Eurusd

On Fx (Krasting)


Monday, July 23rd, 2012

I’ve been running a short EURUSD for the past six weeks. I got in at 1.2650 on June 30, and doubled up on July 8 at 1.2260. I was delighted to see the Euro get cheap in Friday’s trading, but the market action forced a decision. I wrote some things down on a pad, thought about it a bit, and said, “Screw it”, and cut the whole position. Some of my thinking:

I hate trading FX at the end of July . The markets shut down with the approaching European August vacations. The last week of the month is about cleaning up positions, not putting new ones on. August is never a time to be involved, unless you have to.

There was something odd about the EURUSD trading Monday through Thursday. Tyler Durden, at Zero Hedge, made note of this.

The red arrows that Tyler drew bother me. This stinks of “official guidance”. It’s tough to make a buck at the FX casino, it’s tougher still when the tables are rigged.

In May and June the Swiss National Bank (SNB) bought CHF 110Bn worth of Euro’s. That’s a staggering amount. I’m convinced that the intervention was heavy in July as well. Reserves are headed up another CHF50Bn. I think these numbers still understate what is happening, as the SNB has been writing calls on the Franc.

In the course of just three months ¼ Trillion Euros have crossed into the Alps. This is unsustainable. At some point it will have to result in a messy blow up. But not necessarily in the month of August.

I don’t think the SNB is going to fold its cards just because they are under attack. If the SNB were to quit intervening, the EURCHF would be nearing par in a matter of days. The cost to the SNB would be CHF40Bn (15% of GDP).

Before taking a loss of this magnitude, the SNB, (with the blessings of the government), would implement a variety of exchange controls. I think this is a something that could come sooner than the market believes.

It is my understanding that there is significant macro hedge fund positioning in the EURCHF. I don’t believe that the SNB is going to simply write a monster check to some fat cats up in Greenwich. There will be (at least) one more chapter in this story.

Should there be something that makes people blink on the CHF, it could end up causing short positions in the EURUSD to get jumpy. I’d rather not be part of a jumpy crowd.

I’m worried about what Bernanke may do on August 1st. We could see something that brings the US negative short-term interest rates. (My thoughts on this). It’s very difficult for me to be a dollar bull. I’m much more comfortable playing the dollar from the short side.

The Euro weakness on Friday was related to a big selloff in Spanish bonds. The Spanish ten-year ended up at 7.27%. This means that a Spanish bailout is not far off and Italy is next in the crosshairs.

Really? I don’t think so. It’s not going to be that easy.

The Euro technocrats are not going to fold in August. They may be going down, but I fear more battles are in the offing first. SMP purchases of sovereign debt is likely next week.

Realized gains have been elusive for me this year.

Now that I don’t have a position to worry about, I’m worried about not having a position. I will be looking for an opportunity to re-load a short Euro exposure. Hopefully it will be at higher levels than Friday. Either way, I will act before September rolls in. The Euro is still toast.

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Unscrambling the Euro Eggs (Krasting)


Thursday, May 10th, 2012

 

by Bruce Krasting

On April 17 I wrote about a conversation (link) with an individual who lives in Athens. He had this to say about the coming Greek elections:

“The other parties are communists, radicals and crazies. If they have a hand in the new government, then on May 7 Greece will be forced to take dramatic steps. The whole idea that the country should suffer, so the bankers can get paid will have to change.”

He also said this:

“The attitude in Brussels and Bonn towards Athens will change after the election as well!”

He had that right, so I called him back to get an post-election update.

BK: Is it true that you will soon spending Drachmas?

Athens: This seems to be the only possible outcome. Germany will no longer support Greece, neither will the IMF.

BK: What would the new Drachma be worth in Euros?

Athens: Far less than the rate that was used to convert Drachma to Euros in 2001. At least 50% less. For Greece, the exchange rate for the Euro will be the key, but you can’t forget that the Drachma will also have a new exchange rate for the dollar.

Greece joined the Euro in 2001 at a fixed conversion of 341Greek Drachmas to the Euro (EURGDR). In the period preceding the link, the USDGDR was 328. Assume the Drachma floats freely and promptly loses half of its value versus the Euro. The market rate would be EURGDR 682. If the EURUSD was trading at 1.3000 it would mean that the USDGDR would be 568. The GDR would lose half its value against the Euro but it would only lose on 37% versus the dollar. I asked the fellow from Athens about this:

Athens: There is the proof. The Euro is too high against the dollar.

