Great Graphic: The Rent is too Damm High

Quick great graphic from my webmaster, who is still in California drinking wine and watching baseball.

Also stay tuned because in honor of the campaign we will be introducing our new political series next week. Think this:

 

Position Adjustments in the Currency Futures and More

Initial post and a a typo regarding the net long Australian dollar futures position.  It has been corrected here.  

Most observers who look at the weekly Commitment of Traders report in the currency futures market focus on the net non-commercial or speculative positioning.  The speculative positions rather than the commercial positions are studied because they contains information about views while commercials are typically thought of as hedgers (having an underlying business exposure).  The net position is studied because it combines the long and shorts into a number that can be tracked.

Yet one of the take-aways from the crisis is the importance of gross figures not just net.  The pipes of international finance, for example, have to be sufficiently robust not just to handle the net flows, but the gross capital flows.   Another example is trade.  Most economists and other observers focus on trade balances--exports minus imports.  This may be fine for some questions, but other questions about significance of trade or the impact on the economy, the gross figures or imports and exports may be more important than net figures.  

Scandi Update

The Norwegian krone and Swedish krona are the strongest major currencies today, appreciating about 0.85% and 0.6% respectively. While the fundamental justification of the more modest gains in the other major foreign currencies may be more elusive, in the Scandi's case, fundamental developments are supportive.

Sweden reported stronger business and manufacturing confidence numbers earlier this week, but the Feb retail sales report was a more significant catalyst. Retail sales rose 1.2% in Feb. The consensus was for a 0.1% rise. The Riksbank's Ekholm suggested today the economy appears to have bottomed after a 1.1% contraction in Q4. This week's data seems to further rule out a rate cut in April, which many had previously expected.

Dollar Under Pressure at Month End

The US dollar is finishing the week, month and quarter on the defensive. The euro appears poised to challenge the $1.34 area that capped it earlier in the week, while sterling is trading above $1.60 for the first time since last November. Demand from short-term players as well as asset managers. Sterling has been particularly resilient over the past week or so amid M&A reports. The greenback is also sporting a softer profile against the yen, with a marginal new low for the week recorded in early Europe with a dip below JPY82.00.

The US dollar’s weakness is broad based, with the dollar-bloc currencies, Scandis and emerging market currencies all gaining today. Equity markets are mostly higher. The MSCI Asia Pacific managed to close marginally higher, though the Nikkei traded heavily after the unexpected decline in February industrial output (-1.2% m/m vs consensus of +1.3%), but of note the Shanghai Composite gained about 0.5%, for the first gain since the start of the week. India’s equities were the strongest with a nearly 2% increase.

Dutch Update: Problem Unresolved, Pressure Mounts

The Dutch government nearly collapsed yesterday as efforts to find more savings to reach its deficit targets is causing near unbearable strains on the fragile coalition. However, highly secretive negotiations are resuming today as there is little alternative shy of new elections.

Recall the sequence of events. A key government agency warned of a budget overshoot for 2013 early in March. Rather than reach the EU-mandated deficit target of 3% of GDP, it now looks like 4.6%. This forced the coalition to begin negotiating a solution.

New Experiment in China: Perestroika?

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The immediate focus on China is the possibility of another reduction in the required reserves. China has announced that this weekend (Saturday and Sunday) will be working days and that Mon-Wed next week are official holidays. This, coupled with the continued slide in the Chinese stock market (Shanghai Composite is off nearly 10% since March 14) and the largest injection in the money market in two months today have fanned speculation for some more relaxation of financial conditions.

There is also a larger story unfolding. One of the characteristics of China's developmental strategy has been for it experiment locally before scaling up those that succeed, like special economic zones.

Dollar Firms, But Pittance Thus Far

The greenback is generally firmer today, but still remains largely bouncing along its recent trough.  The best case for a more positive assessment is with the Australian dollar, which has now fallen through last week's low to trade at its lowest level since mid-Jan. 

European officials have been making all kinds of allusions to the worst of the crisis is over.  We demur.  We are concerned the first quarter was about absorbing the LTRO liquidity and the second quarter is going to see the crisis flare up again, with political factors increasing importance as well. 

It is Really about Political Economy in Greece

Greece's economic mess has understandably dominated investors' concerns. News from the ECB earlier today that Greek bank deposits fell 2.7% in February and now stand at the lowest level since Oct 2006, reflects the ongoing bank run. The fact that Greece's new 10-year bond is yielding around 20% reflects ongoing concerns that the PSI is not put closure on this chapter of Greece's tragedy.

