G3 Recap 11-12-10

Main Items:

  • U Michigan Consumer Confidence improved to 69.3 in November vs 69 expected and 67.7 previously.
  • Nothing substantial out of G20 as expected.
  • Chinese buying has driven copper to a record of nearly $9,000 a tonne and traders warned that prices could rise a further 25% next year to more than $11,000 as demand continues to outpace supply – FT
  • US Municipal Funds have gotten hammered over the past few days. Pimco’s Muni Income Fund II, for example, is off 10 bucks from its Oct highs. Interestingly, the muni CDS markets have been very stable, suggesting something more is in play.


  • Eurozone GDP rose 0.4% QoQ in 3Q vs 0.5% expected and 1.0% previously.
  • EU IP rose just 5.2% YoY in Sept vs 7.1% expected and 7.9% previously
  • PIGS:
  • Finance Ministers of France, Germany, Italy, Spain and the UK: “whatever the debate within the euro area about the future permanent crisis resolution mechanism … we are clear that this does not apply to any outstanding debt and any programme under current instruments. Any new mechanism would only come into effect after mid-2013 with no impact whatsoever on the current arrangements". Note that a meeting of European finance ministers is scheduled for Nov 15-16 in Brussels
  • Spanish Banks cut their reliance on the ECBY by 40bn or 36% in October. (Spanish CDS tightened 14bps in Oct and is now 50bps higher) This leaves Spanish banks’ reliance on the ECB to €71 bn (2.1% of total banking assets). In Ireland usage rose by €11 bn to €130 bn (7.9% of total banking assets).


  • Chinese equities sold off more than 5% overnight, the most since August 2009. This precipitated a correction in most global cyclical assets. Then, just before noon, US treasuries tanked, which exacerbated the move.
    This continues to look and feel like a reversal of the buy everything mentality that has been prevailing for the past couple months. The over-bullish sentiment was evident across multiple metrics, with the peak lining up well with very technical indicators across multiple asset classes. The question now is how far this move can go.
    This is probably where we will see some differentiation across asset classes. Equities remain cheap despite the sharp rally, so the correction shouldn’t be too hard in the context of supportive seasonals. However, a 3 week or so period of consolidation will probably be required to set us up for the next leg. Bonds, on the other hand, have rallied for 7 months instead of 2 and are much more vulnerable. A retest of 3% before the end of the month is pretty likely, in my opinion. Depending on how far it goes, it could set up some good opportunities to reload front end carry type trades that have been too risky for several months now. G10 currency moves are likely to follow rate differentials.
    In the face of this uncertainty, it’s probably wise to lighten up on risk a bit, if you haven’t already. There will likely be some good trade opportunities as we get close to year end, and having some powder to capitalize on them will be very valuable. As Grantham said, cash give you optionality.