Sanctuary

The world’s mad dash for sanctuary has proved to be corrosive to recent strategies set for purpose of illustration. As always, strategy is based on our view of economic reality just ahead, vs St consensus, that which is priced in. Clients of course can work our insight in any number of ways.

Our US anchors have held very well, today’s Claims print a fit. We have been long the US curve from Oct/11; this progressed modestly, spreads expanding, but now back to entry levels on 2 - 30, better by 12 bps on 2 - 5 but worse by 12 on 2 - 10, beat to death in the flight to safety.

We have once again been short US debt to the German equivalent, set Nov/2 with the US 10 yr then plus 16 to the Bund, then out to 28 or so, or 30 target re-set to 40 (what?) but last print, plus 17.  We will abandon this trade.

Finally, given our relatively constructive view on the UK (today’s Oct Retail Sales print fit our anchor nicely) and what we understand will be the impact of any further Bk of Eng firing, we have been long the UK curve from Nov/9.  Most levels along the curve are unchanged but 2 - 30 is worse by 8 bps.  Here again, beat to death by E-Z events.

If one understood that an E-Z Armageddon were just ahead one would abandon these, or related positions. Today’s events in the E-Z perhaps qualify!  If one feels that we may return to the link to real sector developments, one would then maintain the US and UK positions or similar. But if by a returning to normality one expects the ECB to launch a full fledged QEI, forget it. It won’t happen.

Wild cards remain the E-Z and Middle East.

Robert Craven