I thought that was an interesting comment. I went back and looked at the original conversion rates to the Euro for France, Italy and Spain and compared them to what the USD exchange rates would be today:

- The +11% results for these countries versus the USA looks wrong to me. I considered what the local currency rates would be if the Euro were lower in value versus the dollar. A rate of EURUSD 1.20 still doesn’t get it done for me. It starts to “look right” with the EURUSD at 1.10


- If the Euro were to be broken back into its original pieces, the old legacy currencies would trade around the Deutche Mark (DM). It is a very safe bet that if there was a free float of the currencies, the DM would increase in value versus all of the other EU members. It’s an equally safe bet that the USDDM of ~1.67 that was posted on 12/31/98 (last day of the DM) is going to also be much weaker (DM strength).

If the DM is going to make a comeback it will create a very nice new reserve currency. Money will migrate from both Switzerland and Japan to a different “safe” place. It will end up in Frankfurt. These are my estimate for what may happen:
USDYEN = +10%

USDCHF = +10%

DMYEN = +30% (1999 to date)

USDDM = -40% (1999 to date)

USDDM = Parity

DMCHF = Parity

DMFF = +15% (1999 to date)

DMLIRE = +20% (1999 to date)

DMPESETA = + 40% (1999 to date)

DMDRACHMA = +60% (2001 to date)

DMESCUDO = +50% (1999 to date)

DMGUILDER = +10% (1999 to date)

Of course these are just estimates, but I think the directional moves I describe will take place. The issue is how long it will it take and how violent the markets will be. On that score, I would estimate that it would take at least a year for these adjustments to take effect, the process of making these adjustments will be very violent indeed. One thing is clear to me, Germany is going to take the brunt of the adjustments that must follow.

The Germans are going to get hit from all sides. Its currency will rise against all the EU countries, it will rise against the Dollar and the Yen. This reality is the reason that Germany has done what they have to avoid a breakup of the Euro. I don’t think they can avoid the consequences much longer. Germany is now stuck between a rock and a hard place.

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Goldman’s Thomas Stolper Comes Clean on the Euro; Even More Confusion Ensues


Wednesday, May 9th, 2012

Because the market sure could do with some humor on this blood red morning, we bring you FX strategist extraordinaire Thomas Stolper, who sadly does not give us the latest fade trade, but decides instead to come clean with pearls as: “On our EUR/$ forecast, last revised in January, we have been both right and wrong.” Surely the “right” part is what he is worried about: after all if Goldman prop (whatever it is called these days) can’t take the other side of the clients’ trades, nobody gets paid. Yet Tommy still gets paid the big bucks: Why? For insights like these: “Cyclical forces and continued fiscal stress account for the lack of a EUR/$ rally…and we see little chance that they resolve themselves near term for EUR/$ higher.” So cutting right to the good stuff: “Our structural, long term thought framework has not changed; we think global macro and flow fundamentals still argue for a weak USD and this theme will likely overwhelm other currency market developments on a one to two year horizon.” We get it: the EURUSD can’t go higher, but the USD is going lower. Mmmk.

From Goldman’s Thomas Stolper

  • On our EUR/$ forecast, last revised in January, we have been both right and wrong.
  • EUR/$ hasn’t cratered, despite very negative sentiment. On this we have been right.
  • But it also hasn’t rallied in line with our past forecasts. On this we have not been right so far.
  • Cyclical forces and continued fiscal stress account for the lack of a EUR/$ rally, …
  • and we see little chance that they resolve themselves near term for EUR/$ higher.
  • Longer-term we retain the view that broad USD weakness will reassert itself.

1. Market update

German industrial production for March announced yesterday surprised positively, attesting to continued solid underlying growth in the German industrial sector. After a brief squeeze higher, EUR/$ spent much of the day cycling around 1.30, as the uncertainty driven by the elections in Greece over the weekend continued to weigh on markets. European equities closed the day down 2-3%, while the SPX was down a more modest 0.8%. Sovereign bonds on the Euro periphery continued to take things in stride, with 10-year yields rising only modestly. This morning, risky assets continued to trade on the backfoot.

Elsewhere, Australia’s 2012-13 budget reinforced our bottom-of-consensus views on economic growth there, suggesting that the weight falls on the RBA to provide some stimulus to the economy as the Government moves to an unprecedented contractionary setting. We continue to expect the RBA to ease interest rates 25bps in June and 25bps in November 2012.

