Europe, China, US

* With the ECB decision looming, it's perhaps worth checking in on the state of play of ECB liquidity, market pricing, and expectation.  Unsurprisingly, given the ongoing QE purchase program and assorted LTRO facilities, excess liquidity closed last week at a record high.   While spot EONIA has historically been asymptotic to the ECB depo rate  (why lend money in the EONIA market for a worse rate than you can get by plunking it down with the central bank?), forward EONIA can obviously trade wherever it likes.  For most of the last year, 1y1y EONIA was well below the spot rate; recently, however, the forward rate has narrowed the gap and actually traded above spot EONIA.   The market no longer expects any more rate cuts from Draghi.


Interestingly, however, there have been no such qualms with Schatz, which have traded with a defined but non-asymptotic relationship with the ECB deposit rate.   As you can see below, the current ultra low level of Schatz yields is broadly consistent with the curve of the relationship over the past decade.

Where it gets a little weird is when we plot the two spreads together (1Y1Y EONIA - spot, and Schatz - the depo rate) and see how closely they are historically aligned.   This is largely because on essence they capture the same things, namely policy expectations.  The recent divergence in direction is notable.  We can put this down to a few things: pricing capital key/sub depo purchases changes from the ECB; using Schatz as synthetic calls on a new DEM (or puts on a new ITL, if you prefer); a technical outcome of European money market reform.



Whatever the reason, the divergence is interesting, and at some point will spell opportunity.

* Another day, another CFETS fixing within the established range.   Whatever Voldemort's transgressions were a decade ago, it seems hard to argue with the idea that the authorities are leaning against further CNY depreciation.

Of course, their job has been mad easier by the moderation in capital outflows over the last couple of quarters.

While these flows are still negative, obviously, they are comparable in magnitude to the trade surplus.  As such, the torrent of outflow of PBOC's FX reserves slowed to a mere trickle for much of the year.   That being said, the reserve decline accelerated again in October, and very likely sped up again last month (above and beyond any valuation differences.)


Clearly one to keep an eye on; November data is slated for release some time tonight.

* Wasteful spending by the Pentagon has been a regular feature of the American political landscape for a long time.   On the face of it, therefore, Donald Trump's twitter salvo against Boeing is sure to resonate.  Yet there are clearly reasons for concern that go beyond "he's lying again."

While the contents of the Tweet were misleading, it wasn't wholly fabricated; the development/manufacturing/delivery costs of the new Air Force One program are indeed budgeted at something close to $4 billion...albeit over a span of many years.  As far as Trump's veracity goes, that's probably close to as good as it gets.

What's troubling, however, is Trump's decision to pick on a single company, one whose CEO (in a stunning coincidence) publicly criticized the president-elect's protectionist agenda.  Trump's not even in office, and we already have concrete evidence of his picking winners and losers on a company by company basis.  That's hardly the foundation of a healthy market; can you imagine what the reaction of the SEC would have been if a billion dollars was knocked off of Boeing's market cap by a half-assed rumour tweeted out by, say, some bloke living over his mum's garage near Heathrow airport? 

Although clearly not on the market's radar at the moment, if and as evidence mounts that the new administration has a penchant for picking out individual corporate winners and losers depending on some arbitrary reaction, possibly at 3 am, by the president, might the market demand a higher risk premium to factor in the possibility of getting trumped (both metaphorically and literally)?



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washedup
admin
December 7, 2016 at 2:53 AM ×

Thx MM - on the CFETS its interesting that the basic trend of proceeding from the top left to the lower right has not changed ,neither has its tendency to go sideways after a sizable trend move down (similar to last summer and early winter for example) - the big difference in behavior recently seems to be the dampened volatility within the sideways range after a big wave down. Could merely be lack of volume and liquidity not to mention diminished spec interest due to the proven difficulty of winning on anything short China.

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AW
admin
December 7, 2016 at 5:31 AM ×

Have been doing my best to avoid following him on Twitter...
Thankfully anything controversial is spread fairly quickly by others.

TWTR suddenly enjoying a huge spike in relevance.

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Anonymous
admin
December 7, 2016 at 5:49 AM ×

I doubt the boeing fighting shows Trump has any sustained principle on what winners to pick, he needs to keep up his image as fighting for his supporters so he will periodically pick a target to fight.

