A spectre of short covering

Has the time arrived for the long-awaited post-election correction?  It's starting to look that way.   Yesterday's US data was solid, to say the least, with the consumer confidence figure a) rising to the highest level since before the financial crisis and b) confounding the reaction of urban intellectuals, for whom confidence is pretty clearly not at a high.  Or perhaps the Conference Board surveyed a panel exclusively comprised of macro traders this month?

Either way, the failure of either the dollar or fixed income to build on the recent trend despite data that pointed that way is certainly suggestive that a dip in the buck and/or yields may be in the offing.   Of course, today is month end, and while Macro Man's study earlier in the week did not suggesting that buying fixed income on rebalancing flows was a lay-up, that's not to say that there's no chance of short-covering, be they pension led or otherwise.

FX rebalancing models have a somewhat better track record, and there too the signal clearly points in the direction of a reversal to the recent trend.   You know the spec market is short euros, and published models suggest a strong EUR buy flow into today's fixing.  Given that last December proved to be a rude awakening for consensus euro shorts, what odds a little more short-covering today (if only to re-sell post fix?)

At the same time, one does wonder if the Italian referendum is something like 110% in the price.  Perhaps it's complacency, but there doesn't seem to be anyone out there who expects anything other than a No vote.  Maybe it will be a shame to lose Renzi, but a political shambles in Italy isn't exactly a new development.   In any case, BTPs finally put in a decent day yesterday for the first time in ages.

Perhaps this was just Bund/BTP spreaders ringing the register?  After all, Bunds were down on the day, and the spread really just looks like the above chart, inverted.

European fixed income remains a source of fascination, generally.   As observed last week, short end swap spreads in Europe have been widening steadily for months.

Now to some extent this may reflect a shortage of collateral in the system courtesy of ECB purchases.   If so, however, why are 2y spreads at their wides of the year, but 10y spreads nowhere near?   Does the street only want to borrow Schatz?


While some of the widening at the short end may reflect a "euro breakup" premium, it's worth noting that spreads have also been widening steadily in France as well, albeit with a hiccup after the US elections raised the spectre of Le Pen in some punters' minds.


Presumably the ECB is monitoring all of this.  If they take the view that it represents distortions caused by too much buying then the market, much like last December, may be in for a rude awakening when policy is announced.  This time around, the market will have no one but themselves to blame.
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Anonymous
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November 30, 2016 at 9:13 AM ×

Re Euro swap spreads. The latest move accelerated 17/11 - it just so happens the day before European MMR was green lighted. While execution and timeline still have to be clarified q4 2018, q1 2019 are right where it should kick in. DUZ6 ASW is a conveneint maturity. Surprised how little airtime EUR MMR is getting after all the broo-haha over the US version this year which probably had a 15/20bp effect on rising libor into Oct 14th

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Nico G
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November 30, 2016 at 9:28 AM ×

http://www.salientpartners.com/epsilon-theory/american-hustle/

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checkmate
admin
November 30, 2016 at 11:21 AM ×

I enjoyed the link Nico. He as some interesting ideas and I certainly agree with his views on the expectations in markets vis a vis the eventual realities of policy impact. One to fight at your peril.
Meanwhile , I am finding amusement watching Carney and Draghi swap verbal 'punches' on the EU/UK negotiations. Does anyone still believe that central bankers are apolitical ? I think they should go policy duels at dusk and let the one who can still pronounce 'ineffectual' be the winner.

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Anonymous
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November 30, 2016 at 2:27 PM ×

RIP TLT

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Anonymous
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November 30, 2016 at 3:09 PM ×

https://www.bloomberg.com/news/articles/2016-11-29/bullish-druckenmiller-sees-growth-boosting-dollar-yields-to-6

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Whammer
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November 30, 2016 at 3:54 PM ×

Good stuff there Nico. "If you don’t want barking, don’t get a Sheltie." ;-)

- Whammer

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AB
admin
November 30, 2016 at 3:55 PM ×

The reference to 6% yields was removed from Bloomberg's Drunkenmiller story. I thought the man had gone nutty for a moment.

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Anonymous
admin
November 30, 2016 at 3:57 PM ×

Never thought I would see the day when the Irish MEP Luke Flanagan asked Mario Draghi directly, and in Parliament, a question.

Flanagan :

“In 2007 you were governor of Banca d’Italia…Unicredti the biggest bank on your watch: Can you please confirm whether you were informed by the Central Bank of Ireland of the multi-billion Euro breaches at UniCredit Dublin? If so, can you explain why the bank has never been sanctioned for those breaches of 2007.”

The exchange:

https://m.facebook.com/story.php?story_fbid=1162932557117392&id=182354901841834

The whole sordid Irish banking debacle now published as a book:

https://www.smashwords.com/books/view/685170

Looks like Trump picked another Goldman alumnus as Treasury Secretary.


