Posts Tagged ‘Quantitative easing’

Investors Beware: Crucial Week Coming Up

In Financial Markets, Health and Environment, International Econnomic Politics, Law & Regulations, National Economic Politics, Views, commentaries and opinions on 30.10.10 at 23:19

The coming week will be a kind of make-or-break for the global financial markets. Not only do we have a Congressional election in the US, we’ve also got the FOMC‘s decision on further quantitative easing coming up. In addition, the European sovereign debt problem has taken a turn for the worst, with the difference in CDS spreads hitting a record high on Friday.

“The next few days will have a crucial importance on both politics and economics.”

Gavan Nolan

The revival of political risks in Greece, Portugal and Ireland, and the growing potential of an Anglo Irish Bank debt exchange, caused the sovereign CDS spreads to widen further. The basis between the Markit iTraxx SovX Western Europe Index and Markit iTraxx Europe Index reached 53bp on Friday – the widest on record.

However, according to, the SovX is trading with a considerable skew; “i.e. the theoretical level of the index is trading tighter than the index itself,” credit analyst Gavan Nolan writes in Markit’s weekly credit wrap.

And when comparing the theoretical levels of the two indices the difference is 36bp.

“A high level but nothing exceptional and well below the 47bp reached on May 6,” Gavan Nolan points out.


Formerly Known As “Political Risk”

Politicians have been derided many times for their often shaky knowledge of economics.

Ronald Reagan’s supply-side policies were dismissed as “voodoo economics” by none other than George Bush in the 1980 presidential race.

And when Bill Clinton ran against George W. Bush in 1992, one of his most famous slogans was; “It’s the economy, stupid!

Probably one of the best indications of how deep the knowledge of economic and financial issues  are (in general) amongst our political leaders, sadly.

More recently, the newly appointed UK shadow Chancellor of the Exchequer Alan Johnson has faced opprobrium for his supposed ignorance, even half-joking that his first action would be to “pick up a primer of economics for beginners”.

But whatever their levels of competence – and many of them are more than competent – the actions and utterances of
politicians have a direct influence on the economy and asset valuations.

“Events in the euro zone’s periphery over the past few days have made this evident. Political instability in two of the most troubled countries in the currency club has caused a mini-revival of the volatility seen earlier this year,” Gavan Nolan writes in this weeks market wrap.

Greece’s spreads widened sharply this week, reversing some of the strong rally seen over the last two months.

The Prime Minister George Papandreou warned that “we have not yet escaped the danger. I am sounding the alarm”.

As if this wasn’t enough to deter investors, Papandreou threatened to call a general election if his party fail to win decisively in the upcoming local elections.

Then the finance minister George Papaconstantinou weighed in, revealing that the country has “serious tax compliance issues”.

“Those familiar with Greece will regard this as a truism, but if the sovereign is to get its fiscal house in order then it needs to fix this issue quickly,” Nolan points out.

The country’s budget deficit is expected to be upgraded by Eurostat to over 15%, and the sovereign’s spreads are still indicating that a debt restructuring might be the most likely – and least painful – way forward.

“On the other side of the periphery, Portugal – hardly a paragon of fiscal prudence – has its own political problems.” Nolan comments.

Budget talks between the minority Socialist government and the main opposition party, the Social Democrats (PSD), broke down on Wednesday. The latter party is insisting that spending cuts should make a larger contribution to the austerity package.

It is likely that a compromise will be reached before the final vote on the budget next month.

“Nonetheless, the uncertainty created by the deadlock caused spreads to widen and they are set to remain volatile until an agreement is reached,” Nolan notes.

“Political friction in the euro zone will no doubt be relevant to risky asset valuations next week,” the analyst writes.

The Risks of the Week

But any fresh developments are likely to be overshadowed by events across the Atlantic, as Tuesday brings the US mid-term elections.

The polls are predicting that the Democrats will lose control of the House and maybe the Senate.

“As investors digest the implications of possible political gridlock they will be hit by the FOMC decision the following day,” Gavan Nolan adds.

The markets have been pricing in additional QE for some time now, and are expecting a confirmation on Wednesday.

The big question is how big – and how gradual – the liquidity injection will be.

