Outlook:

We went into the weekend thinking everything was fairly hunky-dory and decent US payrolls made the world safe for risk. One analyst said it would be unwise to go into this week “short risk.” Then Monti happened. So far the effect is a typical one-day shock effect—big rise in yields, big drop in equities. It remains to be seen whether the initial impact build momentum. After all, maybe Monti can be persuaded to stay. 

The calendar this week includes the ISM semi-annual economic outlook, US October trade, the German ZEW (tomorrow), and Japanese core machinery orders (also tomorrow and key leading indicator). Wednesday is the FOMC and a likely announcement of MBS buying rather than Treasuries, although most analysts admit they don’t really know how the Fed is thinking. Some say maybe the Fed will keep its powder dry and not announce anything, but we say that would be inconsistent with the Fed’s obsession about transparent communications.

Thursday we get PPI and a Congressional hearing on the Volcker Rule, which may be fun, and Friday it’s CPI and industrial production. By the new will all be exhausted, since Europe is delivering a steady stream of data, too. 

The Monti resignation bombshell is a reminder that a single person and a single Event can change everything. Draghi did it last summer with his “whatever it takes” announcement. Presumably the US government could do it with a fiscal cliff fix. OPEC, on the other hand, has probably lost the power to have long-ranging ripple effects deep into the global economy (no more incidents like 1973). Japan may be about to fall off its own fiscal cliff, seeking both unlimited accommodation (an invitation to a banking sector disaster) and unparalleled spending (more river beds paved over, maybe). 

It’s a long list. On the whole, Monti is probably out for real, to feed the Italian appetite for political theater, and that means US outcomes have to be even better to overcome the contraction of risk appetite that should accompany European worries. We also think the Greek bailout is failing, with only €29 billion offered in the debt swap, but better qualified persons have yet to be heard from. The dollar may have some juice left in it if all the worst outcomes come to pass, but beware premature judgments. A single announcement in a joint press conference by Beohner and Obama could put equities into the stratosphere and the dollar on the defensive. Basically our advice is not to trade on any timeframe shorter than two hours.


Eurozone Sanity Check: 
European Commission Pres Barroso proposed at end-November a process that could last as long as 5 years to create a true Treasury in the eurozone with taxing and borrowing authority. It is proposals like this that keep the magic in the euro, despite the eurozone economy diverging from the US and sliding into recession. The EMU sanity check:

  • The eurozone is officially in recession, with Q3 GDP down 0.1% after -0.2% in Q2. The IMF predicts a 80% probability of eurozone recession in 2013. The European Commission say 2012 growth will be 0.4% and cut its eurozone growth forecast to 0.1% in 2013 from 1% in May. German growth was cut in half to 0.8% from 1.7%. France will contract by 1.4%. The OECD forecasts 2014 as a second full year of recession. On Dec 6, ECB chief Draghi said growth will be 0.3% in 2013 at best and -0.9% at worst.
  • S&P cut Spain's rating two notches to triple-B-minus, one step over junk; Moody’s cut France’s rating by one notch to Aa1, leaving Finland as the only eurozone country with a Triple A rating. The Economist Magazine names France the ‘time-bomb at the heart of Europe” on labor market rigidity and loss of competitiveness.
  • The EU banking supervisor will be established by year-end but may not have the authority to recapitalize the Spanish banks for another 6-12 months.
  • Greece still needs Bailout Two, now settled (11/27/12) but yet to be disbursed and disbursement dependent on each member government agreeing and a debt buyback.


SPOTCURRENT POSITIONSIGNAL STRENGHTOPEN DATEOPEN RATEPOSITION GAIN/LOSS
USD/JPY82.19LONG USDWEAK10 /17/1278.714.23%
GBP/USD1.6048LONG GBPWEAK11/26/121.60220.16%
EURO/USD1.2913LONG EUROWEAK11/26/121.2970-0.44%
EURO/JPY106.13LONG EUROWEAK11 /21/12105.380.71%
EURO/GBP0.8046LONG EUROWEAK11/26/120.8095-0.61%
GBP/JPY131.91LONG GBPWEAK11/21/12131.020.68%
USD/CHF0.9344SHORT USDWEAK11/26/120.9284-0.64%
USD/CAD0.9879SHORT USDWEAK11/26/120.99320.54%
AUD/USD1.0486LONG AUDSTRONG11/07/121.04530.32%
AUD/JPY86.18LONG AUDWEAK10/17/1281.196.15%
USD/MXN12.8317SHORT USDWEAK11/26/1212.97801.14%