Guest comment on 2011 so far, wih some views of where we may head..

Today I have the honour of a guest posting from someone I have known and respected for many years. He prefers the posting to remain anonymous, however I will just add that he is very good friend who is highly knowledgeable on markets having traded them very successfully for the best part of the past 2 decades. I particularly like his comments on yields. 

Feedback and commentary, whether in agreement, or with alternative views, would be highly welcomed..

Below is my data and my thoughts on the year thus far ... if , by the time you read this, new highs or lows have been made in a certain product , then that is my apology , but its a moving market....

ok , so below you will find the products i track regularly , their years highs and lows And the date these levels were made, and some short , brief thoughts from myself (all original, unless quoted) .  if you could take some time and look at the data and the dtes, you will be able to discern some patterns and events that have been major points this year...middle east ; japan and the mini crash and the subsequent jpy intervention; ecb hawkishness ; all rates relative to usa widening ; vix complacency etc....

I hope you enjoy looking at this and i would welcome all your thoughts

asset class                            years hi and date made                                        year low and date made

------------------                       --------------------------------                                       ------------------------------

dow jones                           12419  (1/4)                                                              11555  (16/3)

sp                                         1344  (18/2)                                                             1248 (16/3)

nikkei                                      10857 (21/2)                                                          8227 (15/3)

ftse                                           6091 (8/2)                                                              5598 (16/3)

dax                                            7426 (18/2)                                                             6483 (15/3) 

shanghai                                   3002 (9/3)                                                              2677 (25/1)

observations :  there was a mini crash on 15 and 16 march on nuclear radiation panic ...but clearly the dow has fully recovered . ftse in narrow range as befits a country stumbling along with a fair amount of economic issues (pure commodity inflation ,unemployment , falling wages , fiscal austerity , weak housing etc )  ; the nikkei should lag all for a while .  shanghai also narrow range as markets constantly anticipating chines RRR hikes and rate hikes and the 'pending' china slowdown or crash landing . less hot money is being drawn to chinese asset bubbles.

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vix                                              31.28 (16/3)                                                         15.46  (14/1 )    [ note a few bounces around 15.5 on few occasions]

gold                                            1447  (24/3)                                                        1308 (27/1)

WTI crude                                  108  (1/4)                                                              84.22 (15/1)

observations : Gold and Brent are having a period of high correlation , with a 1% move in Brent driving about a 0.5% move in Gold as movements have been largely driven by Middle East events.   the vix should not really go below 15 as there must be a form of fear premium in the market .  vix close to 15/16 is an alarm bell for risk assets . nevertheless , the asset markets are rising on a mixture of vapour , decent economic news, qe2 and easy money , and all bad news gets shrugged aside . this could be a problem in spurts ....but overall there is optimism out there. 

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june 2y tsy                                 109. 16 3/4  (16/3)                                            108.22 (8/2)

june 10y tsy                              121.08   (16/3)                                                    116.12 (8/2)

june 30y tsy                             122.16   (16/3)                                                     115.21 (8/2)

june gilt                                     119.46  (3/1)                                                       114.13(9/2)

june schatz                                 108.82    (3/1)                                                      107.03 (1/4)

june bund                                    124.85 (10/1)                                                     120.73 (1/4)

2y tsy yield                                0.893 (1/4)                                                        0.54 (28/1 and 16/3)

10y tsy yield                               3.766  (9/2)                                                        3.145 (16/3)

30y tsy yield                                 4.787  (9/2)                                                     4.32 (16/3)

gilt yield                                     3.912 (9/2)                                                          3.42 (4/1)

schatz yield                                 1.856  (1/4)                                                       0.817 (4/1)

bund yield                                    3.41 (1/4)                                                         2.852 (7/1)

observations :  clearly german fixed income the massive underperformer on mixture of hawkishness from ecb inflation paranoia ; good stock market performances ; higher long end global yields as BRIC countries are also raising rates and anticipation of end of QE2 and the rally thats underway in usa long yields. BUT ALSO PLEASE NOTE..the more the germans help bail out euro peripheries , then the more the bund etc become one of them!! ie the bund will be debt laden too...hence bund to underperform , anyway.   also,  note 16/3 mini stock crash and black swan event caused us yields to implode ....

