All eyes on MPC – wait and see mode?

Current developments to be aware of:

• Q1 GDP was -0.2% so back in a technical recession, this puts a bit if a spanner in the works.
• More signals that we are entering a ‘sticky’ period of inflation (again).
• Recent ‘less dovish’ comments from various members.
• Fatty McDove Posen dropped his vote for QE as developments in data swayed him.
• MPC minutes said the UK economic health was much better than official data had suggested.

UK Inflation:

• March CPI was higher than expected at 3.5% up from 3.4%, mainly due to the increase in food and clothes.
• Oil remains stubbornly high.
• Recently strength of sterling will counter balance some of the imported inflation effects.

Policy:

• Data will be closely watched in the coming months. Negative GDP and stubborn inflation indicates that the BOE will probably extend their policy pause beyond May, whilst external factors run their course.
• Eurozone problems will be in the back of members minds, so don’t rule out a chance of more QE later on in the year.
• Rate hikes are very unlikely till 2013.

Currency:

• Currently greatly affected by other central bank policies (SNB, Fed, and BOJ) are likely to be adding safe haven buying into sterling, none of these look as though they are going to change any time soon, so sterling buying may continue.
• EUR/GBP is technically very oversold, chances are there will be a pullback but will be short-lived due to political uncertainties in the Eurozone.

Guru’s Thoughts:

• No QE: I would not take a position straight away, I would prefer to sit on the sidelines and wait for an extended move if there is one, then jump in.
• +25: possibly worth a small buy in short sterling and gilts, and selling cable. However, if short sterling goes ‘too far’ I will look to get short.
• +50: buy short sterling and gilt, sell cable.

Good luck!!

A few market thoughts

German bonds: Bunds have yet again been rejected from its all time highs. This to me signals that we a witnessing the high in the bunds, they feel toppy to me. The Schatz remained firm yesterday, despite a selloff in Bunds and Euribor it remained strong, this to me signals that there are shorts trapped in the market. The reason I am bearish these binds is due to the fact that yields are too low, with all the liquidity now sloshing around the system thanks to the central banks, should investors still be as cautious with their money? With bunds currently yielding around 1.8% and inflation at 2.6%, surely the likes of SPGBs, Oats or BTP yields look far more attractive. Roll over tomorrow.

Stock market: Yesterday we saw one of the bigger sell offs we have seen for a while, on juicy volume as well. To me it looked like it was US led. There were stories going around that it was funds unwinding QE trades after Bernanke had a crap all over the idea of more QE for now. This theory may well be true as the bonds failed to gain much of a bid and gold to a kick in. I just think it was people just getting stopped out. As well as being bearish binds I also remain bearish of indicies, but I doubt there is much to the downside, and we are more likely to enter a consolidation period caused mainly by a fierce rally in oil.

Euribor: Yesterday we saw a rally in the morning and then new lows in the evening. I have got a hunch, I can see Draghi being hawkish tomorrow, and I think some people also have this suspicion. There was some funny option plays occurring yesterday, which seemed to be moving the strip. I would rather be selling a rally in Euribor, but will also feel fairly comfortable buying on any decent support. Today’s fix is called -1.0bps.

Short Sterling: The word mad springs to mind. We saw a very strong rally on Friday, then a powerful sell off on Monday, then yesterday showed some indecision. I think this market is being led by the Eurodollar curve and flattening out. I feel comfortable trading both sides in Sterling as I see it doing bugger all in front of the important data in the later part of this week.

Eurodollars: The fix came in flat yesterday, this in my opinion puts a spanner in the works and caught a few people out. I am surprised we bounced so far afterwards, but this was mainly due to buying further out the curve as the fronts still underperformed. Today’s fix will be important to see whether yesterday was a one off or whether the trend has paused. Call is -0.1bps.

Good luck trading

Ze Bund thoughts

Recent activity: Been a bit of a turnaround since the second half of last week. There’s been a lot of indecision this week so far, it's been trading in a very very jerky manor. Today we once again came close to the 2% yield mark.

Recent fundamentals drivers: Monday night the finance ministers finally passed an agreement which will permit Greece to obtain its next bailout funds. We have been waiting for this since f*cking October when it was announced. Monday was full of ‘risk on’ sentiment as participants were pre-empting a completed deal. Yesterday there was a troika report doing the rounds (http://av.r.ftdata.co.uk/files/2012/02/Greece-DSA.pdf) that basically said they thought Greece was f*cked! Many people that I talk to seem sceptical of the deal and think it will be a matter of time before holes are poked in it and floors are found. When a fundamentally important piece of news is the market focus for a prolonged period of time, once a conclusion is made the market usually breaks out of the range to make significant new highs or lows, so the next few days are significant to show how the market will absorb the news.

Guru’s thoughts: I think being as there has been such a build up to the Greek deal and it has been the focus of most bund traders, it has over shadowed other dilemmas. At the centre of Europe there is still a rotting core. I think the deal will only supply a short-lived flood relief. The chances that other peripherals will need a second bailout and/or debt restructuring is pretty high, I think this will still keep some sort of bid in the bunds and not let it run too far over the longer term. I will be watching to see if the bund rejects the current lower levels, if the scenario occurs I think there is a strong possibility we will see the top end of the recent range.  – Good luck!

PSI thoughts

This morning it was unveiled that the Greeks and the European authorities are at the final stages of a bind swap deal with the private sector. The deal is meant to ensure that the private sector will suffer a reasonable loss whilst the ECB and any other central banks will not suffer any.