Given the latest round of nail biting over Greece, we today review where we have been right, and where we have been wrong, on our EUR/$ call. In particular, we quantify why EUR/$ has not rallied in line with our past forecasts, and assess the implications going forward.

2. Quantifying the drivers of EUR/$

While our long term EUR/$ views are driven by our structural bearish stance on the USD, ever since the European crisis began we have emphasized that near-medium term EUR/$ swings are primarily driven by three forces: (i) the weak balance of payments of the US vis-a-vis the more balanced picture for the Euro zone; (ii) interest differentials as a proxy for growth and monetary policy divergence between the Euro area and the US; and (iii) a fiscal risk premium, which measures sovereign distress on the Euro periphery.

Now, while most can agree on how to measure the interest differential – we have used 2- or 5-year swap rate differentials in the past – measuring the fiscal risk premium is tricky. What we have done in the past is to try a variety of things. We have used the relative performance of European versus US equity markets (see The Global FX Monthly, January 2012 ), and have also used the cross-currency basis as a measure of bank funding stress. Finally, we have used the GDP-weighted spread on 10-year sovereign bond on the Euro periphery over Germany (see Global Markets Daily: Quantifying the Drivers of EUR/$, Jan 26, 2012). None of these measures is perfect, of course. Our broad point here is simply that the Euro zone crisis has injected a risk premium into EUR/$ where previously there was essentially none, and that this risk premium has been – empirically speaking – roughly as important as the rate differential in explaining EUR/$ moves over the past year or two.

We can use such a framework to decompose the decline in EUR/$ from its peak in 2011 to now, focusing in particular on the roles of the interest differential and the fiscal risk premium in the recent EUR/$ move. For purposes of illustration, we use GDP-weighted Euro periphery 10-year bond spreads over bunds as our proxy for the fiscal risk premium. This exercise shows that – of the 18 big figure drop in EUR/$ between April of last year and now – 8 big figures reflect the interest differential, another 8 big figures reflect the fiscal risk premium, with the balance reflecting other factors we control for like global risk appetite and oil prices. In short, we think cyclical factors, like growth and monetary policy, and the fiscal risk premium have accounted in roughly equal parts for pretty much the entire fall in EUR/$.

In January we revised our EUR/$ forecast to 1.33, 1.38 and 1.45 on a 3-, 6- and 12-month horizon, respectively. The key element of our forecast was near term stability of EUR/$ (in the form of our 3-month forecast, while consensus was for EUR/$ weakness). That said, it has been a long-standing forecast of ours that EUR/$ would rally. For example, in September 2011 we had 3-, 6- and 12-month forecasts of 1.40, 1.45 and 1.50 for EUR/$. We now discuss in greater detail where we have been right and where we have been wrong on EUR/$.

3. Where we have been right and where we have been wrong

The fact that the EUR/$ has not fallen sharply year-to-date and actually rallied since its January low of around 1.26 is where we have been right, in particular since we made our forecast in January against the backdrop of pervasive EUR bearish sentiment. The fact that EUR/$ has held up well has underscored two of our core beliefs: (i) that USD is itself very weak, due to a weak balance of payments (see Global Markets Daily: The Largely Ignored Deterioration in US Flows, Dec 13, 2011 ); and (ii) short EUR positioning that remains large, so that a lot of bad news is already priced in. In these two respects, we have been right.

However, the EUR/$ strength we had been forecasting back in 2011 for 12-months out also has not materialized, and this is where we have not been right so far. Our thinking in the past had been that gradual policy progress and markets becoming comfortable that tail-risk scenarios like a full-scale Euro break-up are not going to happen would ultimately cause the fiscal risk premium to come down, providing EUR/$ with a boost.

What has happened instead is that fiscal consolidation has brought a hit to growth, which has weighed on EUR/$, while offsetting the more marginal benefits from any reductions in the fiscal risk premium. We had thought markets would gradually get used and look beyond the near term muddling through in Europe. Instead, currency markets remain skeptical in regards to fiscal and growth risks on the periphery.

4. Now what?

Our structural, long term thought framework has not changed; we think global macro and flow fundamentals still argue for a weak USD and this theme will likely overwhelm other currency market developments on a one to two year horizon.