The IMF's mission to Greece warns that the pace of reforms remain insufficient, and it highlighted the efforts to fight tax evasion underscore its conclusion, which the market fully embraces that "the rescue has a high risk of going awry."

Dollar Consolidates

It is difficult to get much of a signal from the market's noise today.  The dollar is largely consolidating recent moves, but euro, sterling and Swiss franc continue to appear fairly resilient to what seems to be a some deterioration in the underlying situation in Europe.  Key support for the euro remains prior resistance in the $1.3280-$1.3300 area and provided this area holds, the short-term bias is for a firmer euro. 

Like the euro, sterling also finished the North American session on its lows, but unlikely the euro that has recovered, sterling saw follow through selling.  That selling ironically peaked (sterling bottomed) prior to the publication of the downward revision to Q4 GDP (to -0.3% from -0.2%).    French Q4 GDP figures were unchanged at 0.2%, though the year-over-year rate was shaved to 1.3% from 1.4%. 

Great Graphic: Obama etc..

My brilliant webmaster is currently on spring break in California. But she had a few things to share.

The first is this hilarious, albeit not at all related to the markets SNL clip.

The second is this great graphic from the President Obama's pinterest page. For those of you who are (like myself) less adept at understanding social media check out this post.

China Politics: Reflections from a One Party State

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The original text confused the alignment:  President Hu came from the Youth League and his successor will have the backing of the princelings.   It has been corrected here.

The controversy surrounding demise of Bo Xilai in China has sparked much debate about Chinese politics. There seems to be a misunderstanding about the way a one party state works.

I grew up in Chicago. The Democratic Party has run Chicago for almost as long as the Communist Party has controlled China. The Democratic Party took control of Chicago in 1955. The Communist Revolution was 1949. From 1955-1976 Richard Daley was the mayor of Chicago. After an interregnum period, his son became mayor in 1989 and ruled until last year.

Dollar Soft, Bernanke Misunderstood

The US dollar is little changed against the major currencies as North American players return to their posts.  A modest extension of yesterday greenback losses was seem, but a consolidiatve tone has emerged as the market awaits new incentives. 

Judging from the press coverage, we suspect many observers have misunderstood Federal Reserve Chairman Bernanke's comments yesterday.  They need to be placed in the context of what went before: namely several hawkish regional presidents spoke, seemingly raising the prospect of a hike as early as next year and a backing up in US yields.  His comments justified the continued accomodative policy a necessary to make further progress in reducing unemployment, which he argues requires a faster growing economy. 

Five Overlooked Euro Zone Developments

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There are several developments that warn of future problems in the euro zone and these make us suspicious about the euro's ability to sustain the upside break.

First, we are surprised by the lack of commentary and focus on an important ECB decision last week. It decided to give member central banks the option of not accepting bonds as collateral under written (guaranteed) by countries receiving international assistance. The ECB was explicit, national central banks are not obliged to accept bank bonds guaranteed by such sovereigns. Recall that in early January the ECB allowed 7 of the 17 national central banks to accept a broader range of collateral. This may not seem to be significant at the moment, but if there is a new flare up of tensions, this could compound the challenge of the distressed countries' banks.

Today's Developments and 4 Important Observations

The US dollar is broadly firmer against the major currencies to start the week, but remains well confined to ranges seen at the end of last week. The market lacks conviction after shrugging off the disappointing European flash PMIs last week. Even though Italian and Spanish bonds are firmer today, outperforming Germany, we detect a deterioration of conditions in Europe and are concerned about a flare up in tensions after the market gets through the quarter-end portfolio adjustments.

Today’s developments include a better than expected German IFO reading (business climate 109.8 vs consensus 109.6) and an increase in Italian consumer confidence (96.8 in March, the highest since last July, from 94.4 in February). There are also signs that Germany will relent at finance ministers meeting at the end of the week and allow the EFSF and ESM to run simultaneously until the middle of next year.

CFTC FX Positioning Update: Not What You Think

The latest Commitment of Traders report from the CFTC covers the week ending March 20.  Among the major currency futures, there was dramatic reduction of net short speculative positions.  To appreciate how this was achieved is only possible by disaggregating the data.  

The net speculative euro short position was cut to about 83k contracts from 99.3k the previous week.  This is the smallest net short position since the end of February.  In the previous week there was a decline of net short euro contracts roughly of the same magnitude. This was almost solely the function of shorts getting out.  However, this week the establishment of new euro longs was larger (10.1k) than the shorts exiting (6.3k).

