Euro clarity

While Macro Man was sceptical that the Italian referendum would deliver the sort of shank-a-thon that EUR and equity shorts were hoping for, even he was a little surprised by the vehemence of the squeeze in EUR/USD.  Clearly positioning was at work here, as was a classic "sell the fact" mentality after a widely-expected "crisis event" duly materialized.

So how now?  Clearly a decent chunk of euro shorts vacated the premises yesterday, and the future of European markets rests, to a degree, with the ECB.   Macro Man suspects that if Mario Draghi could somehow fast forward through this meeting, he would; after all, it is likely to be a tricky business to both extend the QE program while at the same time hinting at its eventual demise, all without upsetting markets.

Of course, the ECB has form in upsetting markets while delivering more easing; one need only hearken back to this time last year for a classic red-hot poker for euro shorts.  Now obviously, price action so far this week has made positioning less pernicious than it was last year, at least in FX.  One could argue that Schatz, on the other hand, are still priced to perfection, yielding -0.70% when the deposit rate is -0.40%.   Even there, however, the worm may be turning; the chart is suddenly looking rather toppy, and a rather substantial amount of put flies have gone through recently targeting the 111.90-111.80 area on the March future.


While EUR/USD looks somewhat muddled for the time being, the picture for EUR/JPY is starting to look quite interesting.  The weekly chart certainly looks to have formed a nice rounded base, and it's blown through a rather nice trendline resistance as well.

Although the Italian referendum result duly caused some angst over that country's banking sector, for the Eurozone as a whole the recent steepening of the yield curve has been an unmitigated boon.  The chart looks fairly similar to the EUR/JPY chart above; very quietly, the SX7E has put in a 35%-plus rally since its nadir over the summer.

The front end looking ropy, the currency looking a bit perky and the banking sector showing signs of life; if you didn't know any better you'd think there was the faint whiff of reflation in the air!  At this point gambling on Draghi to successfully walk the tightrope looks just like that: gambling.  Last week Macro Man took profits on his ED steepener vs ER flattener position, and he's glad he did.

While the heart may say to stay short Europe, the head (or at least the eyes) suggest the opposite.   When head and heart are out of sync, it's usually a good idea to go flat, which is what Macro Man has done.   That served him well over the weekend, and he feels happy going into the ECB with a clear head and a clear position sheet.
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MOOSB
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December 6, 2016 at 8:44 AM ×

Vol smiles and 1 week risk reversals showing a significant shift in EURUSD sentiment ahead of the ECB. This week's meeting could be like last Dec's one.

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Rossco
admin
December 6, 2016 at 10:15 AM ×

not that too many people are looking but Australian GDP tomorrow could be an interesting one

the sell side rushing to downgrade to negative numbers today

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Anonymous
admin
December 6, 2016 at 10:23 AM ×

Rossco - yea and banks are starting to raise rates without RBA moving. Could be interesting.

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checkmate
admin
December 6, 2016 at 11:08 AM ×

As Jimmy Radcliffe never sang "Long After The Squeeze is All Over" when do we start pricing the accumulative trend of anti EU sentiment into the 2017 elections ?
Italy was certainly not ,in isolation, a Brexit/Trump event ,but it is another accumulative marker and if the market is really forward looking then you know it's going to want a premium for EU political risk.

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washedup
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December 6, 2016 at 2:21 PM ×

Another gem from Trump today
: Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!

Here are some future ones I imagine:

Facebook CEO shamefully defends fake news - shady company - sell!

Aapl ticker has too many letters and iPhones suck -shame!

China openly manipulates currency - RMB should be no more than 4.0 - buy!

political janet wrongly kept interest rates low - the higher the better - sell!

and finally

Nico won't ever succeed in convincing bulls - sad!

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Leftback
admin
December 6, 2016 at 2:40 PM ×

In addition to those who are intentional EURUSD shorts there are also functionally a lot of "trapped/captured longs" in other long USD vehicles (e.g. spoos) who are therefore synthetically short the €. This is quite substantial b/c of recent trends in positioning in FX. If punters are short anything else (gold, GBP, AUD, JPY etc) against USD and the € rallies hard, it will be Cold Steel and then Edward the Second - they will end up getting squeezed painfully, simply because EURUSD is half of DXY.

