What Was THAT?

From Nic Lenoir of ICAP

If I come up with a stupid idea, I try to always own up to it. However when it comes to yesterday afternoon I am completely fine admitting that even if I had the text of the FOMC release in advance, I probably would not have made a penny that day. My biggest conviction in Fixed Income for the day was 5s/30s flatteners, and that has somewhat worked, more so overnight but nothing to write home about. I believe the trend will continue going forward but I would have expected a much stronger reaction. As far as direction in Fixed Income with a lot of rumors flying around about the Fed stopping to pay interest on reserves or a QE 2.0 announcement the logical thought would have been to have the market sell-off after the release, especially given that there is supply next week and 2Y yields are already at the lows. In the end it seems like good old technical analysis has not failed us and ever since we tested 123-00 in 10Y US Treasury futures and 129.10 in Bund futures the market has done nothing but rallying. Without expecting to revisit the supports afore-mentioned following FOMC, I did expect a pullback. Now it looks like if pullback we have it should be more than ever a buying opportunity.

Besides Fixed Income though, FX was the most puzzling market. It feels like everybody came out of the woods shorting the USD like it was December 2008 all over again. Now I fully agree that the USD is a piece of junk, but the point is that FX is a "relative" game and I am not too sure what you are supposed to love over the USD: AUD is rich already and on resistance as per the attached chart, USDJPY has a floor defended by the BOJ, and China is pegging! EURUSD is the only one that I could understand would break out. By the way the ECB must be one unhappy camper right now as the 3 largest economies in the world (US, China and Japan) basically have the same currency at this point via pegging and intervention, and they are taking it down the drain. Something tells me that the nice H1 2010 growth in Germany is not going to be repeated if the ECB doesn't step in. For now I am sure they will only have a couple speakers complain that intervention or pegging has negative effects saving proper course of action for when it's too late. Beyond those considerations though, why did the USD sell-off YESTERDAY. Did anybody expect Mr. Bernanke to say anything less than he stood ready to print benjamins on toilet paper if needed to get this thing growing at least nominally? The argument being touted is that the statement regarding inflation being low end is very dovish. The Fed has two mandates: employment and ensuring price stability. If anybody out there thought that ensuring price stability means fighting inflation but not deflation, stop trading and go back to school. Ben Bernanke is a lot more afraid of deflation than inflation, it's not like he earned the nickname helicopter Ben being a pilot during the Vietnam war for crying out loud. The statement yesterday was nothing that should have been adverse for the USD: interest payments were not dropped, QE 2.0 was not announced effective immediately, the Fed simply stated what we already knew, and that is it will do everything in its power to avoid a double dip, at least on nominal basis. Again, I don't disagree with the USD being junk but the timing of the move is odd and it's all about what you sell it against.

I expected Gold weakness yesterday and technically the market started turning but obviously once the USD started getting smacked precious metals went right back to their highs. I remain cautious on the short term outlook for precious metals even the medium term trend is unquestionable. If anything they are a better buy against other commodities that will suffer from trade wars and weak demand.

The twilight zone experiment:

When the S&P future traded up 7 ticks post FOMC yesterday I stood up and offered to bet that stocks would finish negative on the day. With only a bit more than an hour to go before close, the market having shot up 11 ticks after the announcement and trading up 0.6% on the day, I thought that offering even odds should have been a no brainer for any bull out there. The funny conclusion of this anecdote is that no one took the other side. I even said I would literally shoot myself if stocks finished up on the day... Thankfully they did not though I am still not sure that was a good thing. Bottom line is that nobody seemed to understand or care what stocks were doing: that to me is very scary. Keep watching for a break back below 1,130 as the Vix bearish signal for equities is still in effect and equities in Europe are not really confirming the break out.

The only pleasant conclusion after yesterday was that the long USDJPY, long 10Y Treasury, and short 10Y JGBs trade we recommended has moved 14bps already and is threatening to break key support. The rationale is simple: USDJPY is bid by the BOJ, 10Y US Treasurys are supported by the Fed, the carry is massively positive...

Good luck trading,



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