Au revoir, Sarko

The electoral surprises keep on coming, as Francois Fillon won the first round of the French LR primary by a commanding margin, thereby relegating the political career of a certain N. Sarkozy to the historical dustbin.  Although Fillon had seen his support improve in recent days, the margin of his lead over Messrs. Juppe and Sarkozy was certainly a surprise.

Against Marine Le Pen he rates roughly the same as his competitor Alain Juppe: that is to say, polls suggest that he would get roughly 2/3 of the vote.   While polls have of course been famously incorrect this year, the miss has been nothing like the margin of the lead that Messrs. Fillon and Juppe appear to have over Le Pen.   Sarko is a somewhat different matter, so his exit stage right does, in some way, reduce the risk of a third electoral shocker.

In other European political news, the "revelation" that Angela Merkel will seek a fourth term in office will be cause for celebration on the streets of Athens...or B.   In any case, in the near term it is Italy that will be the political focus for the euro, and relative policy settings even more so.   EUR/USD extended its down streak once again on Friday; while the narrative certainly supports a parity party at some point in the not too distant future, one would have to think that with Thanksgiving this week there will be some short covering over the next couple of days.

How deep any correction will be should provide some guidance as to what kind of legs the Trumpflation love fest will have.
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Nico G
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November 21, 2016 at 8:33 AM ×

fully 160 lots short as of this morning - what an exciting year

the only new idea Sarko had during his brief 2016 campaign was to double the french fries serving to all muslim kids at school who would refuse to eat ham. What a visionary, what a legend. Bon d├ębarras.

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Anonymous
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November 21, 2016 at 8:49 AM ×

what are you short Nico ? Spooz ?

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Anonymous
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November 21, 2016 at 12:38 PM ×

Are bunds a sell here? I'm torn between all the euro issues and any eurozone issues leading to Bund buying. Thoughts? France a better short?

Surely higher rates and inflation in the US will be exported to some degree.

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Maverick
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November 21, 2016 at 1:58 PM ×

5y5y inflation fwd is 1.6% vs 1.2% in June, and had a jolt higher following the Trump win, and it was circa 1.7% when bond buying was announced. So the impact of higher inflation expectations in the US is being translated to the euro-zone, to some degree.

...but eurozone inflation remains woefully low, although on the rise from even lower levels.

On USD rally: I don't believe in this Trumpflation hype. The lack of policy is just creating a situation in which many market participants, fed up with the low growth world that we have become accustomed to, are pinning their bullish aspirations on a semi-blank canvas somewhere in cloud 9, where contradictory signals somehow will sort themselves out into a net win for the US economy. Whatever positives fiscal loosening will have, higher rates/USD will be self-limiting to some degree and anti-trade and anti-immigration rhetoric - while boosting inflation expectations and USD - will be bad for growth and so likely to offset this to some degree. I think the USD will rally for a few more months, but then be tested when policies become clearer and it becomes apparent that there is no magic bullet to create growth and there will be a price to pay from the Trump approach.

I'm betting that this time next year, UST 10yr will be <2%. Just a hunch.

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Maverick
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November 21, 2016 at 1:59 PM ×

EUR 5y5y inflation fwd that is...

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wcw
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November 21, 2016 at 2:17 PM ×

@Maverick, what most likely is hype is the idea that there will be a trillion dollar federal infrastructure spend. Dollars to donuts whatever comes out of the sausage grinder will probably be under $0.2T, even accounting for tax giveaways.

The likelihood of DJT-Ryan slashing marginal tax rates, though, seems high. The last time a US president slashed rates the deficit increased by 2% GDP. Selling bonds may not be the right response, but it seems pretty reasonable with a dovish Fed.

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Nico
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November 21, 2016 at 2:46 PM ×

Anonymous said...
what are you short Nico ? Spooz ?


Demo account ;)

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abee crombie
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November 21, 2016 at 3:04 PM ×

From JP

Banks, for example, have outperformed Staples by 44% since the relative lows
in Q3 of this year. This is the biggest move since ‘09. Value has outperformed
Growth by 11% over the last three months, again the strongest move since ‘09.
How much of past underperformance has been unwound? Quality run started
in earnest in ’11, and now it has retraced the gains only back to Q3 ’15

How do the valuations look now, given the big moves? Banks’ P/E relative
has rerated by 30% in the past few months, but it is still cheaper than historical,
and we think P/E relative has further 30-40% upside if we are to witness a
rally similar to those seen in '09 and in '13. Value has rerated by 12% vs
Growth, but it is still trading below the last ten-year median P/B relative.
 The areas where we are seeing a break from the past relationships include:
 1) The historically strong inverse correlation between USD and commodities is
unravelling. Commodities are up, but USD is going up, too. This might not last.
 2) EM relative to DM is selling off significantly, but the Mining sector is
performing well. This has never tended to last. Either EM bounces, or Mining
rolls over.
 3) The typically strong correlation between the performance of Eurozone vs
US equities and bond yields is breaking down. US is performing too strongly
vs Eurozone given the backdrop of rising bond yields. The relative performance
is also puzzling given the strengthening USD, which has typically tended to help
Eurozone vs US equities.
 4) Periphery relative to core usually tracks Eurozone Banks relative. Most
recently periphery is down despite Eurozone Banks holding up.