If boeing gives him "visible" concession he will forget about them and move onto the next controversy. I doubt the market will care once this becomes regular.

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December 7, 2016 at 7:50 AM ×

Is Good http://www.metaldetectorindonesia.com/

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Celeriac1972
admin
December 7, 2016 at 10:48 AM ×

These (from Saxo Bank) are always fun:

http://www.prnewswire.com/news-releases/saxo-banks-10-outrageous-predictions-for-2017-605153916.html

And 2016 for comparison....

http://www.prnewswire.com/news-releases/saxo-banks-10-outrageous-predictions-for-2016-562588631.html

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Anonymous
admin
December 7, 2016 at 12:55 PM ×

The "Fade Nico" trade once again works perfectly:

(Reuters) Futures rise for third day in a row
(BBG) Banks Lead Stock Rally as Bonds Gain With Hopes Pinned on Draghi
(Reuters) Monte dei Paschi bolsters European stocks

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Flowthrough
admin
December 7, 2016 at 1:04 PM ×

With all due respects, Obama clearly picked individual company winners and losers. Again think of his many public broadsides against the banks. Then his defense of Apple and Google against the EU and his attack on inversions (often illegal). And let us not forget his delay/denial of pipelines, Keystone and now Dakota Access. The latter being quite illegal.
Not that I think Trump's tweets are a good idea, but at this point they should be not be viewed as meaningful to the market.

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checkmate
admin
December 7, 2016 at 1:10 PM ×

Almost time to wrap the year and for me it's certainly been a tale of two halves. H1 was beyond expectations because of the bond weight in the portfolio. Call it luck if you like ,but banking that in the summer was the standout decision of the year.
H2 not so good. Barely moving foward because of underweight equities overweight cash. Upward move in the equity curve was only because the select picks by sector on equities plus buying a few short maturity bonds with decent yield outweighed the equity picks that didn't work out. Could benefit marginally if we get a santa rally worthy of the name bearing in mind what's already behind us.
As years go I'll take it as H1 buys me time to consider 2017 positioning. That's best done in the sunshine with some sand between the toes.
I'll wish you all the best for xmas and the new year , and that's a wrap.

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Anonymous
admin
December 7, 2016 at 1:12 PM ×

"That's hardly the foundation of a healthy market"

Beg your pardon, what healthy market are we talking about, again?

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Anonymous
admin
December 7, 2016 at 2:56 PM ×

A healthy market is one where a majority of participants remain on the sideline yammering about how unhealthy it is. This is precisely what then provides the subsequent catalyst(s) for said market.

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Anonymous
admin
December 7, 2016 at 3:18 PM ×

So it begins...ITALY TREASURY STUDYING RAISING STAKE IN MONTE DEI PASCHI BY BUYING SUBORDINATED DEBT FROM RETAIL INVESTORS, CONVERTING IT INTO EQUITY

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JMT
admin
December 7, 2016 at 3:55 PM ×

Another great piece MM. IMHO, one of the great injustices in this era of modern central bank policy has been how the central banks have been subsidizing/supporting the banks with their paying above market rates on overnight/term deposits, as noted in the "why lend money in the EONIA market for a worse rate than you can get by plunking it down with the central bank?" observation regarding the ECB.
I wonder how long the Fed can keep this farce going of having a 25 bp 'range' for Fed Funds, giving a free arb (of 10-12 bps) to the banks (mainly foreign) by paying at the top of that range. The Brenake defended this policy many times but it seems now that its purpose is superfluous.

Amusing and interesting note from "Celeriac1972" regarding Saxo Bank's '10 outrageous predictions'. I imagine that they italicize and double underline the word 'outrageous'! (Curious, do they produce a list of 'dignified' predictions?)

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Leftback
admin
December 7, 2016 at 4:10 PM ×

Price is News department notes that the biotech ETF IBB is melting down again, while gold and the long bond are catching a bid. The latest OPEC-driven oil price con seems to be abating and spot WTI already dropped below $50 on Cushing inventories data as there is clearly an abundance of crude oil available to buy right now. The inflation driver is going backwards again.

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Anonymous
admin
December 7, 2016 at 5:00 PM ×

Before ECB, it seems that fx and bonds showed some sign of reversal and equity is still lagging behind as usual.

