Recap 2-10-12

Main Items:

• U Michigan Confidence declined to 72.5 for Feb vs 74.8 exp and 75 prev. 31% of respondents expected lower unemployment in 12 months, the highest level since 1984.
• EU finance ministers want the Greek parliament to pass the austerity package before continuing negotiations. German finance minister told German lawmakers that Greece is missing debt targets. EU said Greece must detail 325mm euro in spending cuts by February 15th
• Karatzaferis said that Greek sovereignty is being handed over for aid. Greek finance minister Venizelos said Greece must decide if it will stay in the Eurozone by Feb 15th. The Greek parliament votes on austerity measure this Sunday. The PSI is expected to be finalized on 2/13
• EU Banks submitted to the EBA plans to raise 98bn by June, 26% more than required. 42% will come from new capital & retained earnings, 22% from conversion of existing hybrid assets to core Tier 1. 6% will come from convertible issuance, and 7% from asset disposals. 7% will come from adjustments to RWA calculations.
• CME will cut the collateral that traders must put up for crude, gold, silver, platinum, and copper contracts, while raising margins for nat gas, effective after the close on Monday Feb 13. Trading margins for gold, silver and platinum were lowered by 11.8, 13.5 and 22.2 percent, respectively. Margins to trade copper were cut by 13 percent

Overseas:

• UK PPI Output Core declined to 2.4% YoY in Jan vs 2.3% exp and 3.0% prev
• Swiss CPI declined -0.8% YoY in Jan as exp vs -0.7% prev.
• Chinese M2 growth slowed to 12.4% YoY in Jan vs 13.7% exp and 13.6% prev.
• RBA Statement of Monetary Policy moderately downgraded the bank’s growth and inflation forecasts

Coming Up:

• UK CPI, GE Zew Survey, US Retail Sales

Commentary:

There was a lot of chatter the past few days over whether risk assets are likely to correct. Most of the commentary has been based on how far markets have rallied or upcoming EU problems. The fact is that if the Greek bailout package fails to get approved, risk assets are likely to correct substantially. Absent that, the likelihood of a much larger correction is much less likely at this juncture.

First, anecdotal data does not suggest positioning in risk assets is stretched. Regressions of equity hedge fund returns to the market remains low, (hedge funds were only up 20bps in Jan, when the S&P was up 4.4%) and the most recent BAML fund manager survey also confirms that equity positioning is low relative to historical weights. Second, the economic data continues to be stronger than expected. Most economic surprise indices show US data surprises to be at the highest level since early 2011, and similar strength out of Europe. Third, the global economy just experienced a shock & mid cycle slowdown in the second half of last year. As a result, inventories are lean, balance sheets are less levered, and in general, growth will be more resilient over the next couple quarters. And finally, the net foreign private sector investment position in Greece is now under 100bn, according to JPM.

Having said that, the bulk of gains for risk assets are undoubted already realized, simply given how far markets have retraced their losses. At some point this risk rally will end. The problems facing global growth remain substantial. But before markets face a more serious correction, some of the above factors need to change first.

Finally – I liked this comic, h/t Riholtz