- Piigs CDS widened further today as Portugal, Spain and Italy are all auctioning debt this week.
- Kocherlakota, a new 2011 voting FOMC member, said in an interview that “The bar for dissent from the committee is going to be pretty high for me.” Fisher, also a new 2011 voter, said in an interview that “I expected that program [of Treasury purchases] to be carried through.” These comments were both dovish relative to market expectations, as Fisher had been expected by some to actively dissent.
- Oil markets were braced today for the impact of the loss of up to 15% of US crude after a pipeline leak forced BP to shut down 95% of production from North America’s biggest field – FT.
- Alcoa earned 21c vs 19c expected in 4Q. Sales missed: 5.65bn vs 5.75bn.
- Chinese Trade balance dropped to 13.1bn in Dec vs 20.75bn expected and 22.9bn previously. Export growth slowed sharply to 17.9% YoY from 34.9% previously, while Import growth was steadier at 25.6% YoY vs 27.7% previously. This series has historically been pretty choppy with regular seasonal effects, but the surprise this time is that the seasonal downturn that usually occurs around February may have hit earlier.
- Italian Budget Deficit in 3Q printed 5.1% of GDP in 3Q vs 6.1% previously
- There is a lot of fixed income issuance this week, from EU sovereigns, (Wed, Thurs) corporates, as well as the US Treasury (Tues-Thurs). The EU debt is spooking the markets, pushing PIIGS CDS up along with European financial CDS. The Itraxx 5yr Senior Financials CDS index hit a new high today:
The interesting part is what didn’t happen: EURUSD didn’t fall, but actually rallied on the day.
Let’s put this into a context. Over the past 500 trading days, a regression of EURUSD vs 5y rate spreads, log(Senior European Financial 5yr CDSI), and the 3rd WTI contract had a correlation coefficient of 85%. The T stats are -42, 12, and 5, respectively, indicating that the CDS was by far the biggest driver for the cross over this time period. Furthermore, according to this model, EURUSD should be trading at 1.23 by now:
But instead, the cross is trading 5 figures higher, and despite a higher CDS and lower rate spreads, EURUSD rallied on the day. The last time that the model broke down this badly was in March and August of last year, which were both short term inflection points for the cross. This strongly suggests at the possibility of a short term reversal. ()
Judging by the correlation of risk assets to the EUR recently, such a reversal is also likely to be risk positive.