An question on bank: what is difference between a bank and a money manager specialized in direct loans or alternative investment? It seems to me that both should be in the same boat reacting to the Fed policy change.

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abee crombie
admin
December 7, 2016 at 5:06 PM ×

Zinc is trading above 2010 and 2011 levels, and CRB raw is marching up.

Nico, thanks for detailing your trading process. I'm happy to learn from someone whose been doing it this long. Position management/execution is just as important as trade ideas.

Is the strong dollar trade over? TRY breaking lower and CAD has been stronger for about 2 weeks. EUR has been in a range for 2 years almost.

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Anonymous
admin
December 7, 2016 at 5:09 PM ×

Well the fade nico anon was correct. SPX is melting up as we speak... bears once again getting taken to the cleaners, for what oh maybe the 50th time this year... I guess some people never learn :)

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Unknown
admin
December 7, 2016 at 5:50 PM ×

So many things have doubled in a month which seemed like great shorts beforehand. The trump train is strong and short interests are declining rapidly into this rally. For now discretion is the better part of valor.

All this nico baiting is deplorable, so much vitriol here when markets break their ranges. You cannot judge a trade by its outcome.

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Anonymous
admin
December 7, 2016 at 6:08 PM ×

@Unknown
Stop being a fucking snowflake. Nico is almost always wrong and deserves to be called out. As for the other macro "experts" who haven't got long stocks the past few years, you really ought to get another fucking job.

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Anonymous
admin
December 7, 2016 at 6:17 PM ×

Huh? You can ONLY judge a trade on its outcome.

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Unknown
admin
December 7, 2016 at 6:32 PM ×

if it's aces vs 27 all in pre flop and the 27 wins you don't say the aces guy made the wrong call

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Mr. T
admin
December 7, 2016 at 6:56 PM ×

@anon(s) - whats the point of coming in here and shitting on the community? If you want to put on your 100% fade-nico trade, just do it. Are we supposed to be sitting back and thinking, "wow, that anonymous sure is a clever fellow"? Because rest assured, noone is thinking that. Get a name, contribute something constructive (even if its counter arguments to whatever nico is suggesting), and move on.

The US flows look frothy to me. RTY @ 47x ttm earnings might look cheap if you believe (as consensus shows) that combined earnings will go from $28 in '16 to $55 in '18 (thats 50% next year, 27% the following year). Paying 25x 2 years out earnings given the multiple crosscurrents out there seems crazy to me, especially with a backdrop of rising non-zero yields. But I don't think anyone is looking at it in these terms - its "get me in".

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Macro Man
admin
December 7, 2016 at 6:57 PM ×

Sigh. If you cannot be civil, you will get deleted.

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Anonymous
admin
December 7, 2016 at 7:00 PM ×

unknown mate - just ignore them - they only scurry out occasionally after the mkt goes up.

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Anonymous
admin
December 7, 2016 at 7:34 PM ×

So macro experts... would you care to elaborate what's happening in US equities today, with leading indexes up 1 - 2% in about 2 hours, during US lunchtime, on no news...

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Nico G
admin
December 7, 2016 at 7:35 PM ×

it's called a bubble

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abee crombie
admin
December 7, 2016 at 7:49 PM ×

Mr T, almost everyone in equity land uses forward earnings. I agree ttm are whats real vs estimated (ask valent sh how well the adj eps did) but unfortunately we like in a forward world. On that measure we are at 25x in RTY, just below the peak last year. However PE ratios almost always expand before EPS really start growing. Yes I think equity guys maybe a bit nutty here, but who knows. In general you need something else besides over valuation to get markets to go down. Over valuations help you estimate how far they can go but ppl who short stuff just bc its expensive dont usually come out ahead, at least IMHO. So here I am sitting. Thinking about what nico said. Either you are short too early or not short enough...

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Anonymous
admin
December 7, 2016 at 7:59 PM ×

You will need reality to set in to change the fantasy minds. Since we are months away, so no hurry.

Right now I am focusing on sector rotation and catch up trades. Technology now and bio-tech in a few days maybe?

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Anonymous
admin
December 7, 2016 at 8:05 PM ×

Spoos will never undergo a meaningful fall. Vested interests (govt, CB's etc) simply won't allow it. That's why we have periods of sideways non-action with huge rallies in between. Greenspan mentioned that with the boomer generation retiring, they'd need to support stocks for years and this is what is happening.

