Archive - Nov 29, 2010

The man in charge of the Fed's Market Group has had an easy life so far: he has been able to delegate the vaporware levitation of the market to the HFT and the PD crew for the most part of 2010 (with that notable May 6 exception). And when those two fail there has always been either State Street, which has been happy to pull borrow on demand, and of course POMO, which so far worked like a perfect confirmation bias charm. Until now that is - ever since the QE2 POMO buybacks were launched, there has been a perfectly inverse correlation between Fed market interventions and the stock market. In fact the only day the market surged last week was when there was no POMO. This has not gone unnoticed by the stat arbs. Which is why one wonders whether today's double POMO shotgun is not about to backfire. The poetic justice of a second flash crash on the only double POMO day would be beyond words. As a reminder POMO #1 start in 5 minutes and ends at 11am Eastern. We will closely track the market's performance during both this and the next one in what could be a confirmation of a major POMO regime change.

The ECB's Securities Market Operation is finally cranking. After a relatively quiet summer during which the ECB would monetize at most €200 million of sovereign bonds weekly, things got rather hot in early October when a record €1.384 billion was acquired. That was followed by the eye of the hurricane when in a period of 4 weeks nothing happened. Then November happened, and things got out of hand. Over the past month the ECB has finally started flexing it muscles, buying €3.845 billion in bonds, most of these Irish and Portuguese. Of course, this is nothing compared to what the US does, which is now buying about $8 billion a day. Then again, the ECB works differently by providing funding directly to member banks, thereby monetizing indirectly. The fact that it has upshifted its direct monetization efforts is troubling as it indicates that QC for the secondary route is collapsing and JC Trichet no longer can rely on his henchmen on the ground, most of which are gripped in a total liquidity drought. Altogether €67 billion in bonds have been monetized under the SMP. Look for this number to double on short notice should the contagion hit Belgium and Italy as is now widely expected.

Merrill's Mary Ann Bartels looks at a slew of technicals today, and focuses on the most relevant one for the day: the EURUSD, although she focuses on the dollar basket DXY. According to her Fibonacci analysis, the EURUSD has a 50% retracement target of 81.49, which "would correlate to a move in the euro to 1.3124." As the EURUSD is trading inside of 1.31 now, this means that purely based on the EUR contribution to the DXY, there is a short-term arb opportunity of going long the DXY which is at 80.90 and selling the EURUSD. Then again, with a firesale in everything EUR related a short leg may not even be required, especially with complete lack of liquidity in the market, and a total lack of appreciation that the US will have to print far more before all this is over.

Update: 1.31 just taken out: will this level prove to be support or new resistance? Next question- what happens to the pair after not one but two POMOs.

The EURUSD, which has just taken on water, and moved to fresh multimonth lows, has just dropped 200 pips in under 6 hours. The pair is now threatening to drop below 1.31 after which John Taylor's target of 1.26 becomes reachable within days. It is unclear what caused the latest weakness in the pair, besides the usual understanding that Europe is in trouble, to put it mildly. More troublesome is that just like the BOJ discovered recently, the half life of interventions and bailouts is now measured in hours. And despite this implicit strenghtening in the USD, gold continues to trade close to overnight highs.

Can a US Dollar rally overcome the Bernanke put? We’ll find out this week. We have a total of six POMOs this week (two today and one every other day). So the Fed will literally be juicing the market by $6-9 billion EVERY day this week. If stocks can’t remain afloat in the environment and the US Dollar strength continues, then the markets are heading into some VERY DARK times in the near future.

Roger Penrose, knighted prof of Oxford, and co-workers have just found evidence supporting his theory that the inflationary Universe, a term used to describe the rapid expansion of space-time, is not a one-time catastrophe originating from the Big Bang, but rather a cyclic phenomena. Economists are known as those who can't make it in math and physics. Well take this you mathists and physicists. Not to mention PhD economists from decent departments, but even econobloggers, and EVEN people who read econobloggers have known for a long time that inflation is cyclic. There, we now have a Grand Unified Theory of Physics and Econmics. This is just too beautiful to be wrong.

Why do people believe such ridiculous things?

• Insider Case Has Soft-Dollar Focus (WSJ)
• Treasury 30-Year Returns as Market Bellwether as Fed Policy Propels Trade (Bloomberg)
• Portugal, Spain in crosshairs as Ireland bailed out (Reuters)
• Wall Street Shrinks From Credit Default Swaps Before Rules Hit (Bloomberg)
• Lee Says North Korea Must Pay for Attack; China Urges Talks (Bloomberg)
• Don’t Just Tell Us. Show Us That You Can Foreclose (NYT)
• Democrats Gird for Tax-Relief Battle (WSJ)
• What the UK is Contributing to Ireland (BBC)

Today at around 5 am Eastern Italy conducted an auction of 3 and 10 year paper. The result was a very weak auction with spreads jumping compared to the prior auction even as BTCs dropped. The Italian treasury sold €5.5 billion of the BTPs, compared with the 83.5 billion to €5.5 billion planned. It also sold €1.339 billion of the October 2017-dated floating rate bond, or CCTeu, compared with €1 billion to €1.5 billion planned. But the sale came at a steep price. The 3 Year sale of €2.5 billion 2.25% bonds closed at 2.86% compared to 2.32% prior, and a bid to cover of 1.38 compared to 1.35 previously. The yield on the 10 Year auction came at 4.43% or over half a percent higher compared to the previous auction of 3.89%, pricing at a 1.27 Bid to Cover, much worse than the 1.42 previously.

• Asian stocks pare gains as Dollar rises on Korea tensions, Ireland bailout.
• Greece wins EU pledge for 4 1/2-year extension to repay emergency bailout.
• Ireland gets $113B bailout as EU Ministers seek to halt debt crisis.
• Ireland to pay 5.8% for bailout as Cowen protects tax rates, senior bonds.
• Oil rises to trade near 10-day high on Europe's debt measures, North Korea.
• Retailers’ stocks may be in the spotlight Monday as investors respond to results from Black Friday.
• UK adjusts projected GDP for 2010 and 2011.

Perhaps if CNBC could pretend for a second that there was more to the economy than (disappointing) Black Friday channel checks it would realize that there is a complete massacre in European CDS spreads. At last check the Iberian Peninsula was the target of a tactical CDS nuke, with Spanish and Portuguese CDS widening by 23 and 36 bps respecitvely, to 354 and 538 bps. The second tier of bailoutees is also expected: Belgium and Italy, both of which are wider by just over 16 bps, hitting 178 and 232 bps. And lastly, even the core is no longer safe, as Austria and Germany were both about 5% wider to 87 and 50 bps each. Bases are widening as cash bonds are lagging today. The reason for the move, which should be completely expected to all Zero Hedge readers, is as Market News reports, that "a growing school of thought believes that - without major debt restructuring for Ireland - the current solution is just buying time. Many traders also fear that the interest rate applied to the new cash of 5.83% is unmanageable for the Irish economy." In other words start your Portugal, Spain, Belgium, Austria bailout countdown timer.

One lone indicator today and two lone POMOs

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 29/11/10

The map is the territory...

Retail traders are notoriously wrong at picking market direction/tops and bottoms. Most retail traders very naturally seem to adopt a counter-trend stance and this offers very accurate signals for individuals looking to trade against this group. This daily report is designed to help traders focus their efforts on higher probability pairs.