Next CB to Provide 3-Year Loans? Denmark

The Danish central bank will borrow a page from the ECB's playbook and provide 3-year loans to local banks next week (March 30). Denmark's banks (~120) have been largely locked out of the funding markets since senior creditors lost money when Amagerbanken failed a year ago.

Danish banks have to repay about DKK150 bln of state-backed debt next year. The take down of the three-year loans next week are likely cover around 2/3 of this. Some large Danish banks are reluctant to participate in next week's offering as it subordinates other senior creditors.

Short Update on France

France reported better than expected business confidence figures today. The March reading of 96 compares with Feb's 93 and is the first time in over a year that business confidence has improved two consecutive months.

Yesterday's disappointing flash PMI report (mfg 47.6 vs 50.0 in Feb and service unch at 50.0 vs expectations for a small increase) overshadowed news that the French government revised its forecast for 2012 growth to 0.7% from 0.5%. Some dismissed this as politically motivated as President Sarkozy continues to trail in the polls, the first round of which is a month away.

Frustrating Friday as Euro and Sterling Bounce Back

The market has shrugged off the disappointing euro zone PMI to take the euro to a marginal new high for the week, and again mapping transversing the range of about $1.3140-$1.3500.   Sterling too rose through yesterday's highs, albeit briefly, though failed to take out the week's high set on Wed near $1.5923. 

While this price looks impressive, color me suspicious.   The Australian dollar, which to my chagrin, led the move lower, has not rebounded as convincingly and is struggling to sustain the thrust back above $1.04.  The underlying impulses remain problematic.  

New Euro Group Head may be Announced Next Week

A battle is shaping up to replace Jean-Claude Juncker as the head of the Euro group of euro zone finance ministers. Juncker has held the largely thankless post since Jan 2005. His current term ends at midyear. His tenure was already extended and now he says enough is enough.

The position has some times been overshadowed by the EU President Van Rompuy and EC President Barroso. The Euro group head convenes and leads meetings and influences the agenda. That is the formal power structure, but the informal one is often the determining one.

Disappointment in Core, but Some Positve News in Periphery

The shockingly weak euro zone flash PMI, especially the sub-50 reading for German manufacturing, is the main focus today. New orders have been weak and the Bloomberg consensus does expect the euro zone economy to contract not only in Q1 but in Q2 and Q3 as well. Many participants seem to have confused the dramatic equity market rally in Q1 and reduced tail risks with economic strength.

There is also a bit of a double-whammy for Germany. It had diversified its exports away from the periphery in Europe toward Asia, especially China just as fears of a harder landing--more pronounced slowdown, have been "confirmed" by the drop in the HSBC flash manufacturing PMI.  

Four Surprises Send Dollar and Yen Higher

The market has been hit by four surprises:  Japan unexpectedly reported a trade surplus.  HSBC's flash PMI for China's manufacturing was plays on fears of a harder landing.  The euro zone flash PMI, and especially the disappointing German numbers underscores recessionary conditions in the region.  The UK's February retail sales decline twice as much as the market consensus had anticipated. 

Individually they would have caused some market stir, collectively they are spurring near-term trend reversals, weighing on equities and lifting core bond prices. After flirting with the upper end of ranges, the euro and sterling have been sold off.  This reinforces the broader range of $1.30-$1.35 for the euro and $1.56-$1.5950 for sterling.   

The dollar appears to be confirming a topping pattern against the yen if the JPY83.20 area contains upticks.   The tactical bullish call on the Australian dollar has proved ill-timed as it has broken through the $1.04 area to record new 2-month lows. 

Japan to Report Another Trade Deficit

Early Thursday in Tokyo, Japan is likely to report a trade deficit for February. On a unadjusted basis, it will be the 5th monthly deficit. Based on the trade figures for the first twenty days of February, it will likely be the smallest of the streak. The consensus is for JPY120 bln shortfall. On a seasonally adjusted shortfall, will the eleventh in a row. At the consensus guesstimate of a JPY342.5 bln deficit, it will be the smallest since September.

Exports are still falling on a year-over-year basis, but at a slower pace. Imports are still rising, but here too the pace is slowing. The swing into trade deficit for Japan happened from both sides. Exports were squeezed by the strengthening of the yen and weaker foreign demand. Imports were bolstered by energy imports as its reliance has dramatically risen since last year's tragedy.

