Euro Hammered By Greek Debt Woes

The euro faced further headwinds as the Greek debt crisis is moving to a next phase. EUR/USD and EUR/GBP are nearing important support levels. However, for now there is no trigger available to stop this ‘correction’.

Eurozone Debt Worries Resurface to Hold Euro Lower vs Dollar/Yen

In Asian trading today, as investor focus returns to Eurozone fiscal problems the common currency Euro extended earlier losses against the greenback after failing to break above key resistance.

PIMCO Disposes of Its Government Debt Portfolio while Bernanke Speaks of an Exit Plan

On the back of some weak data today on the employment and housing markets, and following some disappointing figures from China, stocks and commodities including gold and oil are performing very poorly. Ben Bernanke seems to have contributed his own part to the sudden shift by reassuring us confidently that he and his team of responsible people at the Fed are actually thinking of an exit plan as the economy improves. Expectably he did not make any commitments, but markets apparently don`t enjoy the hints being given so pompously and loudly. 

In Asia, the fact that China has ended up with a small yearly trade deficit instead of an expected sizable surplus is one of the top news items of today. Some have gone so far as to say that this event signals the end of the so-called currency war as the deficit removes the urgency of the need to appreciate the CNY, while others tie it to the government`s conscious efforts to boost domestic spending in order to rebalance the economy. The currency has been slowly appreciating since around June of last year, and a shrinking surplus is natural at this point. However one month`s negative number doesn`t mean much in the long sequence of positive sums stretching back to a long time ago, and if we also keep in mind that the deficit is almost entirely due to the huge jump in commodity prices that followed the Middle East unrest, it becomes clear that the reversal is not a consequence of Chinese actions, but rather of market fluctuations which do not mean much in terms of the USDCNY exchange rate debate. If the worst happens and oil prices skyrocket in consequence of chaos in producing nations, it is obvious that China would be just another victim with exports falling (as demand evaporates in the rest of the world with rising inflation) while imports rise with commodity prices. This is not a China specific event however, and for now its effect must be regarded as temporary because one doesn`t build a base case on a doomsday scenario.

What the Chinese numbers really signify to us is the euphoria that has overtaken the markets on the back of Fed-induced overspending in the U.S., as all the colossal events taking place in the critical Arab World and the chronic problems of European sovereigns were ignored on the basis of momentum trades.

Meanwhile, Bill Gross is preparing his fund for the previous version of the doomsday case, prudently in our view, by getting it rid of its entire government debt portfolio, completing a process that was known to be underway for some time. Mr. Gross apparently wants to play safe for although it is undeniable that any bullishness in the government debt market can last for a while (because it is a bubble), it is also safe to say that the higher it goes the deeper it will plunge, and it will be painful for those who tarry too much in quitting before the masses. We still believe that the U.S. will outperform most developed market economies when the crisis strikes, but that doesn`t mean U.S. paper will do well, only that it will burn with less severity than its less-favored peers in the rest of the world, due to a combination of safety and superpower effects. 

Massive Earthquake Shakes Japan; Markets Shaken by Eurozone Debt

The 8.9 magnitude earthquake in Japan has added to the other worries of speculators these days to exacerbate the correctionary forces already in place, and risky assets were sold today all around the world as even Japanese goverment bonds managed to appreciate in a quick flight to safety. To be sure, the cost of rebuilding and stimulating the economy after the earthquake will plunge Japan  deeper into the red, as it struggles with a budget deficit and a public debt that is monstrous even by the standards of our extraordinary times. Yet the buyers of Japanese bonds seem to believe that if the worst comes to pass, it is still better to have a guarantee that you can get your principal back, which explains the popularity of government debt in the midst of great concern about the viability of public finances and inflation risks.

