Gleacher Market Commentary

Market commentary from Gleacher's Russ Certo

I have tried hard to not have strong views in market recently given what seems to be possible tectonic shifts.  Despite this, I feel as though there was alot of pent up energy at recent range lows and is now being released, to say the least.  We had weeks of very defined range that broke and the damn broke.  After a tepid 3yr auction, I think players extrapolate the increased level of difficulty of having to increase the DV01 of a 10yr and 30yr to follow, particularly in light of trying to repair wounds from December rinsing, November rinsing.......Adult swim.

So, fear is a powerful motivator and with Big Ben possibly being held accountable to riots, emerging unrest, food and energy inflation, repackaging smaller of consumer staples like soft drinks to portion control (a form of inflation)  etc, higher health care costs, transportations costs, taxes, and a general erosion of purchasing power, some feel as though the needle has moved in terms of the Fed HAVING to meet market impulses.  So, tectonic asymmetry with BOTH the 10 year note auction tomorrow and the Chairman of the Board.  Alot of uncertainty to have to commit some capital.

To air some thoughts, Ben is known as helicopter Ben.  And he rarely disappoints.  Further, any explicit communications likely won't have imminence.  Even if the Chairman decided to give lip service to tightening schemes, they could be in the form of gradualist interest on reserves, matched sales, symbolic forward discount rate moves and the like.

Maybe the market is adjusting to what appears to be an increase in the time table for such measures and that the shedding of duration led by the belly of the curve, where QE2 purchases are mostly dictated, is the FIRST reaction. However, I feel as though Ben can A) do what he does BEST and disappoint by being dovish or B) illustrate he is a salty tough banker doing his job and be hawkish.  Either way the long end likely does better as a countering to worst fear expectations in market or a banker with religion protecting the price of longer stream cash flows.  Recall, Greenspan tightened 17 times and had long rates rally.

As for the 10 year auction, it should be best under-written in an environment of fear and expectations leaning on a side to tip a boat.  There has been a tendency for the second leg of auctions series to perform well in light of the extreme negative sentiment to the poor results of the first tranche in a series.  Real money could easily muscle this one around given street positions and expectations.  And I think the zenith of these expectations will be mid-morning staring the supply in the face of supply......and of Big Ben.