Great Graphic: Social Media Explained

The Huffington Post put it perfectly when they said LinkedIn is the gateway drug of social media for business. Unless you are one of the rare people who thrives in the chaos of social media you have probably felt like this at some time or another:

To clear things up here are a few great graphics on Social Media.

This first one from Mashable breaks down how the world uses various social networks:

This graphic from Social Colleague breaks down what happens in social media every minute:

Bernanke Rejects Gold Standard: Apologies to the Paulistas

In yesterday's lecture, Federal Reserve Chairman rejected the idea that a return to a gold standard is desirable or practical. His pointed remarks come as Republican presidential candidate Ron Paul has fanned ideas in some quarters of the benefits of the discipline of a gold standard. Previously the outgoing World Bank head Robert Zoellick had also advocated a return to a gold standard. In addition, there have been press reports suggesting that some central banks have recently stepped up their purchases of gold for monetary (reserve) purposes.

Bernanke's objections were essentially four-fold. First, a gold standard prevents adjusting policy in response to shifting economic conditions. No matter how high unemployment rose, for example, under the strict adherence to a gold standard, monetary policy tools could not be used.

UK and Netherlands in Focus

The US dollar is mostly softer today, despite the Fed's Kocherlakota clearly joining the less dovish camp that says no more accommodation (read QE3) is needed.  The euro extended yesterday's recovery to trade at new highs since March 8. 

We had anticipated the euro moving into the $1.3250-$1.3300 range after the $1.30 support held last week.  We are hesitant to chase the market at these levels, especially with the 2-year interest rate differential (US-Germany) recovering to 7 bp from 2.5 at the end of last week.  The change is often more important than the absolute level. 

Great Graphic: Nuclear Energy

Anyone else see last week's Economist? It was on nuclear energy. They have a pretty awesome interactive graphic on their website.

Now I have posted great graphics before about energy, but they have mostly been about renewable energy and energy efficiency. We've looked at the potential of solar and wind energy in the United States, smart meters in Europe, why Germany is a solar power house, and the need for state legislation for solar jobs. But we have never looked at energy from a national security stand point.

Thoughts about the Euro Zone's External Accounts

Yesterday, the euro zone reported that its January current account surplus of 4.5 bln euros was largest in almost five years. The December surplus was revised to 3.4 bln from 2.0 bln initially. The monthly swings of the time series can be misleading due to seasonal factors and the schedule of transfer payments.

The 12-month cumulative deficit was 21.2 bln in January 2012 vs 50.6 bln in January 2011. Growth differentials have seen the US current account deficit widen,and the same considerations would seem to favor an improvement in the euro zone's external position.

Turn Around Tuesday or Just a Pullback?

The major foreign currencies are broadly weaker, retracing part of the Friday-Monday rally.  The ostensible trigger were reports of military action in Beijing.  There was talk of a reaction to the dismissal of Bo Xilai last week.   Such speculation is likely to prove wide of the mark, but was sufficient to get the ball rolling. 

Late foreign currency longs, like my tactical call in the Australian dollar yesterday--were in weak hands and hence the unwind.   In  fact, the Australian and New Zealand dollars hare bearing the brunt of the correction among the majors.  Even though the dollar is gaining against the yen and is back knocking on the JPY84 area, unwinding of some carry trade positions, while Tokyo markets were on holiday. 

Provided the euro holds $1.3150-60 support area, another run to the upside either later today or tomorrow looks likely.  Some what firmer than expected UK inflation is seeing sterling marginally outperform.  Headline CPI rose 0.6% in February, compared with consensus forecasts for a 0.4% increase.  Base effects still help press the year-over-year rate down to 3.4%, which is the lowest since Nov 2011.  Sterling briefly dipped below $1.5840 but recovered after the data.  Tomorrow the UK presents its budget, which is the focus. 

A Look Back at the US Financial Crisis: 2008

They say that hindsight is 20-20, and never is that more true than in the financial markets.

Inspired by this great timeline from the St. Louis Federal Reserve we are looking back on my thoughts at various points throughout the US Financial Crisis  In a post last week we looked at 2007 which set the stage for the crisis with trouble in the MBS industry and four rate cuts by the Federal Reserve.

Now lets look at 2008...

On January 22nd the Fed had an unexpected rate cut of 75bp three days later in Short and Shallow or Long and Deep I say the Fed had slashed interest rates by 100 bp and now has cut another 75 bp with an additional 50 bp likely to be delivered on January 30. I was right because on January 30th this did happen. I discuss the impact on dollar two days later on February 1st in The Dollar: Takes a beating, Can it Keep on Ticking.

