A View from the Trenches, October 1st, 2009: "Change is in the air"
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Yesterday’s session was full of noise. On the surface, we had the
backward-looking macro data releases: MBA weekly Mortgage Applications
at -2.8% vs. 12.8% (neutral in my view), the ADP Employment change at
-254,000 vs. -200,000 consensus (positive), GDP QoQ annualized at -0.7%
vs. -1.2% consensus (positive), personal consumption at -0.9% vs. -1%
consensus (positive), Chicago Purchasing Manager at 46.1 vs. 52
consensus (negative). Thus, early in the session, we were in
risk-taking mood. On top of this, the Department of Energy’s weekly
release of inventory data showed that gasoline inventories had fallen
by 1.66 million barrels, while the market was expecting an increase of
about a million. Oil, on the news, hit $70+/bl, from $66+ at open. Yet,
none of this was enough to get us to close higher in equities. Why?
While we have the positive data on the surface, deep underneath, we
have the uncertainty over interest rates beginning 2010. Early in 2010,
quantitative easing policies will be ending in the countries that
implemented them and it will be up to the fiscal policies to take the
As we have endlessly discussed here, the unique feature of this
financial crisis of 2008 is the coordination in monetary policies.
Monetary policy is easy to coordinate. There is only one head of a
central bank in each country and all of them can meet at Jackson Hole,
or Bretton Woods to plot against the value of our monetary assets. They
can carry out balance sheet transfers overnight, they can surprise us
with untimely comments, they can side with bankers to keep rates
inordinately low, etc. Coordinating fiscal policies is however a
different issue. It is simply impossible to coordinate them.
In the past two weeks, we have seen an explosion of research
debating the future exit strategies. I have my personal opinion.
However, it is an evolving creature and for the sake of clarity, I
prefer to defer its exposition until further developments prove me
right or wrong. In the meantime, we are going to witness volatility in
the forex markets, on benchmark curves (today we saw an important
steepening move in Treasuries), in swaps and agency debt while gold
should quietly strengthen. It is also true, we may attribute some of
these changes to the fact that we are trading at month and quarter end.
Below, I show the last seven trading sessions in the gold market
(source: Bloomberg). You can see how gold sold off last Thursday, on
the news that Robert Mundell urged politicians to implement the
convertibility of the Euro vs. the USD. We commented the implications
of this proposition two days ago (ref. “A Thought on a convertible Euro” www.sibileau.com/martin/2009/09/29 )
and concluded that such convertibility is not feasible on political
grounds and that the late sell-off in gold should be seen as an
opportunity. Gold is 1.8% up since then. Was it a mere coincidence?
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