Evidence this week supports our view that the US remains the world’s locomotive, to be followed closely by China. Finally, we remain constructive on the UK vs consensus view.
For either trading operations or for corporate planners, continue to rely on these anchors. However, violence tagged to the E-Z has provided some distortion to traders, making the translation to the bottom line a bit sluggish.
For example, we have highlighted the US and UK term structures as the very simplest way to illustrate our point.
We recommended owning the US curve from Oct/11, 5-10 then 101, 2 - 10 188, 2 - 30 then 289. The curve expanded well enough into early November, then came in with massive flight to safety, last 113, 185 and 284. Remain with this or similar positions as fundamentals will continue to support the trade.
We likewise recommended owning the UK term structure on Nov/9, 5-10 then 108, 2-10, 168, 2-30, 270. Last, 129, 193, 290. Underpinnings detailed earlier remain in place, both fiscal and fundamental. Realize some profits perhaps, but remain with a majority of the position.
The new Fed-sponsored facility put in place this week does provide some solace, putting dollars to the Europeans at about 60 bps. Since this is cheaper than the 75 charged at the US discount window, there are rumors of a cut in that rate. “Why should Europeans get money cheaper than us?” ranted one banker. Because they don’t. US banks borrow at the FF’s rate, or about 8 bps. So a cut is meaningless. Our banks don’t have funding problems.
Finally, despite the protests of Richard Fisher (perhaps the most qualified of the bunch) and a few others, the Fed remains biased to stimulate further. The result will be to 1) bloat commodity prices, 2) spark equities, esp those of the less deserving type and 3) expand the term structure. That’s fine for the desk but it will backfire and retard consumption if indeed they pull this trigger.
Out of the spotlight, the Middle East remains a potent wild card.
Robert Craven
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