On February 13th Bush signed the Economic Stimulus Act of 2008 into law. The next week on February 17th Northern Rock is taken into state ownsership by the Treasury of the United Kingdom.

On March 7th in If to Err is Human, is Forgiveness Really Divine I state It is clear that the financial crisis that began in the US housing market and the derivatives tied to it has metastasized well beyond it. That same day the Fed announces $50 billion TAF auctions, extends the TAF for at least 6 months, and initiates a series of term repurchase transactions expected to cumulate $100 billion.

Why I Like the Australian Dollar

The Australian dollar held support in the middle of last week near $1.04.  Japanese retail and institutional investors, always yield hungry have taken a new look, especially as they begin trying to diversify away from the Brazilian cash register.  There is still scope for another rate cut from the Reserve Bank of Australia, possibly in May, but this has largely been priced in. 

Consider what has happened in the past five days.  The Australian 2-year yield has risen 25 bp, compared with 5 bp increase in the US and no change in the Japanese 2-year rate. 

Spain Update

The Spanish news stream is poor as the media focuses on local bank reliance central bank funding and the 2012 budget that will be unveiled next week. Just like roughly 1 in 3 that are unemployed in the euro zone are in Spain, Spanish banks account for almost half of the borrowing from the ECB in February.

Recall that Prime Minister Rajoy unilaterally announced, within hours of signing the new fiscal compact, that it would not reach the 4.4% deficit/GDP ratio has negotiated with the EU, but instead deliver a 5.8% deficit. That follows the large (roughly 2.5 percentage point overshoot of the 2011 target, conveniently blamed on the outgoing Socialist government). The EU has come back and compromised with a 5.3% deficit target this year.

Consolidative Tone at Start of Week

There has not been any meaningful follow through to the pre-weekend foreign currency rally and the euro, sterling and Swiss franc are consolidating in unremarkable activity at the upper end of Friday's ranges.  The yen is a bit stronger amid talk of exporter dollar selling after the greenback's upside momentum faded just above JPY84.00 last Thursday.   The Australian dollar initially extended its gains despite cautious comments from the central bank's Stevens.  However, some unwinding of Aussie-yen positions saw the Australian dollar slipped back into the pre-weekend congestion area $1.0570-80 area. 

Equity market are mixed.  The MSCI Asia-Pacific Index eked out a marginal gain, but markets open late, like India, Thailand and Malaysia are lower.  European bourses are mostly lower with the notable exception of Spain, which is posting broad based gains,  led by health care, consumer goods and technology sectors.  Only basic materials are lower. 

Speculative Positioning Update: Commitment of Traders

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There were two significant shifts in net speculative positioning in the week ending March 13, according to the latest Commitment of Traders report.  The first is an acceleration of the short covering in the euro.  The second is the extension of short yen positions.  

The fact that the euro held support near $1.30 is important.  That is the bottom of the $1.30 to $1.35 trading range that has confined the euro through most of the first quarter.  There is scope for the euro to test the $1.3250-$1.3300 area in the days ahead.   The dollar may fare a bit better against the yen, but is more likely to consoldiate then trend higher.  

Fragmentation of Risk-on/Risk-off Matrix

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One of the most important developments in the foreign exchange market is the fragmentation of the risk-on/risk-off matrix that was a key feature since the onset of the financial crisis.  While cognizant of the non-linear nature of the capital markets and the fact that returns are not normally distributed, we continue to find use in monitoring the correlation between individual currencies and the US S&P 500.  Numerous portfolio managers we talk to also watch these closely.  

The break down has taken place over a range of currencies and we summarize the developments here.  The correlations are calculated on the basis of the percent change in the foreign currency and the percent change in the S&P 500 on a rolling 60 day basis.  

Dollar Consolidating, But may Bounce in US Today

The US dollar is consolidating its recent gains in the foreign exchange market as players await fresh trading incentives.  There is a host of US economic data today, including weekly jobless claims, regional Fed surveys (Empire and Philly for March), PPI and the TIC data.  Yet barring major surprises, the data will not shake the market's confidence that the US economy is performing somewhat better and sufficiently so as to have reduced the odds of QE3.  

The euro held support near $1.30, which is seen as the lower end of its trading range.  Given current short-term positioning, it likely requires a new fundamental development to successfully breach the band, which extends toward the $1.2975 area.  North American players appear to be somewhat more bullish the dollar presently and NY dealers will inherit the books today with the euro getting stretch on the hourly momentum readings.  Look for the upside to be limited to the $1.3100 area.  

