Thursday Musings: The L-Word, Mervynating And Fred The Shred

The Fed might not have used the I-word, but their discussions behind the scenes towards continued QE must have involved it. We would like to think that they were too concerned about market reaction if they had used the i-word, and judging by the reaction received to the mention of "tail" they were right. We can't say we are unhappy with the market response and do see it as the catalyst to moves that have gone global and multi-asset. All reinforced by China's comments on slowing the housing markets in overheating cities extending the pressure on yesterday's commodity moves and this morning's European data separately undermining Europe. So that's three out of three for negatives from the major global regions.

This is enough for us to stay seated in the bus stop letting a few more pass before getting back on. Do we go short Equities? Not yet. We still want to buy at some point, and don't want to go against our core theme. Buying cheaper will be enough for us as this still looks at best like a 5% correction possibility in SPX rather than a major new bear phase. However we are looking at tactical shorts in other recent popular trades as the "3 out of 3" should cause more of a shake down. So what else has been complacent consensus for the past few weeks? In FX land you cant get much more consensus than short yen and, on the long side, we would suggest that NZD and MXN must be up there with the best so we have taken speculative shorts in NZD/JPY and MXN/JPY (again), expecting this general correction to continue.

Is this a new theme? Whilst the breakeven prices haven't really moved it does look as though the speculative inflation expectation trades in other markets are unwinding. Rather than a big new theme developing it so far appears to be positional as we drift back to a less exuberant trajectory in growth and inflation expectations. Equities off, metals off, oil off, USD up everywhere (except vs JPY which is basically a loaded trade) and finally Gold. Each morning we hear how heavily the Chinese are buying and every morning it falls harder. Not a bullish sign. Picking a right level for gold is pure supply, demand and, more importantly, the psychology of price anchoring, so rather than pick a target level, TMM would rather just predict: "it continues to fall".

In the UK, the mighty pound is suffering a right Mervynating. to the point that we think that Merve may well be having a Harold Wilson moment: "... from now the pound abroad is worth 14 per cent or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued." ( Harold Wilson 1967). Which has put GBP only just behind JPY in the league of currencies to sell. Very "Macro 1990s".

Now back to Europe. It's nearly March and March has historically seen the start of Euro-season, where happy hunters flock to the European bond markets to blast away at plumped up, overfed Euro-birds.

Whilst today's focus has been on French and German PMIs, which in TMMs eyes may look headline soft but do contain some structurally encouraging signs, there are signs that stresses are building again. The peripheral bond markets continue to underperform.

The real shocker that seems to be sneaking under the radar is what's happening in Holland. This morning's collapse in consumer confidence to -44 from -35 leaves it at it's lowest level ever since the series began in 1986. House prices are accelerating downwards (-9/6 y/y from last months -6.3% y/y), and the unemployment rate is rising. This leads TMM to wonder whether we are seeing Holland move from core and periphery. It's interesting to note that if there is one country which should give Fred the Shred (of RBS fame) asylum, should he lose his false nose and beard and be hounded out of wherever he is, it should be Holland. Without his wonderfully timed cash purchase of ABN, they would have had sovereign debt/GDP ratio roughly 10% higher. He actually saved them.