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eurusd                                        1.4248  (22/3)                                                  1.2863 (10/1)

cable                                           1.6400 (22/3)                                                    1.5406 (6/1)

eurgbp                                         0.8852 (31/3)                                                   0.8283 (7/1)

usdjpy                                       84.73 (1/4)                                                        76.25(16/3)

eurjpy                                        119.78 (1/4)                                                     106.81 (16/3)

aud                                           1.0395 (1/4)                                                      0.9708 (16/3)

euraud                                       1.4337 (16/3)                                                   1.2930  (7/1)

audjpy                                        87.59 (1/4)                                                       74.57 (16/3)

usdchf                                        0.9785  (11/1)                                                   0.8862 (16/3)

eurchf                                        1.3204  (11/2)                                                    1.2414  (31/1 and 16/3)

usdcad                                        1.0030  (23/1)                                                   0.9627  (1/4)

nzd                                               0.7816  (2/2)                                                    0.7120  (16/3)

eursek                                         9.0321 (16/3)                                                     8.6993  (16/2)

eurnok                                         7.9715   (28/1)                                                    7.6825 (3/3)

observations....clearly the jpy intervention has been the driver form 16/3 lows to 1/4 highs seen above as the carry trade was given license to print as the speculators were completely flushed out after 16/3 flash crash....   its hard to ever imagine the 16/3 lows will be seen again ... but how haigh can the carry trade go before it buckles under its weight ? who is not long aud, nzd, cad , sek , nok etc?? 

it definitely feels that a carry bubble is being made as aud makes new highs every day , despite softer economic data . (aud pmi dropped 4 points this week).

-------------------------------------------hi's                                                                      lows

euribors 

 jun11                                         98.92 (3/1)                                                              98.345 (3 and 4 march) 

 sep 11                                       98.83    "                                                                  98.045            "

 dec 11                                       98.705  "                                                                   97.785           "

 mar12                                        98.57    "                                                                   97.575            "

jun12                                           98.40   "                                                                    97.375    (3 and 4 march and 1 april)

 sep 12                                         98.175 "                                                                    97.19           (1/4)

observations ... there are enough hikes priced in here .... totally and i would go as far as saying we could be seeing the interim bottoming of the european fixed income curve , both short end and long end ...as one GS observer put it : 3 month Sharpe ratio’s above 4 are often indicative of a “micro bubble” in terms of market psychology. Currently European front-end  has one of 4.4 for bearish positions indicating such positioning might be vulnerable to even modestly bullish catalysts in the near term.
i toltally concurr ... maybe trichet , after hiking on thursday , disspells market view of continuous hikes ??

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short sterling

 jun11                                        99.13 (3/1)                                                               98.77 (7/2)

 sep11                                        99.00   "                                                                   98.49    "

 dec11                                        98.79   "                                                                    98.20   "

 mar 12                                       98.55  "                                                                     97.87  (15/2)

 jun12                                         98.28   "                                                                    97.55   (15/2)

 sep12                                        98.02    (16/3)                                                           97.30    (15/2)

observations :  in a holding pattern , awaiting for  the 'to hike or not to hike' debate to unfold.... again , i believe a lot priced in , given the fragile economy . commodity inflation , with non rising wages , is demand destructive ... its a portend to a disaster ifrates are hiked aggressively .

a token 'regain our credibility hike' by the BOE has no place in this economy at moment.

-----------------------------------

eurodollars

 jun11                                       99.66  (1/4)                                                               99.475  (6/1)

 sep11                                      99.61 (15/3)                                                               99.315   (6/1)

 dec11                                      99.50  (16/3)                                                             99.09     (6/1)

 mar 12                                    99.35   (16/3)                                                              98.825 (6/1)

 jun12                                       99.11  (16/3)                                                                98.45 (6/1)

 sep12                                      98.82   (16/3 )                                                             98.09  (16/2)

observations : totally slave to feds QE2 and if it will end on or before june .. we see all the differing opinions between the hawks and the doves out recently.  my view is it goes on till june , then end .... i think the us rate curve is massively underpriced , relative to europe and uk , so there is a call by me that we are close to big turn in the rate differentials between the us and all europe . close could mean a week or a couple of months....but not more. this ties in with my view of carry trade being in danger and european yield curve too high .

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1y eurusd                               -146  pips (1/4)                                                          -23 pips (3/1) .....

1y usdjpy                              -52 pips  (5/1)                                                             -37 pips (3/1)

1y cable                                 -124 pips (23/2)                                                          -67 pips (3/1) 

observations .... from above , it is clear my view is that forward eurusd and forward cable go back to right eventually and hard .. and forward jpy to left .... 

Likely to remain volatile into next week. + US 10 Year + Is Greece hotting up again?