Great Graphic: US Solar Capacity Installed in 2011

Previously I've posted great graphics about the international solar market and the potential of solar energy in the US. This graphic from Green Tech Media looks at US Solar installiation in 2011.

A Look Back at the US Financial Crisis: 2007

It is important to look back on critical moments of history. For example who among us doesn't remember this iconic moment in 21st century pop culture:

No one? Maybe that is just my millennial webmaster. 2012 marks the five year anniversary since the start of the US Financial Crisis. I found this great timeline by the St. Louis Federal Reserve. So I decided to look back on some of my writings from critical times in the crisis throughout 2007 (we'll examine later years in subsequent posts). In short, sometimes I was right and sometimes I was wrong.

On Febuary 27th, The Federal Home Loan Mortgage Corporation (Freddie Mac) announces that it will no longer buy the most risky subprime mortgages and mortgage-related securities. Three days later on March 2nd I look at the theme managing risk in Jack Bauer, Risk-Aversity, and the Dollar.

On March 20th in Make it or Break it I state Thus far the actual evidence of the sub-prime problem spreading or becoming more generalized has been very light. This remains in the realm of conjecture and anxiety than reality, but needs to be monitored.

FX Note from Singapore

The US dollar is narrowly mixed as the European session is getting under way.  Players appear to lack near-term conviction.  The euro is trying to recover from the breakdown at the end of last week, but needs to resurface above the $1.3210 area to blunt some of the negative bias.  The downside beckons.   The fact that the $1.56 level held in sterling warns that bottom pickers may emerge, but it may find it tough sledding if the the stabilization of the euro proves brief.    

There were some investment houses warning that the BOJ would increase its asset purchase plan at today's meeting.  One board member did, but he lost the vote 8-1.  The BOJ did throw a bone to those who wanted more action, even though it was only last month it surprised most observers by expanding its asset purchase program by JPY10 trillion and announcing an inflation goal.  

True Story

Sometimes keeping up with financial news can feel like this:

So here are the top five posts from the past month:

The Tragdey that is Spain

Note on Commitment of Traders

PSI Update

A Quick Look at Commitment of Traders in the Currency Futures

Why Portugal

Seven Thoughts to Start the New Week

Half way through the Asian business trip and unable to follow the nuances of the foreign exchange market, but from a high level here is what I am thinking about, well besides this:

1. Four central banks meet this week, the Fed, the BOJ, the SNB and the Norges Bank. None will take new action. The Fed may tweak its assessment of the economy a little, but the thrust of the statement will be the same.

After surprising the market with an expansion of its asset purchases and providing an inflation goal in mid-February, the BOJ is unlikely to do anything, but the press conference see new information about its intentions. The weakness of the yen, which reached a 10-month low against the dollar last week, off nearly 7% in the past three months, is likely to be welcomed by officials.

The central banks of both Switzerland and Norway share a common concern, the strength of the own currencies. Barring a crisis, the SNB will be loath to take action until a new chairman is named. Norwegian officials are likely to limit themselves to verbal intervention.

A Quick Look at Commitment of Traders in the Currency Futures

The speculative positioning in the currency futures market gives insight into a particular market segment. It is understood as a microcosm of trend followers and momentum players. In recent weeks, we have been not simply looking at the net position, but have drilled deeper to see the changes in the long and short positions that generate the shift in the net position.

Euro: In the week ending March 6th, the net speculative short position rose to 116.5k contracts from 109.7k in the prior week. Both shorts and longs added to positions. The longs grew by a little more than 4k contracts to 39.9k, which is the largest long since very early in January. The shorts added 11k and as of March 6, were short 156.4k contracts. The break down in the euro in the second half of the week, perhaps a “buy the rumor, sell the fact” activity following the Greek PSI, saw the longs exit out of frustration with the inability of the euro to rise through $1.33 in the spot market.

Great Graphic: Filling in the Monetary Blanks

There is a great graphic over at FT Alphaville today on the monetary easing and corresponding liquidity in the US, UK, and Euro Zone over the past several years. Check it out.

Great Graphic: Top Internet IPOs

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I am in Asia for the next ten days to, among other things, give a speech at the Investment Management Association of Singapore's annual conference on March 14th. While I am gone my brilliant webmaster is in charge, and since she is always showing me something new with regards to life technology I thought we could post this great graphic about the top internet IPOs of the last decade.