At the same time, we have highlighted in our discussion above, the near term path for EUR/$ remains torn between the negative growth impact from fiscal consolidation and ultimately positive effects from a gradually shrinking risk premium. The balance between these two forces in the near term continues to look unclear, in line with our near term forecast for limited EUR/$ upside. Separately, though QE3 in June remains our baseline forecast, this is increasingly a close call, as Jan Hatzius once again flagged yesterday (see US Views: Still Dreary (Hatzius), May 8, 2012), further reducing the potential for EUR/$ top rally in the near term.

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LTRO 2: Goldman’s Take


Wednesday, February 29th, 2012

Goldman waited exactly 20 minutes to try to comfort the market, especially the EURUSD which is getting increasingly jittery, that €1 trillion in Discount Window borrowings is a “positive.” We beg to differ that trillions in more debt collateralized by candy bar boxes and condoms will cure an excess debt problem, especially with all the good collateral now gone, and we are confident that ongoing deleveraging needs will put a major cog in the system, especially since the only liquidity expansion move now is “fade”, at least until the next major crisis.

Banks take out ECB “funding insurance”

The ECB has today – through its long-term refinancing operation (LTRO) – fully allotted €529 bn of 3-year funds to 800 banks. Together with the first auction, the ECB has now injected €1 trn of 3-year funds into the system. This is an extremely high amount and equals, for example, 131% of total (249% unsecured) European bank bond maturities in 2012 and 72% (130% unsecured) for 2012 and 2013 combined. European banks are now effectively pre-funded through to 2014.

Funding stabilized, revenues supported

Large take-up is an important positive. Key reasons are: (1) banks are now largely insulated from shocks in the funding market, having prefunded through 2014; (2) consequently, the costs of bank and sovereign funding have now been detached; (3) pressures for forced deleveraging should reduce (first evidence of this is visible in the recent ECB loan data); (4) deposit pricing pressures should fall (this too is already taking place), resulting in a positive revenue effect.

Country aggregates in coming weeks

While the focus is on the aggregate take-up, we see country aggregates as arguably more important. Over the course of the next weeks, we will get disclosure of country aggregates where we expect the Spanish and Italian take-up figures to be high.

ECB’s actions expand the investable group

We derive our group of ‘investable’ banks by: (1) incorporating P&L effects of ECB action; and (2) overlaying these estimates with ‘extreme’ credit losses (as per the EBA stress test). Within this group, our Eurozone top picks are Erste Bank, BBVA, BNP Paribas (all Conviction Buy), and Intesa Sanpaolo (Buy).

We identify banks likely to be “disproportionate beneficiaries” of the ECB LTRO including: Banesto (Buy), Banco Popular Espanol (Not Rated), BancoPopolare, Banca Monte dei Paschi di Siena and UBI Banca (all Neutral).

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Goldman Explains Why The Market Has Gotten Ahead Of Itself In Its European Optimism Again


Wednesday, February 8th, 2012

While hardly new to anyone who actually has been reading between the lines, and/or Zero Hedge, in the past few months, the Greek endspiel is here, and as a note by Goldman’s Themistoklis Fiotakis overnight, the Greek timeline, or what little is left of it, “allows little room for error.” Furthermore, “Due to the low NPV of the restructuring offer it is likely that part of this investor segment may be tempted to hold out (particularly owners of front-end bonds). How the holdouts are treated will be key. Paying them out in full would probably send a bullish signal to markets, yet it would be contradictory to prior policy statements about the desirability of high participation both in practical terms as well as in terms of signalling. On the other hand, forcing holdouts into the Greek PSI in an involuntary way would likely cause broad market volatility in the near term, but could be digested in the long run as long as it happens in a non-disruptive way (as we have written in the past, avoiding triggering CDS or giving the ECB’s holdings preferential treatment following an involuntary credit event could cause much deeper and longer-lived market damage).” Once again – nothing new, and merely proof that despite headlines from the IIF, the true news will come in 2-3 weeks when the exchange offer is formally closed, only for the world to find that 20-40% of bondholders have declined the deal and killed the transaction! But of course, by then the idiot market, which apparently has never opened a Restructuring 101 textbook will take the EURUSD to 1.5000, only for it to plunge to sub-parity after. More importantly, with Greek bonds set to define a 15 cent real cash recovery, one can see why absent the ECB’s buying, Portugese bonds would be trading in their 30s: “Portugal will be crucial in determining the market’s view on the probability of default outside Greece… Given the significance of such a decision, markets will likely reflect concerns about the relevant risks ahead of time.” Don’t for a second assume Europe is fixed. The fun is only just beginning…

