When the tracking of potential Ben replacement candidates for Fed Chairman by Irish bookmaker Paddy Power, and InTrade prop bet replacement, started it had Janet Yellen as a solid favorite. Shortly thereafter, as news leaked that Obama's favorite was Larry Summers, and as the president made it quite clear Yellen's candidacy was certainly not on the front Burner with the "Mr. Yellen" Freudian slip, Summer's odds soared and hit a contract high of 85% last week. Over the weekend, anyone who had put money on Summers, was Harvarded and lost all capital at risk, and now, it is Yellen who is once again firmly in the lead with her odds soaring right back to just why of 90%, and well-ahead of second placed Don Kohn at 17%. Ironically, while the market never actually corrected for the "market negative" that Larry Summers' candidacy is now spun to be, it is surely uncorrecting now that he is out.
Do you see what happens Larry when you float a strategic trial balloon or two? Your odds literally surge, at least according to Irish bookmaker Paddy Power, which in the absence of InTrade has become the only market polling venue where pundits put money where their mouth is (as opposed to countless clueless Op-Eds written by every self-proclaimed Fed expert in existence). Where two weeks ago, on July 24, Larry "the hawk" Summers was a long 20% odds challenger to Janet Yellen, who was a solid 75% favorite to become the next Fed chair, since then Yellen's odds have crumbled to just 33% currently, while Summers has exploded higher and after peaking at 60% two days ago has climbed even higher, and is a 66.6% (appropriately enough) favorite currently. Time for the perma-Doves to panic yet?
Nearly a year after the Benghazi embassy attack that left four Americans dead including ambassador Chris Stevens, it seems that the deaths of US citizens have "made a difference" after all in the eyes of the amusingly named US Department of Justice, which moments ago filed criminal charges related to the Libyan attack. Alas, that's all we know because as the WSJ reports, the charges were filed under seal. It probably means that is all that shall be known until one day, several years from now long after Eric Holder has left the building, the DOJ will unseal the charges and disclose it never had a case to begin with.
Federal Reserve Chairman Bernanke's term expires January 31, 2014. While his continuation as Fed chair cannot be ruled out, he has given no public indications that he plans to seek another term and most market participants - as well as many members of Congress in last week's Humphrey-Hawkins hearings - seem to believe he will retire from public service early next year. As Goldman notes, the announcement of the next Chair of the Federal Reserve seems most likely to come in October, though nominations for Fed Chair have been announced as early as five months before the current term expires and as late as less than a month before expiration. There does not appear to be much risk to the Senate's ultimate confirmation of whomever the President chooses, though the Fed nominations have become more politically controversial over the last few years, which is likely to lengthen the confirmation process. Following previous confirmations, financial market volatility has typically increased slightly, though whether this occurs following the upcoming transition will of course depend on who is nominated.
If the constitutional scholar was hoping he would quietly avoid a major showdown over the constitutionality of the biggest spying scandal since Nixon (whether legal or not remains to be determined) and which would likely have led to an early POTUS retirement if current president was republican, the ACLU just slammed the door shut on the possibility. Moments ago, the American Civil Liberties Union filed a lawsuit against the Obama administration over its "dragnet" collection of logs of domestic phone calls, contending that the once-secret program is illegal and asking a judge to both stop it and order the records purged. And, as the NYT reports, "the lawsuit, filed in New York, could set up an eventual Supreme Court test." Only once that happens it will be too bad that InTrade is no longer available, to take the other side of a trade that believes the SCOTUS will for once do the right thing and preserve the constitution when everyone knows the decision to formally enact a Big Brother state will pass along political party lines and America will officially become the country that for 5 decades, at least superficially, it was waging "cold war" against.
- Cardinals head to conclave to elect pope for troubled Church (Reuters)
- Hyperinflation 'Unthinkable' Even With Bold Easing: Abe (Nikkei)
- Ryan Plan Revives '12 Election Issues (WSJ)
- Italy 1-yr debt costs highest since Dec after downgrade (Reuters)
- Republicans to unveil $4.6tn of cuts (FT) - Obama set to dismiss Ryan plan to balance budget within decade
- CIA Ramps Up Role in Iraq (WSJ)
- Hollande Hostility Fuels Charm Offensive to Show He’s No Sarkozy (BBG)
- SEC testing customized punishments (Reuters)
- Judge Cans Soda Ban (WSJ)
- Hungary Lawmakers Rebuff EU, U.S. (WSJ)
- Even Berlusconi Can’t Slow Bulls Boosting Euro View (BBG) - luckily the consensus is never wrong
- Funding for Lending ‘put on steroids’ (FT)
- Investigators Narrow Focus in Dreamliner Probe (WSJ)
- With new group, Obama team seeks answer to Karl Rove (Reuters)
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With polls blacked out in Italy, the hope and hype is that Berlusconi doesn't get in, banish austerity, and bring the European OMT-inspired 'confidence' party crashing to the ground. While extremely low volume - and famously entirely wrong about Obamacare - the current Intrade odds favor Bersani massively at an 85% probability of becoming PM with comedian Beppe a mere 0.3% - even though it is somewhat ironic that he can still muster such support (for someone with a criminal record... umm Berlusconi?).
European officials have impressed upon investors that the tail risks of a EMU break up have receded markedly. Some officials talk even that the crisis is over. The premium Italy, and to a less extent, Spain, pay over Germany have narrowed to levels that had previously thought possible only if the ECB were to make good on its promise of unlimited (ex ante) purchases. There have been some signs that foreign investors are participating in the primary and secondary sovereign European bond market. Ireland is returning to the capital markets.