“Prior to both events are the ISM and Markit Manufacturing PMIs on Monday (services on Wednesday) and then the week ends with non-farm payrolls on Friday,” informs.

“The next few days will have a crucial importance on both politics and economics,” Gavan Nolan concludes.

Related by The Swapper:

Credits: PIGs Gone Wild

Marc Faber Expects Market Sell Off On QE2 Announcement

Chart Of The Day: Europe’s Web Of Debt

The Fight Against Currency War

Fitch Place Most US Banks On Negative Rating Watch


Marc Faber Expects Market Sell Off On QE2 Announcement

In Financial Markets, High Frequency Trading, Law & Regulations, National Economic Politics, Quantitative Finance, Views, commentaries and opinions on 26.10.10 at 21:52

With vacuum tubes expecting QE next Wednesday to come anywhere between $500 billion a $10 trillion, it falls upon Marc Faber to naturally take the other side of the bet, who, in this interview with Margaret Brennan, tells the impeccably coiffed Bloomberg anchor that instead of inciting the mother of all flash dashes and hitting the BlackRock 12 month target of Dow 36,000, Mr. Faber instead anticipates that the FED decision “could disappoint investors and may prompt a correction in US stocks.”

In response to Margaret’s question if size does in fact matter, Faber responds that anything under a trillion will “disappoint.”

And with Goldman now throwing out bogeys as high as $2-4 trillion, it is almost inevitable that a sell the news type day will be virtual certainty on mid-term election day.

“The markets are stretched: weak dollar, strong PMs and strong equities – I think a correction is overdue. But I wouldn’t think that a bear market is around the corner.”

In fact the opposite: “Maybe we will have a crack up boom in stocks and commodities like between the end of 1999 and March 2000 when the markets went up very strongly,” Faber says.

Marc “Gloom-And-Doom” Faber is once again mostly bearish on bonds (and cash), due to his long-running expectation that inflation, whether modest or hyper, will make all fixed paper investments lose value very fast.

As for specific equity sectors Faber highlights agricultural commodities and “I continue to recommend the accumulation of precious metals, whereby I think they are overdue for some kind of a correction here and then we’ll get the next move probably next year and then thereafter.”


Here Comes The QE2!

In Financial Engeneering, Law & Regulations, Learning, Philosophy, Quantitative Finance, Technology on 14.10.10 at 02:52

The rally in risky assets gained momentum today following the dovish FOMC minutes published after the European close yesterday. It had become clear in recent weeks that a consensus was reached by investors that further quantitative easing was inevitable.

“This assumption appears to have been proved correct when the minutes pointed towards a distinct shift in the Fed’s policy stance.”

Gavan Nolan

Some members of the committee noted that if growth remained too slow or inflation too low then additional monetary policy accommodation would be appropriate “soon”. This suggests that a decisive majority is in favour of further easing before the end of the year.

QE is not the only “unconventional” policy tool available to Ben Bernanke and his fellow governors.

The committee also discussed ways of affecting short-term inflation expectations, including targets for the price level and for nominal GDP.

This was rejected by Bernanke earlier this year but he appears to have changed his mind. The delivery of policy may also change.

The committee’s view that policy would “be most effective if within a framework that was clearly communicated to the public” suggests a more gradual, transparent approach.

“Either way, the Fed’s expected monetary easing should be positive for risky assets judging by the experience of 2009,” Gavan Nolan at Markit Credit Research writes.

Earnings season in the US contributed to today’s rally. Intel Corp’s solid Q3 after the close yesterday boosted sentiment, with the firm’s profits and sales both slightly above expectations. More importantly, Intel didn’t disappoint with its Q4 outlook.

“Today we had the first major bank to post results, and JPMorgan did its usual trick of beating expectations.,” Mr. Nolan notes.

The bank’s net income of $4.4 billion exceeded consensus estimates, helped by declining credit loss provisions and a solid retail banking performance.

As expected, lower trading volumes led to a fall in profits at the investment bank.

JPMorgan’s spreads were little changed on the news and spreads were mixed elsewhere in the banking sector.