Looking at the present global economy and EZ inflation trends, the situation seems not to necessitate major intervention by Dr Aghi. So although we don't expect a massive Taper Tantrum, there may be a few hints that QE will not continue indefinitely. It is also very unlikely that any additional programs will be announced here, simply because there is no need for his Bazooka. Monte Paschi is a bad bank, and it will be bailed out again in some form by Italy. Nothing to see here.... the major hazard to the global economy here is a runaway dollar, so expect that to be curtailed.

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Leftback
admin
December 6, 2016 at 2:41 PM ×

In addition to those who are intentional EURUSD shorts there are also functionally a lot of "trapped/captured longs" in other long USD vehicles (e.g. spoos) who are therefore synthetically short the €. This is quite substantial b/c of recent trends in positioning in FX. If punters are short anything else (gold, GBP, AUD, JPY etc) against USD and the € rallies hard, it will be Cold Steel and then Edward the Second - they will end up getting squeezed painfully, simply because EURUSD is half of DXY.

Looking at the present global economy and EZ inflation trends, the situation seems not to necessitate major intervention by Dr Aghi. So although we don't expect a massive Taper Tantrum, there may be a few hints that QE will not continue indefinitely. It is also very unlikely that any additional programs will be announced here, simply because there is no need for his Bazooka. Monte Paschi is a bad bank, and it will be bailed out again in some form by Italy. Nothing to see here.... the major hazard to the global economy here is a runaway dollar, so expect that to be curtailed.

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Anonymous
admin
December 6, 2016 at 3:10 PM ×

FactSet:

• Earnings Growth: For Q4 2016, the estimated earnings growth rate for the S&P 500 is 3.3%. If the index reports
earnings growth for Q4, it will mark the first time the index has seen year-over-year growth in earnings for two
consecutive quarters since Q4 2014 and Q1 2015.
• Earnings Revisions: On September 30, the estimated earnings growth rate for Q4 2016 was 5.3%. Eight of the
eleven sectors have lower growth rates today (compared to September 30) due to downward revisions to
earnings estimates, led by the Materials sector.

http://www.factset.com/websitefiles/PDFs/earningsinsight/earningsinsight_12.2.16

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abee crombie
admin
December 6, 2016 at 4:51 PM ×

gotta think banks have a hard time going a lot higher from here, at least without some really great beats/upward revisions. JPM already at 1.3x Book, and 14x.

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Nico G
admin
December 6, 2016 at 5:31 PM ×

that uneasy feeling you get every time they lift all the underdogs while the leaders are being sold

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Anonymous
admin
December 6, 2016 at 6:17 PM ×

banks are re-pricing but are also way under-owned. this could run a while if the whole market hangs in.

hey nico, short s&p was looking dicey last week. how much rope were you giving it on the upside?

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Anonymous
admin
December 6, 2016 at 7:44 PM ×

Any thoughts on impacts of FCA on Cfd's? Looked like relentless covering ahead of ecb today

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Nico G
admin
December 6, 2016 at 9:55 PM ×

6:17

about last campaign

EURUSD looked promising when Asia opened Sunday...nasty 1.5% down i thought i'd see some liquidation on Globex Spoo open. I gave it a 40 minute timestop to cover and it spent that hovering around first Fibbo retracement so had to cover at 2180.50, above average but i can't waste a 'good' exit opportunity with such size. GBP has gone the right way the last two weeks so it has more than made up for the small inconvenience

am stubborn though, Santa or not i already put 1/3 back to work at 2210, next clip at 2230, last clip at 2250, i want to have a foot in the game after almost eight years up. It would be nice if Spoos made one clear new high, not some hesitant price action like now, just a frank blow off

i give a lot of rope to the upside, it's been best year in 20 years of trading courtesy of China and Italian banks, i could weather that illusional '2500' and it wdn't kill 2016 profit. But as long as market is supported i'd rather cover on dips, and reengage higher hopefully the day it breaks hard i will still have one foot in the game you know how they say, you are either short too soon or not short enough

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Nico G
admin
December 6, 2016 at 9:58 PM ×

PS; Italians banks are STILL bankrupt and should remain under-owned i guess folks have not learned the lesson given by Greek banks who went close to zero before seeing life. The European mess is only beginning. If you catch falling crooked knives you better have a very long timeframe

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Anonymous
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December 6, 2016 at 11:33 PM ×

Delighted to see perma-bear Nico once again shorting spoos. This is a clear signal that we will break all time highs in equities and see a sustained bull market continuation for at least another 6-12 months.

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