We are equally surprised to learn from a report in Bloomberg that PIMCO is going to be starting a derivative-lite version of its main fund controlling $230 billion in assets. The new fund will use less leverage, purchase less high yield paper and generally avoid the more exotic forms of risk that have been favored by the financial market over the past decade. It is a sign of the changes that the finance world is going through, and the shift in mentality towards greater conservatism in all fields, that the world`s most successful bond fund which has beaten "98% of competitors over the past 24 years" is now averse to risk plays that have made it such a success and a popular name in its field.

In Libya, the Colonel`s mercenaries and regular Libyan armed forces units are reported to have regained control of some of the oil producing regions near the town of Sirta, where clashes were taking place in the past days, with Western leaders moving slowly towards more drastic action against the dictatorship in spite of a lack of leadership. Today, France went so far as to recognize the opposition movement`s leadership as the legitimate representative of the country, and while others have so far not taken this step, it should not be long before whatever remains of the regimes legitimacy is destroyed by the Colonel`s erratic and arbitrary decisions.

Nobody should be surprised that sovereign debt issues in the Eurozone are resurfacing in this highly pessimistic environment, and we note the rise in the yield of Portuguese debt as the country`s finance minister warns of the need to understand the consequences of the crisis. We don`t think that the minister was saying anything extreme, but the market, in its usual habit, is waking up to all the risks and dangers at the same time, and lumping junk European debt with all the rubbish out there at a time of  great tension.

In short, today is proving to be an active day with lots of gloom in the air, and we can only expect it to get worse before it gets better, especially as the true scope of Chinese tightening, Middle East Revolution, and the Eurozone crisis remain inadequately understood. 

Japan Rallies while Western Markets fall on Sovereign Debt

The Americans and their allies were moving to reduce the intensity of  air strikes in Libya now that the Colonel`s defenses have been mauled, and optimism with respect to Japan`s fortunes in dealing with the nuclear crisis was improving as well, but ironically markets have reacted to the news with sales today. Technical analysis experts, including Laszlo Birinyi, were predicting a fall of around 10% for the entire correction, but even if that were to happen, it will still be a brief reversal in what is essentially an central bank inflated global asset market.

Today`s sales were attributed to the 90-odd bps rise in Irish 2-yr yields, and since Asian markets were doing reasonably well with Japan in a bullish mood after yesterday`s holiday, this explanation seems to make sense. And if we consider how resilient the market has been to what could have been a period of severe pummeling, after a number of massive negative surprises, a little bit of selling should come as no surprise. We believe that stock and commodity markets will continue to remain in a bullish trend for as long as the Fed maintains its easing bias. As such, while the oil shock and the Japanese earthquake are powerful enough to derail any trend in the short-term, the printing press will rule in the longer term.

The main question is whether the Fed will be inclined to raise interest rates at any point as a consequence of the events that we are focusing on at the moment, in part due to emotional reasons. There is little sign that the bank will see the recent fluctuations as an indication of a shift in long-term, multi-year inflation expectations, on the notion that the Libya War as well as the Japanese Earthquake are all one-time events that will not have lasting influence on pricing power or consumption trends. To reinforce this viewpoint, we have some signs that the Japanese people will be even more conservative in their spending habits - a phenomenon that might at best be compensated for by increased government expenditure. Only a sustained bull market in the country would challenge this analysis, but Japan has no grounds to fuel such a trend, outside of the external dynamics generated by global economic growth. It therefore makes sense to expect both the BoJ and the Fed to maintain their present postures.

It is clear that the Asian and Western markets cannot remain decoupled from each other for a long period of time, and if the concerns about Europe intensify there is a good chance that we could see the weakness spread around the world to last till the end of this week. But given how big the incentive is for Europe to avert a breakdown of the E.U., after so much money spent and committed in the past year alone, we believe that the first half of 2011 will be a bullish phase, overall, for the world of finance.

