Dissent Was Repressed

Those leaders in Brussels agreed
That bailing-in banks may proceed
But as many guessed
Dissent was repressed
More problems are still guaranteed

The yen has been the main loser in the overnight session, with many comments about it being a risk on environment. First, let me be clear in that short of a crisis event, I think recent evidence belies the idea that risk-on/risk-off is a viable paradigm any more. And second, I am trying to figure out what would have encouraged investors to take on more risk because of what we saw overnight.

Was it the fact that the Chinese liquidity crunch remains in place, albeit moderating slightly? 7-day repo rates remain at 6.74%, double their average this year and it has become pretty clear that the PBoC is not about to flood the market with liquidity. The Chinese economy is going to need to adjust to the new ideas about monetary policy and that will be a painful and volatile process, hardly a harbinger of buying risky assets.

Perhaps it was the fact that, as I suggested, the EU announced a compromise on the banking situation, which essentially stated that countries need to abide by the rules unless the situation is such that they don’t think they need to abide by the rules for national reasons. This was not the strong and clear rulemaking that is likely necessary for success of the banking safety net. And let’s take a moment to consider the EU meeting that starts this afternoon. Last June, they pledged “immediate action” on growth and jobs. Today, with unemployment having risen since then from 11.4% to 12.2% and GDP having fallen by 1.1% in that time, they are going to pledge “determined and immediate action” on growth and jobs. I know if I were unemployed in Europe I would feel much better now! At any rate, this does not strike as a reason to jump on the risky asset bandwagon.

I know. It was yesterday’s downward revision of US GDP to 1.8% in Q1 from the previously reported 2.4%, with the Personal Consumption piece falling to 2.6% from 3.4%. That type of news would certainly warrant jumping into risky assets, right?

Ultimately, I think all that is going on is market position adjustments ahead of the quarter end. Remember, Friday is the end of Q2 and many investors are massaging their portfolios to appear in the best possible light for reporting purposes. As such, I am not convinced that the recent gyrations are caused by changing views of the global macroeconomic situation, or changes in policy settings. The market remains quite concerned, and rightly so, that as the Fed removes policy accommodation, equity prices and bond prices will decline.

But looking across the FX markets, we have seen some strength and some weakness with no discernible pattern. Today’s US data will reveal Personal Income (exp 0.2%) and Personal Spending (0.3%) as well as Initial Claims (345K). None of these are likely to move markets greatly. Several Fed speakers are slated for today, NY’s Dudley and Atlanta’s Lockhart, and they may have a much bigger impact on things. For now, it seems that virtually all markets revolve around the Fed’s next steps, and indications that the ‘taper’ is closer will result in further selling of both bonds and equities.

Some days it’s just hard to get excited about the markets, and today is one of those. The long term trends remain in place, but the day-to-day is still subject to the next headline.

There will be no commentary tomorrow as I will be traveling and unable to observe the market.

Good luck and good weekend
Adf