From Goldman Sachs – Market Uncertainty Ahead from Euro Area Sources

Overview

News reports over potential progress in Greece’s PSI talks and the possible involvement of the ECB/EFSF in the restructuring deal have once again boosted the performance of risky assets, with S&P futures trading stronger and the dollar weaker. Peripheral Euro area bonds are trading flat-ish. Today is a quiet day in terms of data releases and markets are likely to start focusing on tomorrow’s ECB and BOE meetings…. In today’s note we discuss the reasons for managing our recommendations more cautiously, linked to Euro area sovereign uncertainties and the likely balance of risks around the ECB’s policy stance vs. market expectations.

A Tight Timeline For Greece Allows Little Room For Error

Greece remains an important source of risk to watch. As we have argued in the past, markets have interpreted the case of the Greek Private Sector Involvement as a precedent for restructuring within the Euro area. Over the last eight months of PSI discussions and preparations, the deterioration in Greek debt dynamics has been accompanied by a gradual deterioration in the terms of the deal for the existing bondholders (in an effort to achieve debt sustainability). In the end, the revealed preference of policymakers in the Greek case has been to pass a significant part of the cost of restructuring Greek debt to the private sector. Fundamentals in Greece may be much worse than in other countries, but the market has extrapolated the policymakers’ reaction function to the other peripheral countries with better fundamentals, thus pushing risk premia higher.

The next few weeks will be no exception. There are important issues to be resolved and further important precedents to be set thereby. To better grasp the complications at hand it is important to discuss the timeline of events ahead. The agreement between the Greek government and the creditors represented by the IIF is likely to be reached in parallel with an agreement between the IMF and the Greek government on the new austerity measures. Then the new austerity measures (including reductions in minimum wages and further reductions in pensions), which are likely to prove unpopular domestically, will need to be approved by the Greek parliament. All this needs to take place about 3-4 weeks ahead of the March 20th bond redemption, so that there is enough time for the IMF to sign off on the new loan package, for the offer to be extended across bondholders and for maximum participation to be pursued.

As we have discussed in previous pieces on the subject, outside official lenders, Greek bond holders and Euro-area banks, there are about EUR70bn of bonds scattered across different institutions. Due to the low NPV of the restructuring offer it is likely that part of this investor segment may be tempted to hold out (particularly owners of front-end bonds). How the holdouts are treated will be key. Paying them out in full would probably send a bullish signal to markets, yet it would be contradictory to prior policy statements about the desirability of high participation both in practical terms as well as in terms of signalling. On the other hand, forcing holdouts into the Greek PSI in an involuntary way would likely cause broad market volatility in the near term, but could be digested in the long run as long as it happens in a non-disruptive way (as we have written in the past, avoiding triggering CDS or giving the ECB’s holdings preferential treatment following an involuntary credit event could cause much deeper and longer-lived market damage). One way of staging such an involuntary restructuring operation for the holdouts would be the retroactive imposition of collective action clauses and their invocation following the conclusion of the voluntary restructuring operation. The introduction of such clauses would likely happen before the PSI exchange offer goes live – in order to further discourage investors from holding out.

The good news is that after a successful restructuring operation, Greece’s systemic importance as a source of risk declines meaningfully due to the limited refinancing needs, the meaningful reduction in debt servicing costs and the low levels of residual market exposure to Greek bonds post PSI.

Portugal’s Significance to Rise Post-Greece

Greece has created a market concern to do with low recovery rates in the event of a restructuring episode in the Euro area, which has been reflected across sovereign risk premia in peripheral Euro area bond markets. However, Portugal will be crucial in determining the market’s view on the probability of default outside Greece. This is because Euro area policymakers have gone out of their way to signal that Greece is a unique case, addressed with a one-off operation. Therefore it will be important that this commitment is maintained.

As Silvia Ardagna and Andrew Benito discussed in a recent Viewpoint, it is likely that Portugal may need an increase in assistance funds. The progress that Portugal has made in its adjustment programme and the reasonably limited resources that need to be put to work make it likely that a “top-up” of official funds to fully cover Portugal’s needs may ultimately be the preferred policy option.

But given the significance of such a decision, markets will likely reflect concerns about the relevant risks ahead of time.

