Another perfectly normal day in the market, marked by the totally logical run up in stocks, bonds, commodities... and the USD. Why is the USD stronger? Some of the commentary suggests this is due to risk aversion trades – but US equities are higher, oil is higher and many point to this week’s economic data as suggestive of economic stability. So in the search of more satisfying explanations:
1) The month-end flows. While we think most of the flows should be EUR positive there is a natural mismatch to the week. Many of those that need March 31 as their closing date may be trading now rather than waiting for the exact fix next week. The US passive hedgers seem to be dominating today rather than Europeans – making the USD bid.
2) The ECB. Worry is high that the ECB is behind the deflation curve – witness the series of really ugly confidence numbers from Europe today. The ECB catch-up to QE is a risk and its being priced into the EUR.
3) Positions. Its really quite simple – anyone that is bearish USD is being punished right now as US assets do better.
4) FED QE concerns were overblown – this is a key and very worrying risk for market – as the FED buying of $7.5 bn US Treasuries yesterday didn’t lower US rates. In fact the US Treasury issued $34 bn in 5Y notes overwhelming the effect of the FED action. Market has sold bonds this week as economic data turned and as the FED actions are proving insufficient to turn the market around. Until and unless we get negative CPI prints the market won’t believe that US bonds aren’t rich. Also the market suffers from asset allocation where bonds are being sold to buy equities to reweight battered portfolios. All of this supports the USD, as it's an indication of tighter conditions. Eventually this will hurt growth outlooks and stocks but not just yet, as stock buyers are tempting fate under the soothing chants of the CNBC and the Geithner siren brigade, who seem to practice their Jedi mind tricks oh so successfully on the investing public every single day.
5) Technicals. On the technicals we are far from any level where the EUR is going to be in trouble for another shot at 1.3750 or 1.39. Yet all the momentum players are watching a sagging market and giving up. The 1.3250 or 1.3120 support seems far far away. The interest in USD buying in EUR has put pressure on JPY as well and the technical line to watch there is 98.70 which we saw tested briefly a few moments ago.
6) Fundamentals. If you read the stories below – more regulation from SEC and US Treasury; more doubts about the US banking system as the Senate pushes back on more bank bailout funds and Lacker highlights the need for stress tests. The mix of data hasn’t been positive or negative – so arguing that anything new has hit the tapes about economy or policy misses the point.
In other news, what is the SEC seeing about money market accounts that others aren't? It is no secret that the SEC will not react to a vicious dog attack until the fido has planted its mollars deep in the commission's gluteus maximus. Thus one is left to wonder what Mary Schapiro knows when she told congress that U.S. securities regulators will bolster the regulation of money market funds and the protection of investors who entrust their funds to broker-dealers and investment advisers. In testimony prepared for a Senate Banking Committee hearing, SEC Chairman Mary Schapiro said the agency is considering ways to improve the credit quality, maturity, and liquidity standards applicable to the money market funds. Schapiro also said SEC lawyers are working on a plan to require investment advisers with custody of client assets to undergo an annual third-party audit, on an unannounced basis, to confirm the safekeeping of those assets. We smell smoke...
Lastly, Senator Kent Conrad had some amusing quibs about Obama's recent spending rampage reminiscent of a valley girl's first trip to soon-to-be-bankrupt-unless-inevitably-bailed-out-as- systematically-imporant Nordstrom's with daddy's gas card, better known as the taxpayer's printing press. As is widely known, Obama has requested in his budget $250 billion, to add to the $700 billion widely-criticized financial bailout fund. But the chairmen of both the House of Representatives and Senate Budget Committees refused to include it in their budget plans. Senate Budget Committee Chairman Kent Conrad told National Public Radio that he would not include it "when there is no plan as to how to use the money and no assertion by the administration that they're even certain it would be needed." The bailout fund was originally designed to prevent a complete meltdown of the financial system by taking bad real estate investments off institutions' balance sheets to get credit flowing again. But lawmakers have panned it for not doing the job sufficiently. Obama's request for more money came in his budget proposal for fiscal 2010, which begins on Oct. 1. But it was described as a "placeholder" and White House officials said that they may not seek the extra funds from Congress, where lawmakers are now drawing up their own budget plans. Both congressional budget committees quickly jettisoned it, giving them an easy way to cut massive red ink from their budget plans for the few years. The Congressional Budget Office last week forecast that Obama's budget would make the deficit balloon by $9.3 trillion through 2019, $2.3 trillion more than forecast by the White House. "You know, when you lose $2.3 trillion in a revenue forecast, we simply can't budget money for things that are theoretical," Conrad told NPR.
The schizophrenia-cum-amnesia in U.S. capital markets has reached an unprecedented stage. From utter despair a mere 3 weeks ago to irrational exuberance currently, the conviction in the infallibility of the financial system is hindering all administration attempts to extract nickels and dimes from the taxpayer for the financial armageddon boogeyman. And as most traders will confirm, there are many more invisible hands in the current market than even the most vetted conspiracy theorist will attest. The last time macroeconomic second derivatives indicating existing home sales, or economic spending are "slowing", despite all primary indications still showing much more pain is in store, last caused a 20% rally in, well, never... Anyway, long story short, in order to demonstrate the weakness of the financial system, and to get a quick signature for any bailout placeholders, we would not be at all surprised to see stock borrow of Citi (and other financial) shares mysteriously come back with a vengeance. Bottom line is that the administration has realized it can effectively fly even the most egregious hedge fund enriching, and treasury debt multiplying proposal past the US public which is only transfixed by day-to-day market gyrations and the occasional flare out of populist anger against 10-20 Salem witches who are singled out by the WSJ and NYT for collecting bonuses. In the meantime, that great sucking noise you hear is the greatest wealth transfer in decades, transferring some marginal peace of mind to the current generation at the expense of the great unknown of the future. But when we are talking $9.3 trillion deficit increases in 10 years, who really gives a damn. After all, it is Nordstrom's, and the valley girl will not have to worry about a 3rd term (and very likely a 2nd one either).
Also thanks to reader Michael for his donation and kind words.
Sphere: Related Content
Print this post
Thursday, March 26, 2009
Posted by Tyler Durden at 11:10 PM