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checkmate
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November 30, 2016 at 4:00 PM ×

As far as buying a correction for the US bonds market goes then today looks important. That EOD needs to turn around the early action and finish weaker. If it can do that it should encourage those in to increase their position. If it finishes the other way then going forward looks like a setup for covering action.

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Mr. T
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November 30, 2016 at 4:13 PM ×

Mnuchin: "We're going to cut corporate taxes, which will bring huge amounts of jobs back to the United States.".

Am I the only one out there that does not see the connection? Profit margins (operating & net) have been as high as they have ever been, for quite a while. Are we now supposed to believe that the net (post-tax) margins were just not high enough to stimulate more growth & hiring?

The immediate impacts of lowering tax rate would be (in order)
a) the street moving from EV/EBITDA to EV/OCF
b) more FCF to fund buybacks & M&A
c) new projects?

If anything, the tax holiday is giving the message to the stubborn toddler that if you hold your breath long enough, we will buy you dessert.

Funny though, GS seems to be doing quite well.

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Justabeancounter
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November 30, 2016 at 4:26 PM ×

Great article.

the tldr: JBTFD

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washedup
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November 30, 2016 at 5:38 PM ×

T - GS insiders have been unloading like crazy into this spike, but that may or may nor mean anything.
I agree with the change of benchmark metrics to cash flow based.
Its really all a red herring ultimately - there are two things through my life in the most painful way possible.

1. The economy has its own dynamics and the impact of policy (even monetary policy, actually) is quite overstated. Things like household formation and the consumer leveraging cycle are way more powerful than say dodd frank, and that works both ways.
2. There has never been a major stimulus passed (control of both houses or not) without politicians being hit in the face with a frying pan first. There are more cats to herd than seems obvious.

Add to this 3 observations about the world we may be entering into for the next 18-24 months - namely a world in which.

1. Rates disconnect from inflation expectations in messy ways
2. Inflation disconnects from economic growth in messy ways
3. Assets disconnect from economic growth in messy ways

Unless you are a fan of disco, you probably weren't born the last time these things were true.

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Nico G
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November 30, 2016 at 5:46 PM ×

my nephews love disco

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abee crombie
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November 30, 2016 at 7:25 PM ×

I wonder if oil is gonna make a new high, > 53... oil equities sure are loving it.

Just looking at the charts in US equities, we do look pretty good. Probably means we grind higher in December

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Leftback
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November 30, 2016 at 8:46 PM ×

The DX failed to make a new high today despite the red-hot employment data, which may indicate some dollar fatigue. It will be interesting to keep half an eye on gold and the GDX, which didn't make a new low today.

TLT also failed to make a new low. Earlier in the day, LB looked at some munis and they were trading well, which was perhaps an indicator of what was to follow in the Treasury market. IQI is actually up on the day, and there has been a strong bounce in the Long Bond (up more than 1% from the low), possibly on the beginning of short covering by Treasury bears after a failure to make a new high in yields today. The long and grinding road to a bottom in US fixed income continues, apparently.

It strains credulity to think that the BLS can find enough hot sauce in the pantry to spice up NFP and top today's ADP fantasy number, so we are probably looking at meat loaf for breakfast on Friday when we convene for NFP bingo, and perhaps the first large volume buying day in US Treasurys for some time. But before that happens, we get an ISM number tomorrow.

Two things are not going to happen next week when the ECB meets. First, Super Mario is not going to announce a new and more massive bazooka, because he doesn't have to, the € has fallen to the 1,05 area and that will do for now, and nobody needs to send Bucky into Outer Space here. Second, he is not going to announce a cessation of bond buying as some media half-wits have suggested, b/c he doesn't have to, and nobody needs yields of BTPs, OATs, bunds, gilts and/or Treasurys to go zooming into Outer Space. All things considered, the likelihood of EURUSD weakening further seems slim.

Oil traders who were short into today's OPEC shenanigans are apparently suicidal, but now that they have all been cleaned out, the crude market still has to cope with a spot price of near $50 in the face of a continuing glut of supply that is going to be around a long time, so we think it will be worthwhile to consider fading the late arriving crowd before long.

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Whammer
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December 1, 2016 at 12:36 AM ×

The dollar strength is causing some trouble in my little corner of the world, where we do global pricing in dollars. The international customers are getting restless....

- Whammer

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washedup
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December 1, 2016 at 3:19 AM ×

Whammer - care to elaborate? Not surprised by it just trying to get some sense of how representative this 'trouble' may be.
Booger you around? Haven't seen u on the board in a while curious what your thoughts on bucky are.

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Whammer
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December 1, 2016 at 5:44 PM ×

Washedup -- it is a little hard to tell, still, some of it might be the usual "customers bitch about pricing" in a new wrapper.

I'm in the tech maintenance business, we sell support contracts that renew yearly. Those are priced in dollars. So last year's support is now more expensive in a local currency, and the pushback is beginning. Our costs are primarily in dollars, so it's not like we have room to negotiate.

- Whammer

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