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5 Reasons Why 2012 Will Not Be A Replica Of 2011… At Least Not For Europe


Wednesday, December 28th, 2011

With many expecting 2012 to be a replica of 2011, at least for US stocks which the non-permabull consensus sees closing the year largely unchanged for the second year in a row, one open question is whether this will also be applicable to Europe. As a reminder, the EURUSD opened this year near the 52 week lows, only to rise by several thousand pips as concerns about European contagion were brushed away on hopes Europe’s politicians had it “under control.” They didn’t, and the EURUSD returned to its year’s lows recently. But is the same pattern in store for early 2012, where as we already noted, the bulk of gross debt issuance is due to take place, especially in January? Below are UBS’ 5 other key reasons why the European resurgence (however brief) that was experienced early this year will not be recreated in the new year that is now just around the corner.

From UBS:

So how do we expect the Eurozone crisis to evolve in early 2012 and how will it affect the euro? Last year, most observers expected Q1 2012 to bring an escalation of the crisis, particularly on peripheral bond markets. Instead, the periphery rallied and so did the euro, from about 1.30, just where we are today, to almost 1.50. Could the same happen early next year? We do not think so for the following reasons:

1) The ECB

In early 2011, the ECB sounded hawkish and then went on to hike rates in April and July, just as the Fed prepared to embark on QE2. 2012 will arguably be very different as the ECB is likely to cut rates to a new historic low of 0.50% and might well then embark on outright QE. At a time when the Fed looks largely done with its QE efforts, this could hit EURUSD hard and for us is the single most important reason to be structurally bearish the euro in 2012.

2) Greece

There is now a non-negotiable deadline for the Greek PSI, which is the bond redemption on 20 March. Negotiations for the new troika programme continue to assume a ‘voluntary’ PSI resulting in a 50% haircut and a debt-to-GDP reduction to 120% by 2020. However, revenue shortfalls due to the deeper-thanforecast recession look set to result in additional financing needs, which in the absence of new official money might mean a larger haircut and hence a coercive restructuring.

3) Contagion

If Greece is forced to impose an involuntary restructuring on investors, the market might quickly move on to Portugal or even beyond. Eurozone leaders have frantically worked at erecting a ‘firewall’ for countries beyond Greece in case of a default occurring. So far they have had limited success apart from raising more cash for the IMF and advancing the European Stability Mechanism (ESM) to mid-2012. Still, these instruments are arguably not yet powerful enough to deal with a country like Spain or Italy loosing market access.

4) CDS

The above Greek scenario would result in a credit event being declared and credit default swaps (CDS) being triggered. Many observers might welcome such an event as a proper default would mean that Greece was finally declared ‘insolvent’ and unable to pay its obligations, which most would argue might be better for the longer term health of the system than pretending otherwise. Still, nobody knows how the financial system would handle CDS payouts of more than €80bn (gross). At least as an initial reaction, the market would probably be highly stressed.

5) PoliticsThe EU has an impressive track record in pushing through projects even against resistance from individual countries and with minimal explicit or implicit support from electorates. However, there may come a point where populations start to rebel, possibly when they are simultaneously faced with ever deeper cuts in public services and ever higher taxes. A relatively benign problem might be resistance to ESM ratification in some countries, but more serious social  unrest could occur both in debtor as well as creditor countries.

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Art Cashin Explains Why Obama Is “Terrified” By A European Collapse


Friday, December 9th, 2011

Confused why Tim Geithner has seemingly booked a weekly round trip ticket to Brussels to give the Eurocrats their weekly pep talk (much to his endless humiliation as Europe Tells Geithner To Take His Advice And Shove It reminds us)? Art Cashin explains not only this, but why the biggest threat to Obama’s reelection chances is not who the GOP candidate is in November, but what happens in the EURUSD as early as today. Lastly, by implication, Cashin shoots down any hope that US decoupling from Europe is even remotely possible… something anyone who actually has seen a full business cycle, which automatically excludes 90% of all traders today, will know too well.

From Art Cashin

Wrong Solution. Wrong Time - Markets are celebrating (mildly) the Euro Summit “agreement”. We suspect Tim Geithner and the President are banging their heads against the wall.

The Euro leaders continue to plan and plot toward long range solutions, but they lack a crisis plan. In essence, they don’t have a fire department. If markets in the sovereign debt or European banks began to spiral out of control, they have no structure to deal with it.

We think the President is terrified, since – if Europe goes, it’s likely he goes too. The biggest threat to his re-election may be completely out of his control. Could be an interesting weekend at the White House.