Markets Take A Breath--Fragile Consolidation

Beginning a 10-day business trip to Asia.  Posts over this period may be sporadic.

The US dollar is slightly weaker today, but generally consolidating yesterday's large advance.  The tone is cautious and fragile with the Greek PSI conclusion looming. Although Greek banks and their pension funds, coupled with the most of the IIF's steering committee and some large European banks have indicated they will participate, great uncertainty continues to hang over the market.  

Asian equities were down for the third consecutive session.  The 0.9% decline in the MSCI Asia Pacific Index is sufficient to push it to its lowest close since early Feb.  It is now up about 10% for the year compared with almost 7% for the S&P 500 and 6% for the Dow Jones Stoxx 600.  The latter is up about 0.3-0.4% near midday in London. Of note financials are up about 0.7% after losing about 7% in Monday and Tuesday's swoon.  

Pressure in the Core: Dutch Treat

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To the extent there is much investor concerns about the core of the euro area it has tended to focus on the French elections, where the Socialist challenger Hollande has been particularly provocative in his campaign rhetoric. He has called for a dramatic increase in taxes on the wealthy and insists on renegotiating the recently approved fiscal pact.

Weekend reports, subsequently denied, that Germany and several other countries would not officially host Hollande. The election has also seen French President Sarkozy's star dim in Europe as he is lagging in the polls and this appears to be impacting his rhetoric as well.

However, developments in the Netherlands may steal the limelight as the French election is still more than a month away. The key issue in the Netherlands is that last week, the Dutch Bureau of Economic Policy Analysis warned that next year's deficit will exceed the 3% target.

PSI Update

Uncertainty over the participation in the Greek bond swap is a major source of anxiety today. Rumors circulated earlier that the PSI "invitation" would be extended by a week due to low participation have been officially denied, but rumors themselves illustrate the market's apprehensions.

It does appear that participation will be sufficient to incorporate the collective action clauses (66%), but not the 90% official goal. The Greek government has signaled willingness to invoke the CACs, if necessary. This may have been an attempt to demonstrate its resolve as surely the preferred outcome is to maintain the veneer of voluntarism. Moreover, invoking the CACs would most likely be regarded as a credit event by ISDA and trigger the credit default swaps.

Markets Brace for Poor Developments

The US dollar is broadly higher against most of the major and emerging market currencies amid concern that the Greek PSI will not see sufficient participation to avoid the triggering of the collective action clauses or worse. At the same time, the downgrade of China’s growth forecasts and the softer service sector PMI released yesterday, continues to take a toll. The strength of the yen and dollar appear to reflect short-term participants bracing themselves for disappointing developments in the coming days.

Consistent with this theme, global equities are lower, extending the first real correction of the year. The MSCI Asia-Pacific Index was off about 1.25% and is now off more than 3.5% since the Feb 29 multi-month peak. Of note, the Malaysian bourse bucked the trend to post gains for the fifth consecutive session, the longest in nearly a month, lead by consumer services and basic materials.

Great Graphic: Why We Need the New York Solar Jobs Act

The New York Solar Jobs Act is currently in Albany and we need it to pass more than Upper East Siders need the Second Avenue Subway or the Knicks need Jeremy Lin. (New York Residents click here to find out how to show your support) Not only would it create 5,000 mW of solar capacity by 2025 but it would add 22,000 new jobs and a $20 billion boost to the New York economy.

Now I've posted (or rather my brilliant and wise beyond her years webmaster has posted) about the potential of solar energy in the US and why solar makes economic sense.

This great graphic from Switchboard illustrate how behind the times New York is when it comes to solar.

CNBC: Euro Outlook, but Sell Swiss Francs

Here is an interview I did with CNBC on Friday discussing why the Swiss franc may be a better short than the euro.

 

The Tragedy that is Spain

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The Greek PSI will be resolved one way or the other this week. Early reports suggest a weak start and the triggering of collective action clauses and credit default swaps remain a distinct possibility. Portugal is next and, although the credit dynamics and implementation of reforms are superior to Greece, the risk remains high that it will need a second aid package and/or debt restructuring, as it is unlikely to be able to return to the capital markets in H2 2013. With 2 LTROs and collateral liberalization, the 10-year benchmark in Portugal is yielding more than 13%, compared with a bit more than 12% at the end of last year.