Lacklustre NFP Release Fails to Move the Markets, as U.S. Debt Limits Are Debated

Friday we received the non-farm payrolls release, and once again, market`s reaction was very weak, contrasting to the past experience where we would frequently have monthly trends started or ended by the directions indicated by the numbers. This was the case, for instance, during the 2007-2008 crash where the slow reversal in Q4-Q1 employment numbers decisively reversed the previous uptrend that had been in place for many years in the risk market. Now, however, markets appear to be convinced that employment does not matter because the Fed will intervene so strongly in the case of multiple weak releases that risk assets will be on an uptrend perhaps indefinitely. This mentality is not a new phenomenon, but has been reinforced strongly by the Fed`s latest actions.

An addition of about 103,000 to the payrolls which brought the unemployment rate to 9.4%, was received positively by the bond market where prices risen again, while stocks and currencies have not reacted by much. Gold, similarly, was mostly unchanged. Our understanding is that the U.S. market is going to go higher, and employment numbers have little to no relevance, provided that another major shock does not damage stability.

Meanwhile, lawmakers are continuing their bickering over U.S. debt which the government demands to be raised by March 31st, or in the worst case April 16th. The ceiling is right now at $14.29 trillion, and to raise it congressmen from both the Democratic and the Republican Parties are pressing the government to present a long-term plan for budget cuts reaching up to trillions of dollars, in a bid to preserve their seats at the next election, and probably, in consequence of a little bit of commonsense and a feeling of responsibility too.

Could the Congress refuse to raise the debt limit? We do not believe that there is even a remote possibility that the debt cap will not be raised, since, as Geithner himself remarks in his comments to the Congress, failure to act would have consequences that would easily dwarf in their impact the experience of 2008 after the Lehman default. It is not hard to see that, if the default of Lehman Brothers could trigger a global financial crisis, the default of the U.S. government would trigger the armageddon for the financial world. But speaking now, and talking tough will cost nothing to the U.S. or to the representatives. And as such, the vocal opposition that we observe right now should not be taken to imply anything more than posturing to the electorate, since after all, if the U.S. went bankrupt, the lynch mobs that would crowd Washington would not be too kind on  Senator Conrad, Congressmen Erskine Bowles, or Alan Simpson, who now head the movement to discipline the administration.

But in spite of the charade - and not withstanding the possibility that the Obama administration will make some cosmetic changes here and there to appease the Congress and to find a compromise - the fact that this debate is now being had, and various possibilities and scenarios are being discussed is proof enough that the mentality of the boom days has been left behind firmly by the people and their representatives in preference for a much more austere and sensible outlook on finances, consumption and economic life. The same reasons that compel the government and the Congress to curb down on borrowing are depressing comsumption in the U.S. and investment and it is extremely unlikely that by allowing people to borrow more the Fed or any other branch of the economic leadership can reverse the trend towards thrift. Perhaps the Fed is preventing a sharper contraction through its actions and interventions; it is certainly a plausible proposition. But it is unclear that by doing so it is not protracting the elimination of the weak (in the corporate world), the survival of the stronger and healthier, and the properity of the smarter, the more competitive actors in the country. We know that the U.S. owes its strength and success to its merciless approach to competition between the powerful and the rich.I it is not clear that the Fed is not destroying this pillar of the American system by its actions, however limited its impact may be in terms of reviving the economy in anything longer than the immediate future.

Taken in this context, the NFP release is a small component of a much larger puzzle which is being dominated by factors that have little relationship to economics. We believe, in consequence, that what happens in politics has greater relevance to economic trends, and the duration of the bubble, than any mildly positive or negative economic data for the enxt few years.

Markets Focus on Today's Eurozone Debt Auctions, CDS Rates Rise, Stocks Fall

Market sentiment was dampened yesterday by today`s large debt auctions in the Eurozone, where the weaker members of the union will be borrowing at least $43 billion. Credit default swaps rose on Ireland, Belgium, Portugal, and while the CDS index that measures that default risk of Western European governments rose to match a record yield of 228 bps. There is a strong sense of tension all around the world as the results of these events approach.

Stocks were lower in response, and in Asia, Indonesia and India were the biggest losers. India`s not being treated very kindly nowadays after the scandals that shook the country a short while ago, while Indonesia is suffering from a worrisome inflation trend in line with the rest of the region.  In Europe, naturally, the falls were sharper, while U.S. markets performed reasonably well in spite of the tense atmosphere.