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Citigroup Explains How The ECB Will Drive The EUR Today


Thursday, December 8th, 2011

Citi’s Steven Englander shares his outlook on what the key things to look out for, in the 8:30 am press conference, are. One variable in his forecast has already been presented: the cut was 25 bps not 50 bps. As he says: “By contrast, if they did 50bps and indicated that more aggressive measures might be forthcoming, the pendulum could swing to positive.” In other words, the kneejerk jump in EURUSD following the ECB has been largely misguided for now, especially with forward EONIA rates jumping across the curve confirming that European liquidity is about to get far tigher all over again.

From Citigroup:

The ECB is the not the only game in town, but it is the first , so it is useful think about how its moves may affect the euro until the Summit results start emerging. Our economists write: “The ECB Governing Council is likely to cut rates today by at least 25bp to 1.0% (maybe even by 50bp to 0.75%) …. downward revision of the Eurosystem’s staff forecast for GDP growth in 2012 and the outlook for weak GDP growth and low inflation for 2013 …  probably will announce an extra LTRO with a maturity of at least 25 months and is likely to widen the collateral pool. ”

Importantly they add: “ we do not expect additional announcements from the ECB to support euro area sovereigns …  [needing] further action from EU governments in order to see further action from the ECB.”

The two areas of uncertainty are 50bps vs 25bps and no additional bond activity versus some indication of more-to-come in terms of bond market intervention.
If the ECB does 25bps on rates plus the other expected measures, it is likely to come across as a bit disappointing to markets and EUR negative. Given that all political comments in the last two weeks have been aimed at getting the ECB more involved, the FX market would see it as a negative if they proved reticent.

The most EUR positive outcome would be some commentary that is supportive of more engagement in bond markets, either by indicating that governments appear to be headed on the right track in fiscal terms or focusing on the degree to which the current rate structure represents unwarranted monetary tightness given the likely path of inflation and growth.  There is some debate over whether additional ECB engagement in sovereign bond markets would be a EUR plus or a negative. The argument for EUR-plus is that tail risk will fall, the EUR has been correlated with positive risk appetite for some years now and that convergence trades would attract capital in a euro zone without tail risk – I think this is the correct logic. The argument for EUR negative is that it would be viewed as a form of QE and put the ECB into the same category as the Fed and BoE in the eyes of investors.

The most uncertainty is what if they do 50bps, but give no nod to bond buying. This may be close to neutral, with the demonstration that they are willing to be aggressive on conventional monetary policy offsetting the disappointment on the long end. If they shut down the possibility of additional engagement in the sovereign bond market, the outcome would swing to EUR negative. Most FX investors see the problems of the euro zone as focused  on risk premia rather than the base level of rates, so adamantly sticking to central bank knitting would disappoint. By contrast, if they did 50bps and indicated that more aggressive measures might be forthcoming, the pendulum could swing to positive.

The EUR move could be quite large if the ECB was seen as laying down a marker one way or another. Most likely the reaction will be muted by the knowledge that there will be leaks galore out of the Summit the next two days, and investors will want to assess the net of fiscal and monetary policy outcomes, rather than a single leg.

Out of these possibilities, I see a little more room for disappointment than for a positive EUR surprise, since the ECB emphasis could be on the conventional rather than non-conventional side.

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Art Cashin’s Refresher On “Post Hoc” Syndrome


Friday, December 2nd, 2011

Nassim Taleb rants against it all the time: the propensity for the media to frame a narrative, or a plotline, to explain market moves. His contention is that for the human mind it is always far more reasonable to have a cause and effect relationship to what is effectively an engine of chaos at the margin, especially these days when the margin is defined 70% by various algorithms, all of which engage in often times illogical feedback loops (such as the ES is high because of a high EURUSD, which however is high due to stressed French banks liquidating USD-assets and repatriating the funds to shore capital) and/or with levered synthetic products such as ETFs, amplifying the noise. On the other hand, sometimes a narrative fits: what Art Cashin describes today as the “post hoc” syndrome. Is he right, or is the human mind desperately grasping to attribute a pattern, and thus pretend it is in control, when faced with the strange attractor that modern capital markets have become. You decide. Here is Art explaining the basics of “post hoc”, aka Monday Morning quarterbacking.