The fact that they are forcing the losses on the private sector is in my eyes a deserved punishment. The problem with the PSI procedure is that it doesn’t reward these economic agents accordingly. This PSI example means that in the future if another government bond crisis occurs again then private investors are far less likely to provide support to troubled governments, and the pesky bond vigilantes are rewarded once again. Investors are then going to short a country’s debt at the very point in time when it needs confidence and buyers. So should this happen again, it could happen a lot quicker.

From a fund/bank/insurance company/pension firm that is going to get scalded for owning Greek debt, will be thinking this: “the investors which were short made money, legal powers are guarantee authorities will endure no damages whilst I’m taking a slap?”. The next time this happens instead of buying it when its cheap and assuming that it will get resolved, you may want to get short or use other derivative instruments to go short of the country.

The vigilantes will feed well, the authorities will not eat less, and the private investor will waste away.

Market thoughts

Equities: Strength is remaining with what I think is investors keep buying in the cash market as they don’t want to miss the rally, and the PBOC’s cut in their RRR gave them a bid yesterday. I can see added strength in the near future as the European shenanigans are pushed aside for the time being. But, I do believe that there are sellers waiting, there will be a point when long term investors decide to get involved and sell into a rally as the market will get more sensitive to negative news.

Bonds: As I think the Greek nonsense is coming to a temporary halt I can see the flight to safety bonds selling off, but if there is a big equity squeeze I don’t think the bonds will sell off as much as participants may think. I also think that Greece will come out the limelight then come back, whether it is in a week to 2 weeks or a month to 2 months, I don’t know. I believe that this ‘trigger’ what ever it is that will bring Greece under pressure again will bring a fresh wave of buying in the market.

Euribor: Can’t really have much of an opinion as these levels, but I do slightly favour the downside from here, however that won’t stop me buying at levels I deem reasonable. In terms of the curve I think the fronts will maintain more of a bid than the pressure that will be on the backs. So I think spreads will remain some sort of bid.

Short Sterling: It looks like it is ready to take a further wallop in the near future as we have burst out of a tight range on reasonable volume. However the fact that everyone thinks this could lead to a squeeze, and remember that gbp LIBOR is still in an uptrend.

Another Greek update

The days seem to be numbered in Greece as the March bond redemption looms. The fear is now that Greece won’t get their second bailout package and that many investors are having doubts on the PSI deals. A Greek finance minister called it a choice between bad and something worse. It has been said that all this tussling between the politicians is simply the politicians trying to look ‘tough’ and are actually bluffing as they will meet troika’s demands as soon as they are re-elected.

THE LETTER: (http://online.wsj.com/article/BT-CO-20120215-705612.html) First thing this morning this was seen as a good thing but once it was actually read by market participants, it emerged that there was a typical Greek slippery underlying current. The part that caught much attention was the last paragraph where this is said: "policy modifications might be required to guarantee the full program's implementation. And, once again, we intend to bring these issues to discussion along with viable policy alternatives..." To me this says: “we’ll renegotiate a deal once we have got our money”. Some EU ‘sources’ I think have realised this and stated that they are considering hold back some or all of the bailout money, but will still avoid a default. Sounds to me like this whoooole thing is about to crumble in front of us.

BRIDGE LOAN: This would take the immediate risk off the table of a default in March. It would also allow a delay of a full bailout until after the election. Now that’s smart, for a change. Greek politicians would have to run on supporting the bailout or risk not getting it. Less chance for “adjustments” after the election under this scenario.

Guru’s thoughts: I’m not at all surprised that there are doubts, it is almost too typical for Greece to bite the hand that’s feeding them. What I think is happening here is due to the Greeks promising everything and delivering f*ck all, now the EU actually want evidence their money is attached to some results  and this is going down too well. There is no way that a PSI deal will be made if there’s a chance the Greeks won’t get their money. A bridge loan will help the immediate threats but as I have said before; at the end of the day they are Greeks and they won’t live up to the terms of the bailout because the terms are unachievable if you don’t like working or paying tax. The Greeks are making it pretty obvious that they would rather be broke than be told what to do by the Germans, so will there be a point where one party says: “poke it up you’re a*se”?? I’m starting to doubt that the disease is actually worse than the cure. But I will warn that you should get you umbrellas out – the sh*t is about to hit the fan....

Bund rundown

The Bunds are currently in a big tug of war, with extremely choppy trading occurring. Bears look like they took the 2% yield level but bull mange to snatch it back during the whole Greek vote palaver. The main things which have affected the bunds today are: the Moody’s downgrades, a good BTP auction, a very very good German ZEW.

The end of last week put a bid into the bund as there were a lot of rumours and sh*t about the Greek vote flying everywhere. Some Greeks didn’t like the terms of the austerity measures, this lead to some of them resigning. As Monday came it appeared that the parliament managed to pass the measures. Despite this the markets did not show any clear-cut response which was expected.

Guru’s thoughts: Bund failed to definitively sell off on good news and again failed to rally on bad news, this combined with very choppy trade leaves me at the conclusion that no-one really knows what the hell to do. With these aggressive burst on minimal volume makes me think that it is simply small investors with low commitment getting stopped out each way. I was very bullish on the Bund last week but now I’m losing faith in the Bund bulls slightly. I still believe that the 2% yield level is something that should be watched closely as a pivot type thing, coinciding with the futures price of around 137.50. An established break below here will put me back in bear mode. However above last week’s high will make the chances of a squeeze to all time highs of 140.23 more likely.


Guru's rant: I don't think it would take the most cunning of people to work out that the c*cks at Moodys gave some of their buddies a nod! Since the US opened yesterday afternoon the Bunds squeezed and the eur/usd got sold. Is it a coincidence?....is it f*ck!
I wish I was in the free money gang!!