To be sure, challenges remain. Greece's will and ability to impose more austerity is questioned. Spain has relied on cuts in public investment over the last several years while other spending has actually risen. With high issuance this year than last, apparently without the help of another LTRO (with some borrowing, perhaps around 100 bln euros expected to be paid back early--beginning as soon as the end of Jan), Spain's funding challenges are likely to resurface. Italy's elections next month could still result in a hung parliament, with Monti's centrist movement seemingly contributing to the fragmentation. However, it is Cyprus that may be the most pressing issue. Yes it is small and few international investors have any exposure. Its significance extends beyond its size.
It's the last trading day of the year, nothing has been resolved on the Cliff, the perpetually wrong media has now decided to change its tune and is spin the Wile E. Coyote plunge as a "good thing" (just as we expected), Congress is nowhere, the Senate failed to reach any resolution last night and is resuming the "negotiations" farce at the bright and early hour of 11 am, and yet somehow, in spite of everything, the strong bid under the futures refuses to go away (thank you Kevin Henry). This despite what is becoming clear to even this broken market (InTrade odds of a debt ceiling deal by the end of today are still a substantial 2.3%) that there will likely be no deal until some time in February or March when the debt ceiling extensions expire by which point the only question is how deep the US recession will be. And still everyone will be shocked, shocked, when nothing is done today either. Why? Because the market continues to price in an outcome which demands that it crash for it to be achieved. That so few grasp this is frankly, disturbing. Also, everything else is perfectly enjoyable theatrical noise. And just to keep the excitement factor really high, most rates and FX markets close early today, with rates and FX futures markets close at 1pm New York time while cash bond trading at 2pm.
While EURUSD is flat, there is one market open (free of manipulation - perhaps) that offers some insights into traders' perceptions of reality - however 'cautiously', 'modestly', 'surreally' optimistic the powers that be proclaim. InTrade's "debt ceiling by Dec. 31st" odds have plunged to around 2%. A week ago, when we continued to urge readers to short the contract, it was at 10% (and at 30% when we initialy said on Novermber 13th no deal would occur) - even as everyone and their pet rabbit was convinced a deal was going to be cobbled together. The 'debt ceiling' odds are implicitly the 'fiscal cliff' odds given Harry Reid's insistence of the 'bundling' to remove every possible point of leverage from the Republicans:
“We would be somewhat foolish to work out something on stopping us from going over the cliff and then a month or six weeks later Republicans pull the same game they did before and say, 'We're not going to do anything — unless this happens, we're not going to agree to increasing the debt ceiling,’ ” Reid said.
“I agree with the president, it has to be a package deal,” he added.
At around 2% odds, this still seems like money good for shorts...
Aside from the occasional deranged FX algo which today has decided to take out all its pent up binary anger on the GBPUSD, everything else today is closed. Everything, except, of course, for InTrade which come holiday, rain or apocalypse, is a true OTC market and is open all the time 24/7, non stop. Of particular interest is InTrade's market on "The US debt limit to be raised before midnight ET 31 Dec 2012" which moments ago once again came closer to reflecting reality and not the clueless gibberish of "expert" political pundits, and plunged to a contract low 10.1% probability (and price) which considering the late stage in the game, and that at this point the Fiscal Cliff is beyond any 2012 resolution, let alone the debt ceiling, is 10.1% too high (as forecast here nearly two months ago). And like a true market, one can naked short on InTrade. So for all the habitual gamblers out there just itching for some global futures market to reopen somewhere: have at it (but mind the brief squeeze at the next appearance of the "we have a deal" rumor, only to be refuted by the sad political reality of this country moments later).
InTrade may have gotten the Obamacare outcome horribly wrong, but it was spot on in predicting the Obama presidential victory. And if it has continued its accurately predictive ways, it will mean a lot of pain is in store for the market (if not so much the President) very shortly, because the online betting service, now only accessible to offshore based US residents just saw odds on a debt ceiling deal plunge to all time lows of 10% earlier today, before rebounding weakly to 16%. As a reminder, Harry Reid has said on numerous occasions that there will be no Fiscal Cliff resolution without a favorable debt ceiling outcome, which therefore means that according to InTrade the odds of a Fiscal Cliff getting done in 2012 have plunged to 16%, and the probability of a market tumble, as the cliff moving over to 2013 means a cornucopia of unintended consequences, is logically (1-16%).
- OECD slashes 2013 growth forecast (FT)
- Fiscal Cliff Compromise Elusive as Congress Returns (Bloomberg)
- China’s PBOC Chief Search Spurs Focus on Finance Regulators (Bloomberg)
- Elected, but Still Campaigning (WSJ)
- Pentagon Readies Options for Afghanistan Force After 2014 (Bloomberg)
- Greece Wins Easier Debt Terms as EU Hails Rescue Formula (Bloomberg)
- Monti presses Cameron for EU referendum (FT)
- Welcome, Mr Carney – Britain needs you (FT)
- Argentina seeks halt to $1.3bn debt order (FT)
- Asean chief warns on South China Sea disputes (FT)
- South Korea Tightens FX Rules to Temper Won Surge (WSJ)
From the moment the polls closed around 7ET, S&P 500 futures have been leaking lower. At 1417, S&P futures are now over 11 points off the post-Ohio-rumor spike highs having given all of that spike back. Treasury yields are down 3bps or so and commodities are bleeding back lower (Gold $1707). The USD is strengthening too as AUD weakens. Interestingly things seems to be going Obama's way broadly in the polls (even though Intrade is falling) which also lends credence to the spike in stocks earlier when it appeared things were going Romney's way...