 at 7:11 PM ×

The Fed's objective of killing the banks via ZIRP is bearing fruit...

https://research.stlouisfed.org/fred2/graph/?graph_id=215945

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Anonymous
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January 14, 2015 at 7:26 PM ×

Have a good laugh...Plosser Says Fed Can Use Excess Reserves to Achieve Inflation

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Leftback
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January 14, 2015 at 7:39 PM ×

Interesting post, MM. We are in broad agreement, and are even now busy gradually unloading large long UST positions that we have held since 2013.

Sentiment has swung quite quickly in rates, as a huge squeeze of the usual suspects has rudely introduced Mr Shorty to two weeks of extremely Cold Steel. As we all know, the mainstream financial media normally eschews any positive coverage of fixed income other than junk bonds, but on panic days, they often feature stories like this:

Time To Take Bonds Seriously?

The usual rule is that any such signs of interest at all in Treasuries by retail investors or mainstream media means SELL BONDS. Plenty of yield out there if punters are willing to dive in the dumpster a bit. The EM/UST compression trade looks good, and all kinds of European dividend payers are on sale.

Of course, we have to buy into the idea that Super Mario saves the world next week...

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Nico G
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January 14, 2015 at 7:39 PM ×

no more debating MM i promise i will stop railing against spoos. The very same situation happened in 2006/2007 on another (paying) website. The owner ended up kicking me out of the forum for being too 'bearish'.

He died of a heart attack in 2008. Most of my friends lost their job. Brutal corrections inflict so much pain you could never say 'i told you so'. i sincerely do not enjoy being a bear because you make money when others lose everything. But hell i also have to feed my family you cannot be too cute if you trade for a living.

You never mentioned the rally length, true that. Those things don't last forever. I am (very) proud to say i bought the spoos from january to march 2009, i vividly remember the Citigroup quarter being that 'spark' on price action that March, the turnaround that changed everything

i was a bull for a couple of years while price discovery was obvious, then like many others i missed the not so obvious part say, 1580-2090, i focused on Europe instead, and still do, Europe still responds to fear when Disneyspoo doesn't.

Sorry again for raising caution i do not trust this market, among so many factors i do not trust the multiple expansion mantra and the buyback bullshit and more especially the religious following of Fed that is now making islamism sound almost reasonable

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washedup
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January 14, 2015 at 7:47 PM ×

out of all long bond length and most commodity/energy shorts today - think bonds are overdone but don't think equities are done going down (not as bearish as Nico, just think 200 DMA ripe for the taking) - also feel bonds may resolve overbought condition through consolidation instead of a big correction, so bears may keep being frustrated.
Really like REITS here - tossed out with the bathwater for no reason last couple days.
And GDX, boy is it undervalued to Gold, trading like c@!p tho.

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Anonymous
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January 14, 2015 at 7:48 PM ×

I like your sell call in EDZ5. FYI..FUTURES: Block Trade B 37,163 EDZ5 Eurodollars at 99.36 08:20
Trade executed at 8:51am New York time. WTF! 37K? That's $929k a bps. No fun shopping for an offer on that size with market spiking higher. So far 99.3365 is the high of the day. Somebody got blowed up.

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washedup
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January 14, 2015 at 7:53 PM ×

anon - entire legions have blown up on bonds last few days - u don't go for 50 bps on the biggest consensus trade of 2014-15 without leaving a trail of blood and destruction.
Oh, and these things never do an A or a V - small short with tight stops would perhaps be advisable.

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Gnome of Zurich
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January 14, 2015 at 8:07 PM ×

People get things backwards. Copper and oil are the typical late cycle commodites that shoot up before a recession like in 2008, not down.

So what we have here IMHO is just another growth/deflation scare combined with a self induced glut in some commodities due to capex overspending like in the mid 1980s.

I remain heavily long the Euro PIGS but shy away from the U.S. market that has become everyones darling. I guess we will see more contagion due to the energy HY market going completly bust. It was a crazy capex bubble financed by debt, like telecoms before 2002. Some shockwaves will come, but they usually don't hit what is already down, shorted and unloved. The disconnect between the U.S. and the rest of the world and especially Europe seems as big as between EM and the U.S. in 2002.

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Macro Man
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January 14, 2015 at 8:10 PM ×

Nico, I certainly don't want to censor views of thoughtful contributors; however, I do feel free to challenge them on their views, just as I'd hope they challenge me on mine.

FWIW, my model recorded its record bearish reading when I ran it in the end of August 2008; you can be sure I was shorting stocks with both hands in the beginning of September of that month (having taken the summer off from selling stocks to go long TRY instead!)

