Archive - Aug 2010 - Story

RANsquawk US Afternoon Briefing - Stocks, Bonds, FX etc. – 24/08/10

Much has been said about the comparison between Japan and the US on a macro level, as both countries succumb to the deflationary forces of social-wide deleveraging. Yet few have analyzed the transition of the US into Japan from the perspective of corporate credits. Below is BofA's Jeffrey Rosenberg, arguably the firm's best analyst, sharing what he sees as the arguments "for" and "against" the credit markets on America's one way road to Japanification.

And once again, all of Europe is dumping its deposits in Switzerland, running away from domestic banking centers, and making the lives of Hungarian CHF-denominated debtors a living hell. The EURCHF just hit an all time low of 1.3066. The Bank intervention sonar just went apeshit as both the BoJ and the SNB are fully expected to intervene at any moment.

Those puzzled by the recent pick up in stocks need not be puzzled much longer: today's POMO operation just closed, and the Fed just monetized $1.35 billion of bonds, an amount which apparently was enough to push stocks by about 0.5% higher, and see a slight sell off in Bonds as holders sold into the Fed's buyback. The submited to accepted ratio was a solid 12.8. Far more relevantly, Morgan Stanley continues to be on a roll in predicting precisely which bonds the Fed will monetize: today, Igor Cashyn got 6 out of the 8 repurchased issues correct. Frontrunning the Fed continues to be the most profitable trade.

In case you missed it...

The Fed has just released the 29 bonds maturing between 2013 and 2014 eligible for monetization by the 11am deadline. And since the Fed has been purchasing notional way ahead of schedule, it may have far less dry powder to reliquify the market: today's auction will likely come at around $2 billion. Anything above that would mean that the Fed is monetizing about $35-40 billion a month, well beyond what it had telegraphed previously, and in essence is undergoing a real QE2 process. The only question is whether the banks will use the new cash to buy stocks in today's smack down, or will they push the 10 Year further inside the 250 bps it was spotted last. The buyback will be complete at 11:00 am at which point we will discuss if Morgan Stanley continues to shine in its Fed frontrunning predictions.

Hello Double DIPression my old friend. 3.83 million sales on 4.65 million expectation. Previous 5.37 million revised to 5.26. The chart says it all: lowest sales since May 1995, months supply largest since 1999.

Well, we sure hope you, ahem, bought the dip. A $17 vertical move in minutes is an appetizer of what will happen when Bernanke says the wrong word at J-Hole (and he most likely will).

The main (and lately only) bullish indicator that everyone seems to be focused on (for all the wrong reasons), continues to telegraph ongoing distressed for the financial segment: the 2s10s part of the Treasury curve has tightened to 206 bps (this was nearly 290bps a few months ago). At today's rate of flight to safety it is possible the key psychological (whatever that means - computers need therapy if Fib levels are brached?) support level 200bps will be taken out. This means all the leading indicators will soon reorient downward yet again, which also includes the ECRI LEI, which is once again due for an inflection point. And the recently far more critical from a funding standpoint, 2s10s30s butterfly, which we have discussed extensively as the primary carry driver of stock purchasing ability, has just gone double digit again.

Today.... in Tokyo:

The often ridiculed (for some incomprehensible reason) John Taylor of FX Concepts is once again proven spot on with his EUR top call, which came when the European currency was at 1.33, at about the time when Goldman reinforced its long EURUSD call. A few weeks and 6% lower, here is Goldman explaining what they really meant (again). In a nutshell - despite the transitory economic boost driven by a plunging EUR export-boom is over, Goldman is hopeful the lingering effects will remain forever. And Goldman continues to be very bearish on the dollar, for one simple reason: "Our expectations for sizeable additional QE by the Fed will only add to the Dollar negative mix towards the end of the year." We are waiting for the Jackson Hole announcement with bated breath: rumor is the Chairman has mastered the alchemy process of converting linen to gold, and will commence printing the shiny metal shortly.

• Deflation: the Neutron Bomb of Balance Sheets  (and why Bernanke will destroy the dollar before he allows it) (Barrons)
• Captain Obvious headline of the day: Asia Slowdown to Have "Serious" on Affect Europe, Economy Chief Rehn Says (Bloomberg)
• Kan Says Yen Move Undesirable; Union Urges G-7 Action (BusinessWeek)
• BoE's Weale Says Britain Faces Recession Risk (Reuters)
• European Banks May Face More Frequent Stress Tests (Bloomberg)
• Libor Volatility is Price of Disrupted Credit (FT)
• We need more TBTFs around the world stat: Greek Banks Pressured to Merge as Economic Slump Hurts Profits (Reuters)
• Housing Slide in U.S. Threatens to Drag Economy Into Recession (Bloomberg)

This is not the start of the global panic you are looking for. That is all

• Asian stocks fall on economic growth concerns; Yen, Dollar gain.
• Coffee futures flirt with 13-year high on crop troubles.
• Greece asks EU, ECB for $8.2B loan disbursement as part of accord.
• Nikkei dips to 15-month low, with yen strength as 'usual suspect'.
• Obama may propose any federal backing of mortgages be paid for through fees on the lending industry.
• Oil falls a fifth day on concern over US supply gains, slowing recovery.

The title of Jan Hatzius' latest piece pretty much says it all, although here is the punchline: "We continue to believe that the risk of a renewed technical recession—defined as a return to quarter-on-quarter declines in real GDP—is an uncomfortably high 25%-30%. In our view, this exceeds the likelihood of the trend/above-trend growth scenario envisaged in the consensus forecast." So just as the Great Depression v2 is now called the Double Dip, Goldman now calls the Double Dip a "Technical Recession." Surely that will make everything better again.