From UBS’ Art Cashin:

Tear Gas, Timing And Logical Fallacies - On the Friday before Thanksgiving, I maintained that the afternoon selloff that led to a technical breakdown the day before had accelerated when headlines about unrest in Athens turned uglier. A few readers questioned what they saw as a time gap between the headlines and when the market reacted. That merits a review for a couple of reasons. The most important of these is probably the “post hoc” syndrome.

As you probably recall from your fifth grade classes in epistemology and logic, there are about seven or eight logical fallacies. The three most frequently cited are usually – begging the question; hasty generalization and post hoc. The full title is post hoc, ergo propter hoc. That, as you recall, is “after this, therefore because of this”. Since B happened after A, it was probably caused by A.

The post hoc fallacy is quite common in Wall Street. The main stream media often credits an up market to some piece of economic data which came out hours and hours before the rally that produced the “up day”. You’ll often see headlines like “market rallies on claims data”. The problem is that the claims data hit at 8:30 and the market didn’t even get into plus territory until, maybe, 2:45 in the afternoon. That’s classic “post hoc”.

While data like claims and payrolls tend to be finite triggers, some information can be more of a process, where the impact may be cumulative. That was the case, for example, in the Kennedy assassination.

The first headline was something like: “Shots reported fired at President’s motorcade”. (That’s bad.) Then, minutes, later “Reports that President may have been hit”. (Worse but no detail). Then, more minutes, “Motorcade diverted to Parkland Hospital”. (Even more serious.) That’s when they closed the Exchange. The series of headlines had a cumulative impact.

The sharp selloff on the Thursday, a week before Thanksgiving was a reaction to cumulative headlines. In Friday’s Comments we wrote:

Around 12:30, just as U.S. markets were retesting the morning lows for a second time, things changed.  Headlines hit that anti-austerity demonstrations in Athens had turned ugly – maybe very ugly. Clashes with police were said to be intense. That brought more selling in stocks breaking the morning lows and almostinstantly the key support at the bottom boundary of that universally discussed “triangle”.

That phrasing was intended to indicate that cumulative impact. We were also quite reinforced by the fact that Dennis Gartman and other veteran market observers saw the same cumulative trigger in Athens. But a review of “post hoc” is always in order. See you back in logic class.

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No We Cannes’t: Here Is Why The EURUSD Is Plunging


Friday, November 4th, 2011

Because while the prospect of democracy returning to Greece may have been killed (for now), the world is discovering that not only will nothing else be accomplished at the “No We Cannes’t” meeting, but the world will now be fully focused on Italy which unlike Greece, is not quite so easily fixable. Europe’s propose solution: make Italy an IMF protectorate. We give this plan exactly 24 hours before massive failure, and before attention returns to the top news of the week: the EFSF is a complete dud, and Europe will never be able to fund the €1 trillion bailout fund.

  • BERLUSCONI SAYS ITALY AGREES TO EU MONITORING
  • BERLUSCONI SAYS IMF TO CARRY OUT `CERTIFICATION’ EVERY 3 MONTHS
  • BERLUSCONI SAYS ITALIAN DEBT HELD MOSTLY HELD BY ITALIANS – like Mario Draghi
  • BERLUSCONI SAYS ITALY HAS NEVER HAD TROUBLE SERVICING DEBT

And in other headlines, confirming just how impossible any form of organized decision-making is in Europe, how ironic it is to think that Obama will ever say no to his banker masters, or just how happy China will be to bail Europe out after it is about to be snubbed all over again, here they are…

  • U.S. SAYS MOST IMPORTANT FOR EU TO GIVE CRISIS PLAN MORE FORCE
  • U.S. OFFICIAL SAYS NOT MUCH DISCUSSION OF SPAIN AT G20
  • ITALY INVITES IMF PERIODIC ASSESSMENTS, U.S. OFFICIAL SAYS
  • IMF TO HAVE INTENSIVE PROCESS IN ASSESSING ITALY, U.S. SAYS
  • UIS. OFFICIAL SAYS IMPORTANT FOR CHINA TO TAKE THAT INITIATIVE
  • US OFFICIAL SAYS G20 TO HAVE STRONG LANGUAGE ON CHINA FX POLICY
  • US VERY COMMITTED TO MAKING BANKS STRONGER, OFFICIAL SAYS
  • G-20 AGREEMENT COMPLEMENT TO EUROPEAN PLAN, U.S. OFFICIAL SAYS
  • U.S. HAS BIG STAKE IN EUROPE CRISIS PLAN’S SUCCESS: OFFICIAL

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