G3 Recap 11-09-10

Main Items:

  • US NFIB Small Business Optimism Index improved to 91.7 in Oct vs 90 expected and 89 previously. This is the highest print since last May.
  • China is tightening capital controls on inflows. BBG
  • Bloomberg reports that Hedge Fund assets hit the highest level since October 2008.
  • Ambac Financial filed for bankruptcy today after the Internal Revenue Service questioned the accounting that allowed the bond insurer to receive more than $700 million in tax refunds
  • PIGS: ECB said it spent 711mm buying government debt last week. FT There were reports that ECB intervention was responsible for the reversal of the widening intraday.

Overseas:

  • UK RICS House Price Balance declined to -49 in Oct vs -39 expected and -36 previously. This is the worst print since April 2009.
  • UK IP rose 3.8% YoY in Sept vs 3.6% expected and 4.2% previously
  • Japanese Eco Watchers Survey Outlook declined slightly 41.1 in Oct from 41.4 previously.
  • Australian NAB Business Confidence declined to 8 in Oct from 10 previously.

Commentary:

  • Bloodbath in rates today, despite a decent auction. The curve bear steepened, lead by the belly. 5yr yields rose 13bps, more than 10% of its yield! Even red Eurodollars had a nasty day – EDZ1 was off a full 8bps today, and 23bps since Thursday. You would have to go back to April to see a sell off of similar magnitude. It doesn’t appear that this is related to the PIGS, as Irish CDS actually tightened on the day. It looks like people are just shedding duration, starting from 1 year out. It’s possible that some of it is related to balance sheet positioning for year end (recall that this drove a sharp sell off in treasuries last Dec) but it’s still early.
  • I noted here a while ago that South Korean looks poised to outperform. Here is one more reason: it is the country with which China has the largest trade deficit. And the total size is nothing to sneeze at: at 84bn RMB, it is almost half the size of China’s trade surplus with the US. Not bad for a country with a population 1/6th the size of the US.
    Taiwan takes second place, followed by Japan, Australia, Russia, Malaysia, and Saudi Arabia. The trade surplus to China is a big reason why the Won and Taiwan Dollar been popular with macro players of late. In fact, the equity indices of South Korea and Taiwan have been better ways to play the Chinese growth story than the FXI ETF. The South Korean ETF has actually outperformed by 20% over the past 12 months:

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5 thoughts on “G3 Recap 11-09-10

  1. yeah nasty combination of things happening with rates …

    1. buy the rumour, sell the fact with GE 2. commodity price spikes inflationary prob more so for markets ooutside the US 3. concessions required for supply at these level 4. chinese rating agency downgrades US debt 4. warsh proclaims not being big fan of QE (uhh so why didn’t he oppose!) 5. swap spreads widening so possibly bank related credit jitters or big rate locks going through …

    like selling eur/cad or eur/sgd … and gbp/usd watch inflation numbers out of UK be way on high side … market should punish highly negative real rate regimes

  2. Yeah, all triggers. I think that the NFP print on Friday took away the confidence of the bulls. This lines up with the fact that the rates sell off really started on Friday.

    Definitely 2 way ideas in EUR right now. I agree with your view in light what’s happening in Ireland, but I got a couple trade recs in my inbox this morning to go long the EUR, albeit ag USD and GBP.

    I’m a bit agnostic on GBP… the RICS numbers were pretty ugly…

  3. all that matters in the UK economy is housing … and we don’t need merve the perve to jack up rates for housing financing conditions to tighten … inflation and fra-ois (through ireland, rollovers etc) will take care of that

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