The devil finds work for idle hands

Outlook:

We struggled to find material to include in today’s Briefing. Aside from some minor waves about earnings and equity market responses, the only real FX-related news is Britain’s third-quarter GDP. Economic data is coming in better than expected and nothing has blown up into an Event. A lull in information flow is a bad thing for markets. The devil finds work for idle hands. Traders may find they have time to read the tons of analysis that has been piling up. Analysts may be able to step back, breathe deeply and take a second look at conditions, perhaps a more rational one. A data-lull can result in sideways consolidation—or reversal.

Expectations are running high that today’s durables will support the risk-on scenario. Considering the variability of this data, we should be afraid. A single company (Boeing) can make all the difference and even though everyone knows it, we get market price effects from headlines anyway. Bloomberg reports its survey shows a forecast of a gain by 7.5% in durables in Sept, while tomorrow’s GDP will be 1.9% for Q3, from 1.3% in Q2.

Wishful thinking for happy surprises is not exactly the best basis to make trading decisions. We wish for the troika to approve Greece’s 2-year extension. We wish for Spanish yields to stay lowish and steady on fear of guerilla intervention by the ECB, with the proper, legal intervention being approved at some point. We wish for the US recovery to continue. We wish for the US election not to upset the apple cart (i.e., a Romney win that would threaten the Fed’s leadership and QE, not to mention individual rights over the State imposing religious beliefs). We wish correlations among asset classes would behave like they are supposed to. We wish global growth will resume and remove the need for central banks to mess up any sane analysis of market conditions.

We can’t overstate this last one. When the Fed is buying practically all of new issuance, and literally twisting the yield curve, how can we know what yields should really be? The old arguments about inflation are starting to look preferable. The situation in Europe is just as bad, if not worse. Does anyone know what Spanish yields should be? The ECB pulled back (hastily) from a statement that it would set a cap, but no one doubts it has one.

We can’t pay proper attention to macroeconomic conditions when market prices are so confused and confusing. And to a large extent, governments are fiddling while Rome burns. Case in point: European Commission Competition Commissioner Almunia made a big stink about Microsoft still featuring its Internet Explorer browser as the default setting in the Windows 8 release. The FT reports “If a user decides to set a rival browser as a default browser, there should not be an unnecessary warning in Windows or confirmations by the user, and the Internet Explorer icon should also be unpinned from the Start screen,” Mr Almunia said. “We expect Microsoft to address these issues.” We hold no brief for Microsoft and swear at Mr. Gates and his juvenile designers almost every day, but this is ridiculous. Almunia and his minions must have better things to do. Moreover, the EC seems to think consumers are idiots and need the nanny state. The case opens up to clear view the wide disparity between the US and Europe over what is fair and appropriate behavior by private companies. Net-net, we see the dollar continuing to fall back from the safe-haven mode today and tomorrow. But traders are a bit angry and feeling frustrated, so don’t count on an Event not appearing to bite us. The EMU sanity check:

• The IMF predicts a 80% probability of eurozone recession in 2013
• The WSJ estimates capital flight/deleveraging credit contraction by $2.8 trillion in assets by end-2013
• German thank-tank forecast EMU growth at -0.5% this year and +0.1% next year.
• S&P cut Spain's rating two notches to triple-B-minus, one step over junk, and Moody’s has the same rating (Baa3), also one notch over junk. Moody’s cut the ratings of half the Spanish regions.
• The EU Summit on Oct 18-19 that was supposed to resolve the Greek bailout terms did not do so.
• 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.

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	80.12	LONG USD	WEAK	10 /17/12	78.46	1.76%
GBP/USD	1.6135	LONG GBP	WEAK	10 /18/12	1.6160	-0.19%
EURO/USD	1.3010	LONG EURO	WEAK	08/07/12	1.2403	4.89%
EURO/JPY	104.23	LONG EURO	WEAK	08/06/12	96.72	7.76%
EURO/GBP	0.8060	LONG EURO	WEAK	08/06/12	0.7943	1.47%
GBP/JPY	129.27	LONG GBP	WEAK	10 /18/12	128.04	0.96%
USD/CHF	0.9295	SHORT USD	WEAK	08/07/12	0.9686	4.21%
USD/CAD	0.9813	LONG USD	WEAK	10 /04/12	1.0229	-0.49%
AUD/USD	1.0384	SHORT AUD	WEAK	10 /24/12	1.0328	-0.54%
AUD/JPY	83.23	LONG AUD	WEAK	10/17/12	81.19	2.51%
USD/MXN	12.9243	SHORT USD	WEAK	07/30/12	13.2485	2.51%