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Anonymous
admin
December 7, 2016 at 8:09 PM ×

Anon 8:05 here. Forgot to add the link showing the data behind the spoos flash-rally:

http://www.zerohedge.com/news/2016-12-07/what-happens-when-buying-algo-gets-excited

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Anonymous
admin
December 7, 2016 at 8:13 PM ×

I hate to admit it and my views generally align with Nico's but Anon 8:05 makes a damn good point.

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wcw
admin
December 7, 2016 at 8:20 PM ×

@abee crombie, 'ppl who short stuff just bc its expensive dont usually come out ahead'

Agreed. A valuation-only short is the worst, especially with zero or negative rebates.

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Anonymous
admin
December 7, 2016 at 8:51 PM ×

What is a meaningful fall? You do not need to catch another 2008 style crash to be right. A small fall like this Jan will be good for your P&L.

And as I read from Oaktree's q3 transcript, they mentioned that there are so much money to JBTFD. The fall in the current circumstance will be steep and short. You can make money through shorting by being quick.

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Nico G
admin
December 7, 2016 at 8:55 PM ×

dunno if it was mentioned here but on the technical side this is roll-over week on Spoos, huge volumes, usually volatile, most volatile being today and Thursday

now a word of caution from granpa

exactly 17 years ago we had a new internet economy and the valuations did not matter, it was easy to get in the cult of internet age and forget all valuation metrics. Nasdap went parabolic December/January 2000 then yield curve inverted in February and you know the rest

As i wrote after Trump election, the feeling is now the same, the cult of a Trump era that will fix everything while there is nothing but hope to support it. Those who've been around know that bubbles end on blind euphoria, not on bad news.

Anon 8:05 sure has a point but the generation argument was used for 2006/2007 US housing remember? that house prices would be supported forever. Buy the cult mantra at your own peril.

To me the size of a 'meaningful fall' on Spoos is... 5% it is foolish to expect more until the bull market has topped. When it tops believe me, we will know. There were a few 100 point moves to catch this year on the downside. It's not glorious bear work, but it works. Being short does not mean you want the world to end. There were far easier markets to short the last 4 years, but they are gone now, so Spoos come in the spotlight.

about those 'rude' people on the forum you are indeed wasting too much energy mocking me i am not a permabear my timeframe is short and i am just wary of cults. Just take the opposite side of the trade and enjoy making money when it works. You look amazing at every new high, granted but noone knows your name or better, your P&L, what you actually capture, the dips you buy, and how many times you got stopped this year. So far you are just market commentators, but everyone here as a screen to check markets, thanks.

I stand by the fact that on Trump election the -5% limit down was caused by the liquidation of people like you who in that case, lose many months of profit. Same for Brexit night, you should not make people believe that you had an easy year if you were ever trading, that is.

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johno
admin
December 7, 2016 at 9:04 PM ×

China reserve #s out since MM's post. Net of valuation losses and estimated current account surplus, looks like outflows continue around the 40b/month mark. China does seem more concerned ... last week there were stories that NRDC, MoC, and SAFE are all imposing new reviews/restrictions on outbound M&A.

USDJPY has held in well, despite today's bid in treasuries. I'm still not sure what to make of the BoJ's last decision, to fix the 10Y yield. It seemed to me at the time that it was stealth tapering and yen bullish. Since then, we've had this massive selloff in US rates and there's now a 56bps pickup to Japanese selling 10Y JGBs to buy 10Y USTs with rolling 3M FX hedges. Will the Japanese start dumping their JGBs to the BoJ, causing the latter's balance sheet to expand at greater than its prior 80t rate and the yen to fall precipitously? Interestingly, the MoF data hasn't shown a big pickup in Japanese buying of foreign bonds since Trump. Maybe one issue is that chasing yield pickup with rolling FX hedges is too risky with FX swap markets as they are ... CSFB's Zoltan is talking about the xccy basis blowing out to 150bps before the Fed does something. And maturity-matched hedged positions have no pickup, so nothing to do that way. All this to say that US rates going higher probably isn't going to cause the BoJ's balance sheet to explode and the yen to collapse. Feel free to correct my thinking.

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