The Day Today 3 Dec 2013

Yesterday’s gangbusters US ISM Manufacturing data took the US 10yr back to 2.80% level as expectations build for a strong employment report on Friday. We’ve just got the small matter of the Bank of Canada, ECB, BOE and UK Autumn Statement before then…

* RBA continues to say AUD is “uncomfortably high” as rates remain on hold, with a lower currency “likely to be needed to achieve balanced growth {fifw NSN MX7TNQ6S9729 <go>}
* China’s yuan overtook the Euro to become the second-most used currency in global trade finance, according to SWIFT {fifw NSN MX84D56JIJV2 <go>}
* As the Canadian dollar heads to a 2year low… Ottawa Citizen: Why Canada’s policymakers may want a weaker loonie http://bit.ly/1bcOxCz
* Construction Index in U.K. Shows Fastest Expansion for More Than Six Years {fifw NSN MX865M6S972F <go>}
* Telegraph: ‘The cost of insuring British debt against default has fallen below the levels for the US, Switzerland, Japan and every major eurozone state except Germany’ http://bit.ly/19erQe1

The Day Today 2 Dec 2013

* The view on the UK from our cousins across the pond
WSJ: For Investors, U.K. Political Risk Comes Early http://on.wsj.com/19cSfsG
* BOE releases Funding for Lending data, +£5.8bn in Q3 from +1.6bn in Q2, biggest quarter since the scheme was launched http://www.bankofengland.co.uk/publications/Pages/news/2013/182.aspx
* Ahead of Autumn Statement, the message is that there will be no ‘giveaways’
Telegraph: George Osborne warns of new curbs on housing market to avoid boom and bust http://bit.ly/1gxrDb3
* PBOC Vice Governor Says China Forex Reserve ‘Sufficient’: Caixin {fifw NSN MX5KQP6JIJVW <GO>}
* PBOC Proposes Special Accounts to Exchange Yuan in Shanghai Zone {fifw NSN MX64O36JTSE9 <GO>}
* China Manufacturing PMI 51.4 vs 51.1exp and 51.4prior – remarkably stable
* Peter Gauweiler, Vice-Chairman of CSU (Merkel’s Bavarian sister party), says Euro area is comparable to socialist states a quarter of a century ago: “The more irreversible one considers a conglomerate, the faster it dissolves,” {NSN MX4PRG6S9728 <go>}

* The Investment Management Association is apparently pressing the FCA for ‘More Disclosure on Currency-Rigging’ {fifw NSN MX1CTJ6JTSEM <go>}

* NZ Q3 Terms of Trade strong: 7.5% vs 2.9%exp and 4.9% prior

The Day Today 6 Nov 2013

* Much better NZ Employment: +1.2% QoQ vs 0.5% exp and 0.4% prior

* Fed to lower the unemployment threshold to offset any taper? Hilsenrath in WSJ flags new study by Bill English, to be presented at IMF meeting Friday http://on.wsj.com/1bWQB0a
* Fed’s Williams disappointed that he’s not seeing the pick-up in data he expected, and he doesn’t see where growth will come from next year {fifw NSN MVTETT6JIJUT <go>}
* UK IP bounces back from last month’s disappointment, 0.9% MoM /2.2% YoY vs 0.6/1.8e and -1.1/-1.5p
* Italy FinMin on the wires again, trying to do the ECB’s job for them: “Surely the European Central bank is taking care of all those factors…[inflation] is remarkably below the ECB inflation targets, and it is an important indication of the ECB future policy” http://on.wsj.com/18YfaXt
* BOJ Minutes: CPI increase may pause; fiscal reform stance may be weakening; economy is recovering moderately  {fifw NSN MVTEWM6K50Y2 <go>}

Fear of Liquidity

Since the Fed failed to taper, the market has taken another hit of the “lower for longer” drug that has been its comfort over the last 5 years. Volatility has fallen, stocks have rallied, yields are lower. The difference now is that we’ve seen what happens when it’s revealed the Emperor has no clothes, courtesy of the June taper-inspired wobble. So how does a market trade when it knows the cold turkey is coming? When it knows that the pain of that snap back-to-reality has just been made worse by another hit of the drug?

It ignores it.
Sure, there are lots of possible bad situations that could eventuate, but why worry until you need to? In fact, the Govt shutdown gave the perfect excuse to bury your head in the sand. “The Fed says it’s data-dependent? Well, the data for at least the next two months is unreliable, ergo irrelevant, so I don’t care”. And so, shut your eyes, do the “risk-on” thing, and push any concerns from your mind.
Except… last week the alleged risk-loving AUD and NZD were the worst performing major currencies while the low-yielding Euro went from strength to strength. It’s hardly a simple case of “Carry as King”. The trouble is that different parts of the market are prey to different kinds of flows, because overall conviction is low. One-off position adjustments dominate. CTAs can quickly run one way then the other in AUD/JPY, just as real money puts cash to work in Korea, and global asset allocation shifts money out of US equities into European ones.
What can we pick out of this jigsaw puzzle?
If there is any theme, it’s one that ML’s Michael Hartnett recently flagged: “The Fear of Liquidity”. Ride the free money wave – but with care. It’s not just that we know now what happens when the plug is pulled, but that its negative impact has been exacerbated by the Fed blinking. They have effectively mandated themselves to get behind the curve. So we feel uncomfortable with holding “risk-on” positions because the fat tail risk has in fact increased.
The trouble is, as ever, timing. Even buying options won’t save you, with implied vols cratering. The JPMG7 fx vol index is on the year’s lows at 7.6 (it hit 12 in June and was around 6 in 2007). The Vix is at 13.3 (vs. 10 pre-crisis). Even the potential threat of a US default, however small, couldn’t keep vols up for more than 24 hours. Investors have discovered that insurance is expensive, after trying to bet on Euro armageddon.
Wouldn’t it be ironic, after years of panicking about the ghost of Lehman past, that the moment the market became too tired to care was exactly when disaster struck?

The Day Today 16 Oct

* “The deal is essentially done” on the Senate side http://politi.co/19Mh9OS * But Boehner cancelled a vote last night  http://wapo.st/1bVJl9t What will he do next? * Fitch placed US AAA rating on negative watch as “the political brinkmanship and reduced financing flexibility could increase the risk of a US default” http://reut.rs/169vxFK

* Argument breaks out over how to cover capital shortfalls that will come out of the ECB bank stress tests  {fifw NSN MUPXGZ6VDKHS <go>} * ECB’s Praet: Euro is in “relatively normal range”; ECB thinking about “what if” in case of US default {fifw NSN MUQ6AO6S972G <go>}

* Merkel Left to Seek SPD Alliance After Greens Drop Out of Talks {fifw NSN MUR3MI1A1I4H <go>} * European Car Registrations Rise 5% in Biggest Gain for More Than Two Years {fifw NSN MUR3AI6S972Z <go>}

* NZ inflation higher, +0.9% QOQ vs 0.8exp and 0.2prior, 1.4% YoY vs 1.2 and 0.7 * A warning for NZ as they tinker with loan to value ratio? Singapore Home Sales Fell 52% in September Following Loan Curbs {NSN MUQXV76S972A <go>}

* JPMorgan Said to Settle CFTC London Whale Trading Probe for $100 Million {NSN MUQT9W6S972E <go>}

* Goldman Sachs Ordered to Disclose Female Employees’ Complaints {NSN MUQRD76S972O <go>}