When a note by a Citi FX strategist begins with the following proclamation endorsing outright fascist despotism, you know it's going to be good: "This is the first European election in which voters didn't do the right thing." Perhaps if Citi would be so kind to overrule the democratic vote, in which 55% or the majority of the people voted against the "right thing", and impose its own unelected Italian dictator, just like Goldman did in November 2011, that long EURUSD call would be happier? Then it only gets better: "Elections are more problematic than market scares or sentiment shifts as they can't be undone by printing monry" (sic). True: some things outright money debasement by central banks can't buy - for everything else there are Siberian Gulags. And the absolute punchline: "Still the outcome does not seem so dire that a bit of growth and ECB flexibility could not turn it around." Why yes, all Europe needs is a "little growth" obviously in lieu of lots of growth, but frankly it will settle for any growth - something it has been unable to do under the wise tutelage of the banker-dominated oligarchy for the past four years, as for that little "ECB flexibility" - wink wink: just where would you like those Euro Stoxx Steve?
From Citi's Steven Englander:
1) The bad news first. This is the first European election in which voters didn't do the right thing. Instead they gave surprising support to politicians who reject austerity and, in some cases, the euro. This could become a major problem if it proves contagious. The feel-good from the runup in Italian asset markets was not enough to offset the feel-bad from austerity, low growth and unemployment. If all it would take to fix this was an ECB rate cut, they would do so immediately, but euro zone politicians may need to ease fiscal constraints and find ways to quickly stimulate growth. Elections are more problematic than market scares or sentiment shifts as they can't be undone by printing monry. Still the outcome does not seem so dire that a bit of growth and ECB flexibility could not turn it around.
Outcome for the euro - negative in short term and maybe further to go, but considering that euro spent months happily over 1.40 with Berlusconi as PM, this is a set back but not a catastrophe.
2) JPY - collateral damage and position cutting. Its not as if any new JPY information came out in the middle of the Tokyo night when markets went pear-shaped . Yesterday's high to low range in EURJPY touched seven big figures. So there were either weak JPY shorts or EUR longs. The BoJ's mistake in 2009-2012 was letting bad news elsewhere lead to yen appreciation, a double hit. If the new policymaking regime is different, it will be because it will resist JPY appreciation on bad news.
Outcome for JPY - temporary JPY plus, but hard to see the incentive for the Japanese government to do anything but talk yen down and Nikkei up again – USDJPY buying opportunity.
3) Monday’s shock helps Fed Chairman Bernanke Tuesday as these developments argue that the world is not a safe place and that a QE buffer against negative economic or financial shocks needs to be maintained. Bernanke will argue for Fed exIt (Fexit?) as soon as possible but not necessarily anytime soon. Very short term I think this will give markets a boost, but data in following weeks are a risk.
Outcome for USD – Fed Chairman will likely try and talk risk appetite back into market, unwinding USD gains. The problem is that once we get past his testimony we may face some weak economic data and renewed concern that fiscal tightening is having a more negative effect than is priced into markets.
4) Positions were big drivers and concentrated positions were hit, while positionless but risk-correlated AUD and NZD were almost flat versus Friday. JPY stronger on JPY negative news. This looks like a positioning and panic induced shift rather than a real risk sell-off. The Italian election is a definite EUR negative but other than with respect to the EUR, the major impact was in markets that were heavily positioned, not where there was bad news. Hence I think that dust will settle slowly in Europe but more quickly elsewhere – GBP, JPY weakness will resume.
* * *
Let's see what else could we add here:
5) If one ignores the 55% of the population that voted against the banker puppets in this election, then Monti and Bersani obviously get 100% of the vote. So you must buy EURUSD
6) Thank you docile little Greeks for doing "the right thing" in 2012
7) Remember "those" European "elections" in the 1920s? They actually were not that bad after all...
* * *
That smell? That's the stench of panicky desperation