Archive - Jul 2011

For what it's worth, and probably not much, here is Goldman's Francisco Garzarelli on why it is "Decision Time or bust" for Europe. With the just commenced summit, the market has very high expectations of a favorable outcome. Should the proposed resolution end up being disappointing, and it likely will upon a close read between the lines as it can not possibly be anything more than merely another can kicking exercise, look for the EUR to tumble after this final relief rally. From GS: "We said at the start of the week that Euro-zone bond markets would be volatile, caught between attractive valuations and expectations of a deal, and the uncertainties surrounding PSI. On light flows, some of the sell-off has reversed over the past 48 hours. If our baseline case above plays out, we would expect more upside and almost all of the widening in intra-EMU spreads seen since Moody’s downgrade of Portugal could be corrected. We doubt we will see more upside than that, at least for a while. It will take some time for the new policies to be articulated and implemented, and all decisions taken today will need to be put before national Parliaments, probably at the start of September. Moreover, concerns over the pace of global growth remain in the background weighing on weaker borrowers. Last but not least, investors have been heavily affected by recent events and thus may want to reduce risk in a recovering market."

When observing the latest "hope" based rally in the EUR last night we said that we "can't help but be extremely skeptical that this short-lived bounce will promptly reverse." Sure enough, 8 hours and 110 pips lower, this appears to have been the case driven primarily by remarks by Eurogroup president Jean-Claude Juncker and Dutch FinMin Jan Kees de Jager, both of whom said that a selective Greek default "cannot be excluded." Specifically, Dutch Finance Minister Jan Kees de Jager said on Thursday he had seen willingness at the European Central Bank (ECB) to discuss the possibility of a selective default on Greek debt. "The ECB is continuously involved in talks about private sector involvement... We have recently seen some room at the ECB to discuss this topic. This is something different than a credit event. I am talking about a selective default," De Jager told the Dutch parliament. Juncker said essentially the same thing earlier, which precipitated the EUR tumble, as this shows that with the summit starting (11 am GMT), once again nobody in Europe has any idea what they are doing. Furthermore, horrible PMI data out of Europe (following last night's Chinese contraction) overnight certainly did not help. And lastly, a Spanish auction of 10 and 15 Year bonds for which the country had to pay record prices even as the Bid To Cover barely moved (and in the case of the 10 Year declined) also took away from any risk on sentiment.

A snapshot of the European Morning Briefing covering Stocks, Bonds, FX, etc.
Market Recaps to help improve your Trading and Global knowledge

S&P 500, Dow Jones, Nasdaq, Russell 2000, Nymex Crude Oil, Comex Gold, EURUSD, GBPUSD, USDJPY

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The rumors were true: after printing on the verge of a contraction back in June, July's HSBC Manufacturing PMI is now sub 50, or 48.9: the first sub-50 print in this particular series in a year. This confirms that the manufacturing sector is now in contraction mode. The immediate kneejerk response is a 20 pip slide in the EURUSD which has retraced half the surge on the earlier, and repeatedly priced in, news about the nth Greek bailout. Now if only China could slow down that inflation to go alongside its economic contraction, which unfortunately as the following chart from Bloomberg demonstrates, will be a difficult proposition.

A few weeks ago we first reported what, according to Bill Gross, the upcoming QE episode may look like: namely a version of Operation Twist from the 60's in which the short-end of the curve -arguably the 2 or 3rd year point- is locked, resulting in a record steep yield curve while allowing ongoing bond monetizations to proceed. While that is a useful frame of reference, a far more relevant observation is what the man in charge of the world's largest bond portfolio -none other than the FRBNY's Brian Sack- has to say about what the future of QE holds, which he conveniently has done in a speech to Money Marketeers today titled, "The SOMA Portfolio at $2.654 Trillion." In addition to the future of the Fed's SOMA, Sack shares some other much needed information such as the trading details of the QE program from the view of the Fed, his perspective on the QE2's strengths and weaknesses, and his overall assessment of the program's effectiveness. Not to mention his admission that the Fed now carries 200% more interest rate risk than it should...

The Pentagon tries to take over social media to prevent any memes which challenge any of the policies of Helicopter Ben, Turbo Timmy, O-Bomb-a or the rest of the boys ...

The EURUSD is pushing higher in the low volume afterhours session after a Reuter report that the German and French delegations have reached an agreement over Greece. Since this is about the 6th "pricing in" of Greek bailout, we can't help but be extremely skeptical that this short-lived bounce will promptly reverse especially since the USD is about to pop on comparable good news to come out from the Obama meeting with Boehner.

Remember how ole' Ronnie bankrupted the Evil Empire by forcing them to build ever more and more nukes, leading to the collapse of the communist empire and unleashing a whole lot of upscale Wall Street prostitution rings in the process? Maybe the CIA can do the same back home, because if the Russian "post default" debt/GDP is any indication perhaps it is time Regan's ghost gave the order to bankrupt none other than the "good empire": the good old US of A. Here is Russian debt/GDP, based on CIA historical data and IMF projections. No "Kolhoz of 6" in Moscow any time soon.

When we presented the Gang of Six joke of a deficit-cutting "plan" we called it a "talking point bulletin full of ridiculous fluff with nothing substantial." It appears that at least Paul Ryan seems to agree: "The plan is not a budget.  It is a set of talking points and graphs
that outlines an ambitious proposal that has serious flaws but also the
potential for worthwhile budget and tax reforms." The Wisconsin Congressman has just released a much needed follow up to the 4 page chart book (disclosed previously here), which confirms that the "Compromise" plan is DOA in the Congress.... 48 hours away from D-Day: "The following analysis
examines these problems, raises questions about the lack of detail in
the plan, and notes the areas where there is potential to make progress
on spending restraint and tax reform."

On July 20, 1973, Bruce Lee, the greatest martial artist the world has ever known passed away. Martial art aficionados are of the widely held view that Enter the Dragon was his greatest film...and indeed one of the greatest martial arts films of all time.

No point in getting too greedy: after the latest spread compression opportunity was presented courtesy of yesterday's late afternoon ramp on speculation of a debt deal, breaking the ES-RISK correlation, and taking it to a 12 point spread, it has since contracted to a nearly negligible 4 points as of last check. The only thing better than free money from a 100% spread closure is 66% spread closure.At $50 per ES contract pt (coupled with a comparable DV01 match on the synthetic RISK side) this is $450 profit (on only ~$5k margin), or around 9% return in one day. We'll take it. Spread entry/exit points provided as usual by Capital Context.

RANsquawk Market Wrap Up - Stocks, Bonds, FX etc. – 20/07/11