Europe, China, US

* With the ECB decision looming, it's perhaps worth checking in on the state of play of ECB liquidity, market pricing, and expectation.  Unsurprisingly, given the ongoing QE purchase program and assorted LTRO facilities, excess liquidity closed last week at a record high.   While spot EONIA has historically been asymptotic to the ECB depo rate  (why lend money in the EONIA market for a worse rate than you can get by plunking it down with the central bank?), forward EONIA can obviously trade wherever it likes.  For most of the last year, 1y1y EONIA was well below the spot rate; recently, however, the forward rate has narrowed the gap and actually traded above spot EONIA.   The market no longer expects any more rate cuts from Draghi.

Interestingly, however, there have been no such qualms with Schatz, which have traded with a defined but non-asymptotic relationship with the ECB deposit rate.   As you can see below, the current ultra low level of Schatz yields is broadly consistent with the curve of the relationship over the past decade.

Where it gets a little weird is when we plot the two spreads together (1Y1Y EONIA - spot, and Schatz - the depo rate) and see how closely they are historically aligned.   This is largely because on essence they capture the same things, namely policy expectations.  The recent divergence in direction is notable.  We can put this down to a few things: pricing capital key/sub depo purchases changes from the ECB; using Schatz as synthetic calls on a new DEM (or puts on a new ITL, if you prefer); a technical outcome of European money market reform.

Whatever the reason, the divergence is interesting, and at some point will spell opportunity.

* Another day, another CFETS fixing within the established range.   Whatever Voldemort's transgressions were a decade ago, it seems hard to argue with the idea that the authorities are leaning against further CNY depreciation.

Of course, their job has been mad easier by the moderation in capital outflows over the last couple of quarters.

While these flows are still negative, obviously, they are comparable in magnitude to the trade surplus.  As such, the torrent of outflow of PBOC's FX reserves slowed to a mere trickle for much of the year.   That being said, the reserve decline accelerated again in October, and very likely sped up again last month (above and beyond any valuation differences.)

Clearly one to keep an eye on; November data is slated for release some time tonight.

* Wasteful spending by the Pentagon has been a regular feature of the American political landscape for a long time.   On the face of it, therefore, Donald Trump's twitter salvo against Boeing is sure to resonate.  Yet there are clearly reasons for concern that go beyond "he's lying again."

While the contents of the Tweet were misleading, it wasn't wholly fabricated; the development/manufacturing/delivery costs of the new Air Force One program are indeed budgeted at something close to $4 billion...albeit over a span of many years.  As far as Trump's veracity goes, that's probably close to as good as it gets.

What's troubling, however, is Trump's decision to pick on a single company, one whose CEO (in a stunning coincidence) publicly criticized the president-elect's protectionist agenda.  Trump's not even in office, and we already have concrete evidence of his picking winners and losers on a company by company basis.  That's hardly the foundation of a healthy market; can you imagine what the reaction of the SEC would have been if a billion dollars was knocked off of Boeing's market cap by a half-assed rumour tweeted out by, say, some bloke living over his mum's garage near Heathrow airport? 

Although clearly not on the market's radar at the moment, if and as evidence mounts that the new administration has a penchant for picking out individual corporate winners and losers depending on some arbitrary reaction, possibly at 3 am, by the president, might the market demand a higher risk premium to factor in the possibility of getting trumped (both metaphorically and literally)?