Four Events and No Funeral

The FOMC - Twist but no QE has not had the effect that we felt many were expecting. Running into the event it felt as though many were thinking that the QE3 trade had been fully priced in over the previous 48 hours and that anything other than a liquidity barf would result in general equity selling together with UST and USD buying and all sorts of commodity linked selling. Well the Big B is still playing a cunning game as Mr Market asks "Is that a Bazooka in your pocket, or are you just glad to see me?"  Holding off and revising down growth and labour forecasts has effectively just rolled down market expectations to next month, yet given the FED some optionality. Ammo for the Twist is running low with probably only room to maintain the current 45Bln per month for the remainder of the year would leave them bereft of 0/3yr to sell. So for now why not play the waiting game as our parents said to us at Christmas, the waiting and expectation is as important as the present itself.

G-20 yesterday. Much press coverage and the multitude of comments are along the lines of "damp squib", but "The Daily Mash" take was probably the best. But to TMM the propensity of Eurocentric comments combined with a hints of intent that are naturally against German policy, sweetened with the obvious concession to Mangler of the "No softening for Greece" clause, actually leaves us less despondent than we normally are after a bout of G20 consensusness. The interesting flow of headlines today has our noses twitching,

*SCHAEUBLE SAYS EFSF CAN BUY IN SECONDARY MARKET &USE LEVERAGING  - Now whilst this is nothing new, Wolfie talking about it now is interesting.  

*ECB HAS DECIDED TO SIGNIFICANTLY LOOSEN ITS COLLATERAL RULES  -MEDIA, CITING SOURCES

*ECB TO EASE RULES ESP. FOR SECURITIZED MORTGAGE LOANS, WELT  

*ECB TO LOWER COLLATERAL DEMANDS FOR CENTRAL BANK LOANS: WELT.. Hmm.  Interesting sources.    


Greek Elections -  Whowuddathoughtiit! A government! But we are all well aware that Greek government is modelled on unstable large atomic isotopes and no doubt will soon spit out a few neutrons and split in an explosive fission event. But for the time being we are back with a body willing to lie commit to ongoing austerity programs to the EU whilst doing their best to wriggle out of them. Basically Greek issues should be back burnered for now.

Spanish auctions - Done and dusted. Not cancelled as some were suggesting at the beginning of the week and though the debate on sustainability of prices paid will rattle on surely for the NOW it is another risk behind us. Suddenly Spanish bonds look bid and there is a squeeze on leveraged positions as the locals are back in buying. Spain to the Back burner for now? Well lets get the stress tests results out of the way tonight, but we think it will be hard to shock a market that at the beginning of the week was running for the bunkers.

Where does that leave us? Well TMM are pretty happy as their Monday short term trades of long Spain short Bunds has bolstered the reserves. Considering the reasons we put this on, how far it has moved and the original short term nature we are taking profit on that one.

But if something is afoot post G20 and the news flow does see an increase in stories of policy response, then the chances of Euro blowing up diminish and the chances of a snap relief rally increase. Lack of policy response and coordinated action has been our biggest concern recently. So this is where we look towards the biggest toilet that everyone has been flushing their Euros down - Eur/chf.

If you don't want Euro then exchanging them at an artificially held price for CHF seems like a free way of getting optionality for a euro blow up. And indeed we were on that trade, but with a few key events behind us we have now lifted it. We are now even mulling the other side and wondering what exactly would happen if everyone else started to do the same. The World may be on the offer at the moment but that doesn't mean it has to be forever. A lift in mood as policy response becomes a bit more tangible, a drying up of eur/chf selling, SNB stop buying, SNB stop recycling  and their offer in eur/haven goes results in Euro gets another lift. And when if EURCHF does start to move there are an awful lot of positions short. Does the SNB come in and sell eur/chf straight away? Doubt it very much. So that leaves us with a payoff of (whilst the peg holds) of a couple of points downside against quite a lot of upside with a marginal bit of carry to boot. Of course the risk is it blows up but over the next 2 weeks we see the news flow getting better rather than worse (that was Monday). So that leaves us with a "flat to down a couple of tics" vs the chance of a decent "didn't expect that" spike up.

And finally. If the Euro is a sell vs chf on the ultimate blow up trade, then wouldn't you expect Xau/Eur to be rallying too and not going falling knife?