Given that it's called both sharp bear and bull moves correctly, I am inclined to give it the benefit of the doubt, even when my own brain tends anchor on the bad news, like many macro guys I know...

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Anonymous
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January 14, 2015 at 8:24 PM ×

At some point you have to decide whether the Econ data is right, along with the front end and things are okay...witness claims, confidence, NFP, retails sales ex gas YoY non seasonal, or crude copper and the long bond are right in foreshadowing. I think the latter is wrong, commodities are getting whacked on long liquidation and CTAs whacking them, which is exacerbating a logical response in the back of the WTI crude to cartel break ups, which may not even happen. I'm an equity risk premium guy, with long rates as they are and the Econ growing, it's hard to not be long stocks. Margins getting hit on wages a wrinkle, not enough to derail. So for me long with cheap hedges for shallow correction you can hold, and short the front end. Within FX, using grinding trades where possible to position, high leverage to smallish moves. Equity risk premium also very wide in Europe. Wondering if Hollande can turn round the CAC over medium term with reform. Wondering why the rates dropping isn't floating through into more EM strength in FX and equity. Still think they hike in the summer...rates futures are a long way behind that...ffq5.

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hipper
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January 14, 2015 at 8:55 PM ×

Looking to dip a toe in EMLC or EMB here.

Just still not sure whether want to play the EM FX mean reversion theory, to which the former would offer exposure and does pay a little bit better yield in the process. The latter is totally USD denominated but has small exposure to Venezuela.

Disclaimer: not in any way connected to these fund providers and not trying to practice marketeering

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Polemic
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January 14, 2015 at 9:21 PM ×

But as MM says. 10yr bond yield now sub SPX. Ok earnings expectations falling but even so I cannot forget a basic that, as with Europe where lots of the Bunds are 0 yield, any stock with any dividend can price to infinity and still yield more. 1/0 and all that.

And Like other here I am shying from US preferring EM and EU

Pol

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Anonymous
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January 14, 2015 at 9:34 PM ×

I believed Nico's comment is valuable when it comes to prevent complacency taking roots in my mind. I was pretty bearish in 2013 and was far behind the spooz. I had a better year in 2014 by following the BTFD rule. Is 2015 going to be the year that the BTFD rule no longer works?

I am now repeating the strategy I used in 2014 because it simply worked. But it is the late stage of the bull run and complacency is the worst enemy here.

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Anonymous
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January 14, 2015 at 9:44 PM ×

Credit Suisse down 10 percent YTD

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January 14, 2015 at 10:33 PM ×

QE has killed the velocity of money and has deflationist effects... add to this that QE kills NII of banks flattening curves and stripping ROI... QE in CBs minds works because it steeps yield curves reviving BE expectations... BUT now mkts had noticed that CBs can't control inflation... they've lost credibility on that...and yield grabbing is doing the rest...
Job vacancies in US are at record high since 2009 and 30yr at record low... no comment!
Agree with MM and Polemic about div yield vs govies yield BUT please don't forget that divs are a promise and you need profit to pay them at the same rate.... Santander & co teach us something...

credit is the breaking point for equities... if this price damage kill some corp names equities will realize that easy money is a dream. Back to reality will be realized not only on obvious name/sector but from Biotech/internet/app world priced to fantasy..

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abee crombie
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January 14, 2015 at 11:01 PM ×

This is a buy and hold market equity bull market in US Equities. Macro and sector guys are getting killed trying to figure out what is going on, when really no one knows for sure, as there are too many moving pieces. But I think if you look back in say 5 years, you will do just fine with buy and hold instead of trying to time all the nuances.

However given that, everyone tries to be cheeky and pick their spots. 2013 was a the year of growth, 2014 was defensives/ yield. What will 2015 be, I hear some say no fed tightening, others saying its all just positioning, honestly i have no idea anymore. EDZ5 looks good from risk reward but not bc I am confident in a view.

Oil, now copper, Yen, EM FX, High yield spreads. Way too many moving storm clouds to go all in now. This is a market for short term traders and systems guys, thats all.

But if you find a good company selling off in the next few months bc of macro reasons, I think it will be a good time to buy and hold

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abee crombie
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January 14, 2015 at 11:05 PM ×

btw, I am very bearish now, mostly due to price action, but i dont think we are going to have another 2008. A 20% correction would be a great LT buying opportunity and would re-set expectations.

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Polemic
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January 14, 2015 at 11:33 PM ×

I find it hard to be monstrously bullish or bearish long term and think 2015 is going to be the year of the whip. The plan is to trade against my decibel meter. Hence now buying all the sold trades of the past 6 weeks.