----
Im gonna be really curious to see how many quant funds got smacked in Nov. I'm betting some got hurt really bad.

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Maverick
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November 21, 2016 at 3:09 PM ×

@wcw true, and even with a $1T->$T0.2 pass through rate, declines in productivity tend to suggest the bang per buck will be less than pre-crisis levels. Even more so as the proposed capital injection is mainly in the form of public spending (less efficient than private), and if there is a large ramp up over a short period of time.

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checkmate
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November 21, 2016 at 4:00 PM ×

Meanwhile if market priming is to be believed then we have just exchanged Osbourne for Hammond ,but both appear to have the same hymn sheet so who gives a f... ?
In the face of Brexit , current depressed global growth rates , and correspondingly low borrowing costs it appears the opportunity to use a sledge hammer to 'smack' the anti-UK Brexit is going to be akin to throwing a pebble in the pond ...the ripples are hardly going to be noticeable.
Beginning to suspect to suspect that a vote for change is going to end up being more status quo as far as the eye can see.

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abee crombie
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November 21, 2016 at 5:01 PM ×

Cheeky long gold here? or is it too much a play on DXY

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Leftback
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November 21, 2016 at 5:13 PM ×

CADUSD and GBPUSD appear to have turned upwards as the price action in crude and copper, among other commodities, begins to look firmer here. AUDUSD and EURUSD are also fighting to stay above water. USDCNY and USDJPY finally slowing down from the breakneck pace as well. We expect any meaningful turn in FX to be mirrored in bond markets as well.

Here at Hammock Capital we think maybe Bucky is getting winded and will be taking a breather into Turkey Day - as we get a look at some recent economic data that matter, i.e. durable goods orders, as well as the Fed minutes. With regard to the Fed it's less about December (a lock) and more about "forward guidance" for next year (1-2 hikes at most is our guess).

Punters might soon be reminded that the US economy is more of a steam engine and less of a frictionless maglev bullet train. More Northeast Regional than Shinkansen.. is this where the pros sell on Wednesday and then clueless recreational punters buy on Friday? We are looking for a 4-5% rally in the long bond and an equivalent drop in the XLF into Dec FOMC.

DX, that's the only thing I look at in the morning at the moment... we also want to remind punters that the Monday after Thanksgiving should be known as Red Monday, as it is often a down day, perhaps because this is invariably when tax-related selling of equities and ETFs begins every year.

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Anonymous
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November 21, 2016 at 5:44 PM ×

@LB, given the consensus is that GOP will cut tax in 2017. The tax-related selling this year may well be selling the loser and keeping the winner. So they maximize the loss this year and maximize the profit next year.

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washedup
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November 21, 2016 at 5:54 PM ×

@anon 5:44 - interesting thought - I am not sure the probability that any tax cuts applying to 2017 capital gains is more than say 50%, but in any case I see only healthcare as being down for the year, and not by much at that.

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Leftback
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November 21, 2016 at 6:53 PM ×

Tax selling is always "selling the loser and keeping the winner". Indeed there are plenty of losing stocks to unload. Equity markets actually are much less strong broadly speaking in 2016, than you might perceive.

Here is a big problem for would-be Reflationistas and Infrastructure builders: the GOP deficit hawks!!!

http://thehill.com/policy/finance/306855-deficits-could-stand-in-the-way-of-trumps-agenda

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Anonymous
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November 21, 2016 at 8:54 PM ×

Got your S&P "2200" hats ready?

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Whammer
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November 21, 2016 at 8:57 PM ×

@LB, wow is there some dishonest crap coming from the GOP in that article. Phil Gramm is probably the worst. Par for the course, however.

Anyway, I fully expect that the deficit hawks will start to take their cues from Right Wing talk radio, and decide that deficits are only a problem when a D is president. They will, however, pretend that they are being serious about the deficit by talking about cutting SS and Medicare -- which of course have nothing to do with the deficit, but it will help keep the rubes at bay. Meanwhile, the "war between the generations" is just warming up. I'm already telling my kids not to put up with all the BS they are going to be fed by the Baby Boomers (my generation).

- Whammer

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Leftback
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November 21, 2016 at 9:19 PM ×

Earthquake, off the coast of Japan. Tsunami warning issued.

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Anonymous
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November 21, 2016 at 9:38 PM ×

2016 really has packed it all in and still Dec to come.

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Anonymous
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November 21, 2016 at 9:51 PM ×

S&P high will be 2016 in 2016 ... perfect symmetry.

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