The US equity markets continues to behave in a volatile nature, this is not surprising given the weight of news and data over the next week. A QE story seems to hit the wires about every 5 minutes, it appears that opinion remains strongly divided both within the Fed and outside. My call is that Bernanke, being the sly old fox, will pander to both sides, perhaps not doing as much as the most extreme expectations, but none the less providing a strong boost, but within that also allowing flexibility for the future so that of he needs to hit it heavy and hard he can, or if he needs to ease back he can. - I do not expect the issue to actually be resolved fully next week, thus this will likely remain an on-going theme for the next several months, adding to increasingly volatile markets. I do not think much, direction wise, will be resolved until next week at least, but clearly the news will have the ability to slice a chunk off of the market, or give it an extra boost, which is why we are seeing increasingly volatile short-term action.

Moving on to US 10 Year yields. This is obviously a central theme in the on-going QE debate, since these are likely to be one of the main tools used by the Fed in the QE operations. However, an awful lot has been priced in on these, and in the past few weeks some of the froth has started to disappear from the 10 year t-note futures markets: Yields have seen a decent pick-up, rallying almost 40bps from the low 2.30s to the low 2.70s yesterday. I had been expecting this to move lower towards 2.00%, however whilst I do not rule this out for a later trade, short-term it looks like a low is in, and the risk of a rally towards the low 3 handles is a real possibility in the next few months. The first chart below shows US yields over the past couple of years.

The chart above shows how the yield has been forming a 'Falling Wedge' pattern in recent months, whilst momentum as measured by the 10 day RSI has been diverging upwards. The past couple of days has seen a breakout from the wedge, the yield may comeback to re-test the top of the wedge, but the risk is that it holds and moves higher. - The 10 Year t-note continuation future chart is also supporting these assertions. The top chart below shows this on a weekly basis. A couple of observations which I have highlighted:

• Firstly the strong similarity between the recent price and momentum action and the price and momentum action at the interim top in early 2008, both highlighted within the mauve ellipses. Note the sharp correction led to an extended consolidation, after which the main rally re-asserted itself. 

• Secondly the similarity between the bigger picture price action and the next chart below which shows Gold weekly 2006 - 2010, in particular the price behaviour as highlighted by the large red ellipses on both charts. On both occasions the breakout of these large patterns led to strong dynamic rallies. In the case of the Gold the rally eventually led to the Gold price being well overbought in late 2009. This saw a sharp correction followed by consolidation, eventually however the rally in Gold, as we know re-asserted itself.

The market is likely to see some rebound I think before and possibly around next week's news, however the move to higher yields could be a theme in the next few weeks.  Will this affect stocks? I am not sure, historically these markets move inversely, however the relationship between these two has not been consistent in recent years. However, if stocks were to suffer a sharp drop, then it is likely that bonds rally and yields drop, thus if the above scenario above were to occur, it is likely it would happen against a steady or rallying stock market environment.

Finally with regard to Greece; there has been a lot of negative talk hitting the wires these past couple of days. One theme seems to be how, with economic conditions weaker than expected (not helped by the EURUSD recovery), tax revenue is coming up short of projections in parts of Europe, and as a result countries struggling with high deficits are now confronting the prospect that they will miss the budget deficit targets forced upon them this year. In the past couple of days things have started to stir in Greece whilst Ireland has had mounting issues in the past couple of weeks. The charts below show the 5 Year CDS for Greece and Ireland over the past 6 months, below that is a chart of the SP500 Index and the EURUSD. I have highlighted the two prior occasions when the 5 year CDS prices moved up sharply in the past 6 months, and how this saw sharp drops in the SP500 and the value of the EURUSD. In addition I have placed emphasis on the action of the past week. - If this whole Euro Sovereign Debt issue were to explode again, then the above analysis is likely to be wrong on the T-note, as US yields should drop as a safe-haven bet while equities would once again probably turn ugly. 

 

TIPPING POINTS ???????!

Overnight markets across the board saw significant moves. Chinese equities dropped sharply, the various indices posted declines of around 4-5%, this has seen follow through in other Asian indices, though not as steep as the Chinese decline. In Europe the move has seen declines of around 2 - 3% thus far, and S&P futures are currently down around 1.3%. Elsewhere global bond markets rallied, leading to a further declines in yields, with the US 10 year yield breaking below 3%. It now appears that Japan, Europe and the US 10 year government yields have all broken key levels... Meanwhile the USD has posted gains versus the Euro and the USDJPY has dropped and is moving close to the spike low posted on the night of the Flash Crash. -- Also worth noting that European spreads PIIGS v Germany have continued to back up following recent declines......
I have posted a selection of charts showing significant markets and the current move in a wider context... FWIW, I believe we are possibly approaching the end of this corrective phase on equity indices, though until the lows of late-May/Early June are clearly broken, this still has the ability to confound me and prove me completely wrong.