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.