Some commentary on the Irish Situation.

Good morning.

My first week for some time of non-blogging, and a very interesting week its been. The Irish/European Crisis seems to have come to a head (for now), and the markets saw some very strong corrective activity, which has certainly helped to de-froth them, particularly in the wake of the QE2 announcement.

In line with my earlier comment from this week, where I announced I will be slightly stepping back from daily blogging, I still intend to occasionally update my page, including a weekly blog at least. I hope to get some analytical stuff out on Monday. For now however I would like to post (or refer) to a couple of articles from other contributors.

The first posting is by NAB economist, and ex-colleague of mine Nick Parsons. Nick is a brilliant economist who has great understanding of markets from both an economist's angle, and having worked closely with traders for many years, a trader's angle. His commentaries and writing style are wonderfully perceptive, witty, and slightly acerbic, all at the same time. Here is his commentary for today (19th Nov):

As millions of freckle-faced, tousle-haired Irish kids set off for school this morning, they’d be well advised to pay attention in their German lessons. It might not be a bad idea to stay awake during Economics too, and they might even find basic Mathematics comes in pretty handy. Their parents’ generation, unfortunately, spent too much time in Politics and Creative Writing classes whilst making the elementary mistake of studying History but failing to learn from it. We have the laughable but tragic situation today of hearing Irish political leaders insist on what is non-negotiable as if somehow they will ultimately have any say in the matter. To be sure, it’s the only bargaining tool they have and they might as well use it, but threatening to bring about the collapse of a European project which has been more than 60 years in the making will cut no ice in Brussels or Berlin. Dressing up a sovereign bailout as a mere accounting issue, a technical plan to provide a loan to the banking system, should fool no-one. Crucially, it’s unlikely to impress the European Central Bank, which is finding its mandate to ensure price stability increasingly undermined by a new requirement to become the lender of first resort to a bankrupt system. The Frankfurt-based ECB is likely to be headed next year by a German central banker. This will be the minimum price for German acceptance of a commitment to underwrite the EFSF for what could become perpetuity. The German economy is booming and a German-led ECB in Germany will increasingly set interest rates for the good of Germany. So it’s not just the Irish who should concentrate in school today. The rest of Europe, like it or not, is likely to find out soon that real power lies with creditors, not debtors.

The second article of the day is from the 'Daily Telegraph' newspaper. The Telegraph is the most widely read of what are known as the Broadsheet newspapers here in the UK: These include -'The Times', 'The Financial Times', 'The Guardian', and 'The Independent'. The article is entitled 'Margaret Thatcher knew the single currency would devastate Europe'. and can be viewed by hitting the highlighted link. I have always considered Margaret Thatcher as the greatest British Prime Minister during my lifetime - by a country mile. However she and many of her followers have often been maligned in the British press, yet she was one of that rare breed that had the courage of her convictions and did what she thought was right for the country, not what was popular, or right according to the opinion polls and columnists.

I think if you read the piece fully you may appreciate our lucky escape here in the UK, and although Margaret Thatcher fell from power in the early 90s, I think her influence and opposition at the time to joining the Euro built up enough of a head of steam to ensure that it never materialised in the ensuing years. In fact looking now at what is happening a short hop across the Irish sea from us, I can't helping thinking that joining the Euro may have achieved for Germany over the UK what 2 World Wars failed to achieve.

At that point I will bid you all a great weekend. 

The PIIGS and Risk aversion - The sequal.

Concerns over European Sov Debt continue to rattle these markets. Irish 10 year yields are pushing close to 9%, to put some perspective on that just two weeks ago they were below 7%. The Irish contagion has spilled over to other PIIGS as CDS prices have risen strongly for Portugese, Spanish and Italian govt bonds. Meanwhile traditional safe-haven currencies USD, Yen and Swissy are outperforming the Euro and the risk orientated currencies such as the AUD. - Stocks have been wavering through the week, however overnight futures markets have seen heavy losses, and the risks are growing of a much deeper setback. The chart below is the SP500 e-mini futures over the past year. I have highlighted strong similarities between the period Dec 2009 to May 2010, and the period over past few months, the likeness is almost uncanny. - If history were to repeat itself here, (or more to the point rhyme), then things could start to get very ugly. The runaway train which was the SP500 last week may now be getting ready to come of the rails.

Something for the weekend:
Here in Britain, these rain-swept islands perched off of the North-West coast of Europe, we have generally been deemed largely irrelevant in the great race into space. The first country to send anything successfully into space were Germany, unfortunately for us in the UK, we were the intended target, with most of Germany's V2 rockets falling back from space and on to London. Since then the US, Russia and China have all managed to send people into space, plus the odd dog and monkey. We did try sending a probe to Mars a few years back, but we don't think it ever actually got there. -  Finally however, I am very proud to report that Britain finally has a space first, something which has been achieved at a mere fraction of the cost of the many Billion Dollar programmes achieved by other nations. Britain has become the first nation to put a paper plane into space. The story can be seen by hitting this link.  -- So lets hear it for British genius, ingenuity and inventiveness, and from now on, whenever you think of nations pertinent to space exploration, please remember to include Britain very firmly on that list. 

Have a great weekend .........

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.