The world’s a happy place again. After racing towards the precipice at astonishing speed, we’ve backed away again even more quickly. People are pointing to all sorts of things: the global central bank puts finally kicking in, the economic data (rather than the sentiment data) holding up better, the mythical European plan to save the Euro from Europe…but it really boils down to the one thing that matters: positioning. In the rally everyone had risk on trades, in this selloff everyone has risk off trades. We’re now back to some pretty key levels, and the question is how much this week’s risk on move has cleaned out the brave souls who’ve had positions. For mine I’m fading this move, but if we get S&P pop up through 1230 all bets are off. For the first time in this move the Eurodollar futures rallied overnight as well, which is a tick for the risk on crowd, but are still at pretty distressed levels, which is a tick for the risk off crew. Also last night we had several European banks biting the bullet and tapping the ECB’s US$ funding lines, with $500mio going for 1 week and $1.4bn going for 3 months…at 1.1% (which is more like 1.3% when you take haircuts into account), that’s a wopping premium to 3m Libor. And the T10 auction last night was very poor, following the poor bund auction earlier…again signs that positioning remains light and things are still dislocated.
Price action today in Oz has been telling: a stronger than expected employment report has been enough to knock the suffing out of the IB and bank bill strips, as the market prices for an RBA that’s more neutral than easing. The curve has flattened but the market found a wall of buying in the 3s down around 96.10, with 96.07 a big support level. The Aussie dollar shot up to as high as 1.0230 but has peeled back off half a cent in short order too. That’s because domestic news doesn’t really matter all that much right now – the RBA has already said that if CPI is behaving itself then offshore events will dictate where and when rates go here.
Internationally the market seems to be giving credence to Merkozy’s plan to have a plan within the next few weeks…but Masnick’s law of Europe says they will always find a way to disappoint. The FT has not one but two good articles on this…first up Martin Wolf: http://goo.gl/N0oyu The broad consensus of the world’s policymakers and commentators is that the eurozone must now do the following: divide countries in difficulties into the insolvent and the illiquid; restructure the debts of the former and provide unlimited, but temporary, support for the latter; and recapitalise banks, after stress tests that allow for losses on sovereign debt, either from national treasuries or from the European financial stability facility, in accordance with the flexibility given by the decisions taken in July 2011….these ideas, albeit now necessary, deal with the symptoms of what has gone wrong, not the underlying causes. As I have long argued, at bottom this is far more a balance of payments crisis rooted in financial sector misbehaviour and cumulative divergence in competitiveness, than a fiscal crisis.
…a way must be found to deal with the immediate crisis that does not allow another panic. But that would not be a solution if it merely led to indefinite financing of fundamentally uncompetitive economies. At the same time, one-sided and unduly hasty adjustment would exacerbate the downturns in the eurozone and world economies. What is needed is financing and adjustment. Unless and until that difficult combination is achieved, we are delivering first aid not a cure.”
Even the immediate idea of using the EFSF as the saviour of all things Euro has some serious problems: http://goo.gl/iTaZU “The fundamental problem of the EFSF is that everybody guarantees each other in a game of domino. Italy’s guarantees make up 18 per cent of the system. But this 18 per cent lacks credibility. Italy is hardly in a position to pay its own debt, let alone guarantee someone else’s. While France is healthier, its guarantees to Italy also lack credibility. And so do German guarantees for France. If you follow the line to the end, there is no ultimate backstop. If you double or treble the size of the EFSF without changing its underlying structure,all you do is double or treble the lack of credibility. If you really want to increase the size of the EFSF without destroying it, then you are left with two options: you have to back it through an unlimited guarantee by the ECB, the only organ in the eurozone that is in a position to give such a commitment. Or you have to change the EFSF’s legal status through the adoption of joint and several liability. This means that member states jointly agree everybody’s debt. The two options ultimately mean the same. The liabilities of the system will be shared jointly by all of its participants. If you want to annoy certain people, you could also call the latter a eurobond.”
And let’s not forget the German attitude to this idea of eurobonds…
Last night also brought the FOMC minutes: http://goo.gl/05Bdr The main upshots out of that…a couple of FOMC members wanted to do more i.e. QE3 rather than Twist, and lots of discussion and a resolution to do more around communication policy. Coming only a few days after the economics Nobel prize was awarded to guys that showed how expectations of rational actors can negate or enhance macro policy actions, this is a positive step towards the Charles Evans style “rates stay at 0% until unemployment gets to 7.5%” and even nominal GDP targetting. The other interesting analysis on the statement is this look at the FOMC recognising the problem is money demand: http://goo.gl/FvjpQ Rising monetary targets are not a sign of inflation, they’re a sign of ongoing panic and risk aversion i.e. excess demand for money rather than assets/goods & services.
If you want to have a laugh, check out this….pension funds continue to delude themselves about potential returns going forward: http://goo.gl/q2eNL There’s a reason real yields are negative and even 30y yields are around 3%.
Finally, a good one from the land of stats…it seems accounting data for US firms is slowly but surely getting more unreliable: http://goo.gl/YysyB