There is no point in pretending any trade is a locked down 2015 all year special. Agility and a nose for what will trigger the other players around the table to act turn this into one of those kids card games where cards are switched at high speed until you hopefully get a set. I'm bloody useless at that game by the way and just watch on in bemusement through the chaos until one of the kids shoats they've won.. and I haven't.


To that end I picked up some more of the oil card set today (again). Hope I'm not holding jokers. .

And talking of oil.. nice option expiry move there.. perhaps mr regulator could stop bleaching the bones of fx and have a looksee at other mkts option expiries??

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Leftback
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January 15, 2015 at 12:35 AM ×

In agreement with Pol, and Gnome of Zurich. This is a fairly serious deflation scare (driven by the very one-sided trade in USD), but yield imbalances are now extreme and will start to drive capital out of overpriced bond markets and into higher yielding equities, which are mainly in Europe and EMs at present. My guess is that in the bounces and squeezes of a whippy 2015 the US market will under-perform as USD backs off.

I don't see any good reason for the sell off in mREITs since early December, and clearly rates don't have anything to do with it. The best I can come up with is someone who owns REITs (e.g. Hedge funds?) might also own something that is going down (oil futures) and has to sell something to raise cash because of leverage?. One other thing is fear or expectation of dividend cuts. ARR had a cut from 5c to 4c/month, perhaps they expect the same from the big players like NLY and AGNC.

My usual yardstick on this is the institutional money that owns the big REIT preferreds, and they have done nothing at all.

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Nico G
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January 15, 2015 at 4:13 AM ×

dunno how many of you trade for shops vs. trade PA but lone punters do have an advantage this year... since nothing is exactly a screaming buy and they can stay in cash

my buddies in funds are really have a hard time doing 'something' to justify their fees these days when they want to wait and see, and certainly not be forced to buy Europe because you know, Europe has been underperfoming so much it only has to catch up blablablah

sometimes everything falls and the markets who were underperforming, or already in bear mode (Eurostoxx) well, just fall some more

have you read about the first layoff from an oil company today

nice posts nice discussion much better than the previous, Taylor made

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Mr. T
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January 15, 2015 at 4:49 AM ×

I'm not sure div yield of equities compared to fixed income really means anything. There are so many factors that go into capital flows for companies that to take one of the output streams and from that infer a price seems too convoluted. EV/FCF or EV/OCF, sure. But yield? If company A is not buying back stock and has a clean balance sheet and is paying out 5% of FCF for a 2% yield, and company B is using 200% of their FCF and stretching their balance sheet to buy back stock and pay a div of 3%, does that make company B's stock somehow "cheaper" than A? Maybe this is where I see the blurred lines between macro and everything else, but you gotta go deeper. I think I understand the argument that in a yield starved world people are intentionally looking the other way and buying the yield, but that's not the same as someone saying "stocks are undervalued by 20% relative to bonds".

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Anonymous
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January 15, 2015 at 6:10 AM ×

If yields are in fact to back up and the relative value argument of 10's vs the yield on the S&P is to hold, then that (in isolation) argues for lower equities for me near term.

The very high level of correlation in Eurostoxx indicated a real degree of distress in that market IMO

The correlation of Tsys and SPX ....not sure what that is saying ?

Some dollar weakness here could see the shiny stuff rip tho that 200 DMA has been stiff overhead resistance.

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Nico G
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January 15, 2015 at 7:53 AM ×

if anyone is in the mood for one funky trade

short Eurostoxx long FTSE mib

if Draghi ever accepts to become the new Italian president like so many beg him to,

you could have a massacre on European equities minus Italy where people would probably go crazy long on what the Draghi-Renzi pair could achieve

strizzata d'occhio

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January 15, 2015 at 8:55 AM ×

Nico... ok you're understimating italians intelligence... Also our politics undestand that draghi At ecb is The only One To Save us From default!

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Nico G
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January 15, 2015 at 9:06 AM ×

to be fair Draghi would be more useful to Italy than in Europe battling 27 cultures...

Draghi/Renzi would be quite a duo of formidable intelligence

forza Italia

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January 15, 2015 at 9:12 AM ×

No Way. ..what can do draghi in Italy actually? Be tanned?

Next president in Italy Will have only a duty. ..don't let People vote And mantain status quo...

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Polemic
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January 15, 2015 at 9:16 AM ×

Perhaps MM should put together some country dream teams together.

perhaps central banks should be like football and have an official transfer window when countries bid for governors. ..

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Nico G
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January 15, 2015 at 10:01 AM ×

uh oh Switzerland totally pooped the party India started overnight

great market great volatility - for the scalpers among us

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Anonymous
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January 15, 2015 at 10:07 AM ×

My bbg shows SWISS 10yr debt tightening two bps, surely locals should expect a world of deflation now, even better buy to them? or now keen to diversify into other currencies?

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