The dollar, naturally, gained against almost all of its peers, while oil rose on anticipation that Asian demand will remain strong. We are pessimistic on oil in the near term, and expect it to reverse course if the European problems intensify, or the Chinese aggressively continue with their rate rises. Commodities are likely to gain to some extent this year as the Fed continues its easy money policies, but perhaps the first half will not be as rosy as some seem to be expect. Gold, meanwhile, should stay on its upward track, notwithstanding the severity of its up and down swings as volatility remains high.

Today`s events are obviously of great significance. What we expect is that, while auctions will find sufficient buyers, in line with the trend of the months, rates will be higher, and money will be supplied at a high price. Regardless of the result, markets are unlikely to be convinced one way or the other, since lacklustre demand is unlikely to signify a withdrawal of borrowers, and a strong showing doesn`t imply much for the future. This makes sense, because the debt issues are long term and will not be settled by one or two auction`s results. If Ireland is shunned by creditors, however, we suspect that it will only trigger stronger European intervention, and not capitulation, as some commentators seem to expect. It is hard to see, as we like to emphasize, how they can reverse course after committing so much to the economic and political integration of the continent. And while perhaps dropping some aspect of the European Monetary Union doesn`t signify a lot from a pragmatic viewpoint, the same cannot be explained to voters in the region. All that convinces us that European politicans will only capitulate  when they are absolutely out of options, but with the Fed allied to them on the other side of the ocean it is hard to see how that even sort of situation would develop.

In summary we don`t expect much to happen as long the present governments remain in place. But we still believe that the Eurozone will disintegrate at some point in some way, only with the additional qualification that this development will be the consequence of powerful political events, and not some predictable surrender to speculators and the markets.

Lacklustre NFP Release Fails to Move the Markets, as U.S. Debt Limits Are Debated

Friday we received the non-farm payrolls release, and once again, market`s reaction was very weak, contrasting to the past experience where we would frequently have monthly trends started or ended by the directions indicated by the numbers. This was the case, for instance, during the 2007-2008 crash where the slow reversal in Q4-Q1 employment numbers decisively reversed the previous uptrend that had been in place for many years in the risk market. Now, however, markets appear to be convinced that employment does not matter because the Fed will intervene so strongly in the case of multiple weak releases that risk assets will be on an uptrend perhaps indefinitely. This mentality is not a new phenomenon, but has been reinforced strongly by the Fed`s latest actions.

An addition of about 103,000 to the payrolls which brought the unemployment rate to 9.4%, was received positively by the bond market where prices risen again, while stocks and currencies have not reacted by much. Gold, similarly, was mostly unchanged. Our understanding is that the U.S. market is going to go higher, and employment numbers have little to no relevance, provided that another major shock does not damage stability.

Meanwhile, lawmakers are continuing their bickering over U.S. debt which the government demands to be raised by March 31st, or in the worst case April 16th. The ceiling is right now at $14.29 trillion, and to raise it congressmen from both the Democratic and the Republican Parties are pressing the government to present a long-term plan for budget cuts reaching up to trillions of dollars, in a bid to preserve their seats at the next election, and probably, in consequence of a little bit of commonsense and a feeling of responsibility too.

Could the Congress refuse to raise the debt limit? We do not believe that there is even a remote possibility that the debt cap will not be raised, since, as Geithner himself remarks in his comments to the Congress, failure to act would have consequences that would easily dwarf in their impact the experience of 2008 after the Lehman default. It is not hard to see that, if the default of Lehman Brothers could trigger a global financial crisis, the default of the U.S. government would trigger the armageddon for the financial world. But speaking now, and talking tough will cost nothing to the U.S. or to the representatives. And as such, the vocal opposition that we observe right now should not be taken to imply anything more than posturing to the electorate, since after all, if the U.S. went bankrupt, the lynch mobs that would crowd Washington would not be too kind on  Senator Conrad, Congressmen Erskine Bowles, or Alan Simpson, who now head the movement to discipline the administration.