However, the devolution in Spain is particularly troubling. The new fiscal compact had just been signed last week, which includes somewhat more rigorous fiscal rule and enforcement, when Spain's PM Rajoy revealed that this year's deficit would come in around 5.8% of GDP rather the 4.4% target. This of course follows last year's 8.5% overshoot of the 6% target.

Dollar Bid, Critical Events Loom

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The US dollar is posting modest gains against most of the major and emerging market currencies to start what is likely to be among the most important weeks here in the first quarter, with numerous central banks meeting, first tier economic data and the deadline for the Private Sector Involvement (PSI) in Greece. The yen is bucking the generalization, recovering from its pre-weekend losses helped by cross rate gains.

Global equity markets are lower, with the MSCI Asia Pacific Index losing almost 1%, with Chinese Premier Wen cutting China’s GDP target this year to 7.5% and the sub-50 reading on the official service sector PMI (48.4 from 52.9) taking a toll on regional bourses and sending the yuan to a four week low against the greenback. European equities have followed suit.

Note on Commitment of Traders

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There have been several interesting changes to the net speculative positions in the currency futures over the past week through Feb 28.  While not capturing the reversals in the euro and sterling at the end of the week, the data is still revealing.  

  

The most notable change has been that the net speculative position has swung from short to long yen for the first time since early June 2011. To be sure it is a small net short position of 1203 contracts.  The net speculative position was long 17.3k contracts in the prior week.  The shift was a function of longs being cut  and shorts adding.  Still the yen longs have not really capitulated as there are still some 57.5k long contracts in speculator or non-commercial hands.  

Dollar Finishing Week with Bid Tone

The US dollar is bid.  It has recouped every thing it lost in the first half the week against the euro.  It is flirting with its 20-day moving average against both the euro ($1.3254) and Swiss franc (CHF0.9108).  The constructive technical toned identified here at mid-week has undermined by what two considerations, the backing up of US rates, which some attribute to Bernanke's testimony (though we are skeptical) and perhaps a buy the rumor sell the fact activity around the LTRO.  A break of the $1.3230 area will immediately target the $1.3150-70 area next.  

For its part sterling has been confined to Thursday's ranges and a better than expected construction PMI may have helped.  It came in at 54.3 from 51.4 in January.  The consensus had expected only a small increase.  It is the best since March last year and is above the 50 boom/bust for the 14th consecutive month.  New orders reached a 21 month high.  

Great Graphic: Apple

There is no doubt Apple has a huge impact on our society. However if you've been living under a rock for the past decade here is some proof:

But exactly how big is Apple? This great graphic from Mashable shows us:
(You might have to click on the image to see it properly)

Euro and Yen: Looking for a Black Cat in a Dark Room

Never known for being easy, the euro and yen seem particularly difficult to understand presently. During such times it is often best to return to basics. Foreign exchange reflects the cost of money. So do interest rates. The relationship between the two is not always clear and stable. Recently there have been some shifts in those relationships that market participants should be aware of.

Turning to the euro first, we note that yesterday the US-German 2-year differential poked through the 10 bp level. The US 2-year yield moved above Germany's in mid-December 2011 and has remained generally above there this year except for a brief exception in early Feb. The US premium yesterday was the high for 2012 and even now at 8 bp it is about 2x the 20 day moving average.

Don't Lose Sleep over China's Fewer Treasury Holdings

Want more on China? See this piece I did back in 2010.

Revisions to the holdings of US Treasuries have set the chins wagging.  The key focus is on China's holdings of Treasuries. 

While the new data revised sharply higher June 2011 Chinese holdings to $1.307 trillion from $1.165 trillion the data points to a sharp decline in the second half of last year.  Holdings peaked at $1.315 trillion in July and finished the year near $1.152 trillion.  There are several reasons why observers and investors should not be very concerned about the report. 

Europe and Bernanke--Euro May Recover

The day after the LTRO, Europe has reported a mixed batch of PMI readings that underscore the multi-speed Europe that is emerging.  Germany, France, UK Norway and Sweden appear to be stabilizing.  However the rest seem to still be in difficult straits. 

A case can be made that Ireland, Italy and Switzerland are stagnating, while Greece and Spain are eroding.   For the euro area as a whole, the manufacturing PMI was left at the 49 reading of the flash report.  It is the seventh month below the 50 boom/bust.  New orders and backlog readings are still falling. 

The euro extended yesterday's downside reversal, but found a bid (talk of Asian official) in front of $1.33.  It needs to get above $1.3350 to stabilize the technical tone that had looked constructive before yesterday's action.