But in spite of the charade - and not withstanding the possibility that the Obama administration will make some cosmetic changes here and there to appease the Congress and to find a compromise - the fact that this debate is now being had, and various possibilities and scenarios are being discussed is proof enough that the mentality of the boom days has been left behind firmly by the people and their representatives in preference for a much more austere and sensible outlook on finances, consumption and economic life. The same reasons that compel the government and the Congress to curb down on borrowing are depressing comsumption in the U.S. and investment and it is extremely unlikely that by allowing people to borrow more the Fed or any other branch of the economic leadership can reverse the trend towards thrift. Perhaps the Fed is preventing a sharper contraction through its actions and interventions; it is certainly a plausible proposition. But it is unclear that by doing so it is not protracting the elimination of the weak (in the corporate world), the survival of the stronger and healthier, and the properity of the smarter, the more competitive actors in the country. We know that the U.S. owes its strength and success to its merciless approach to competition between the powerful and the rich.I it is not clear that the Fed is not destroying this pillar of the American system by its actions, however limited its impact may be in terms of reviving the economy in anything longer than the immediate future.

Taken in this context, the NFP release is a small component of a much larger puzzle which is being dominated by factors that have little relationship to economics. We believe, in consequence, that what happens in politics has greater relevance to economic trends, and the duration of the bubble, than any mildly positive or negative economic data for the enxt few years.

Markets Focus on Today's Eurozone Debt Auctions, CDS Rates Rise, Stocks Fall

Market sentiment was dampened yesterday by today`s large debt auctions in the Eurozone, where the weaker members of the union will be borrowing at least $43 billion. Credit default swaps rose on Ireland, Belgium, Portugal, and while the CDS index that measures that default risk of Western European governments rose to match a record yield of 228 bps. There is a strong sense of tension all around the world as the results of these events approach.

Stocks were lower in response, and in Asia, Indonesia and India were the biggest losers. India`s not being treated very kindly nowadays after the scandals that shook the country a short while ago, while Indonesia is suffering from a worrisome inflation trend in line with the rest of the region.  In Europe, naturally, the falls were sharper, while U.S. markets performed reasonably well in spite of the tense atmosphere.

The dollar, naturally, gained against almost all of its peers, while oil rose on anticipation that Asian demand will remain strong. We are pessimistic on oil in the near term, and expect it to reverse course if the European problems intensify, or the Chinese aggressively continue with their rate rises. Commodities are likely to gain to some extent this year as the Fed continues its easy money policies, but perhaps the first half will not be as rosy as some seem to be expect. Gold, meanwhile, should stay on its upward track, notwithstanding the severity of its up and down swings as volatility remains high.

Today`s events are obviously of great significance. What we expect is that, while auctions will find sufficient buyers, in line with the trend of the months, rates will be higher, and money will be supplied at a high price. Regardless of the result, markets are unlikely to be convinced one way or the other, since lacklustre demand is unlikely to signify a withdrawal of borrowers, and a strong showing doesn`t imply much for the future. This makes sense, because the debt issues are long term and will not be settled by one or two auction`s results. If Ireland is shunned by creditors, however, we suspect that it will only trigger stronger European intervention, and not capitulation, as some commentators seem to expect. It is hard to see, as we like to emphasize, how they can reverse course after committing so much to the economic and political integration of the continent. And while perhaps dropping some aspect of the European Monetary Union doesn`t signify a lot from a pragmatic viewpoint, the same cannot be explained to voters in the region. All that convinces us that European politicans will only capitulate  when they are absolutely out of options, but with the Fed allied to them on the other side of the ocean it is hard to see how that even sort of situation would develop.

In summary we don`t expect much to happen as long the present governments remain in place. But we still believe that the Eurozone will disintegrate at some point in some way, only with the additional qualification that this development will be the consequence of powerful political events, and not some predictable surrender to speculators and the markets.