Bank of America, reporting next Tuesday, was wider while Goldman Sachs (also on Tuesday) and Morgan Stanley (Weds) were marginally tighter.

Unique Market Activity

Markit BOAT is a trade reporting platform which consolidates pan-European cash equity trade data from MTFs, Dark Pools and OTC transactions. The trading activity in this report took place on 12th October 2010 and was published by Markit BOAT on the same day. Trading activity reported with the ‘Market Condition’ flag is excluded from this report. Such trading activity is not relevant because the trade price and/or trading process does not reference or correlate with the then current market price.

The Unique Market Activity section lists stocks which were not active on Markit BOAT on the previous trading day.

Name Sector Volume Turnover €
TOSHIBA Industrials 6,756,400 24,376,310
TOYOTA Consumer Goods 849,850 21,321,440
TORAY INDUSTRIES Basic Materials 4,075,000 16,817,447
MITSUBISHI Industrials 690,500 12,491,010
NIPPON TELEGRAPH & TELEPHONE CORP Telecoms 298,500 9,657,792
SONY Consumer Goods 416,100 9,529,790
HONDA Consumer Goods 361,200 9,337,280
TDK Industrials 214,300 8,831,855
NTT DOCOMO Telecoms 6,878 8,254,325
MITSUBISHI ELECTRIC Industrials 987,000 6,597,168

Top 10 ETF

Name Volume Turnover €
ISHARES EBREXX GVG 5.5-10.5 540,077 69,215,068
AXA EASYETF S&P GSNE 74,775 13,571,663
DOW JONES EURO STOXX 50 SOURCE ETF 301,900 13,503,715
DB X TRACKERS – DJ EURO STOXX 50 ETF 450,000 12,717,000

Top 10 Trades

Name Sector Volume Turnover €
BBVA Financials 12,970,335 125,682,541
AKZO NOBEL Basic Materials 1,175,000 52,052,499
SNAM RETE GAS Oil & Gas 13,000,000 48,458,020
TELEFONICA Telecoms 1,972,702 37,362,977
BANCO SANTANDER Financials 3,556,756 33,326,803
E.ON Utilities 1,385,000 29,384,992
L’OREAL Consumer Goods 300,000 24,070,500
ENI Oil & Gas 1,411,438 22,723,749
DEUTSCHE BANK Financials 500,000 20,000,000
COLRUYT Consumer Services 100,000 19,025,000

Major Movers

Name Sector Volume Volume (T-1) % Change
NATIONAL GRID Utilities 9,637,110 775,700 1142%
TELEFONICA Telecoms 28,578,987 2,454,761 1064%
RSA INSURANCE GROUP Financials 10,881,950 1,352,935 704%
LLOYDS Financials 33,070,285 6,662,311 396%
INTESA SANPAOLO Financials 9,746,158 2,947,217 231%
RBS Financials 12,306,213 4,446,329 177%
SNAM RETE GAS Oil & Gas 60,991,980 25,797,181 136%
BBVA Financials 40,990,221 18,682,987 119%
BAE SYSTEMS Industrials 9,098,474 5,515,663 65%
VODAFONE Telecoms 26,191,430 18,644,216 40%

QE Expectations Continues To Fuel The Risk Rally

In High Frequency Trading, Learning, Quantitative Finance, Technology, Trading software on 11.10.10 at 12:45

QE expectations continues to fuel the risk rally in markets, market strategist Christian Tegllund Blaabjerg at Saxo Bank writes in Monday’s Wake-Up Call. He also points to tomorrow’s major earnings release by Intel

“This is very important for sentiment in markets and will fundamentally most likely provide a solid insight into how expectations will be in terms of sales growth in 2011.”

Christian Tegllund Blaabjerg

“European equity markets will most likely open around 0.2% higher today after a strong close in Friday’s US session on the back of expectations rising on the content of the QE package from the FED. Prepare for tomorrow’s earnings from Intel. This is very important for sentiment in markets and will fundamentally most likely provide a solid insight into how expectations will be in terms of sales growth in 2011,” Tegllund writes.

More market musing from Saxo Bank:

The earnings season does not get really exciting until tomorrow when Intel reports. Furthermore, the macro calendar is very, very light.

However, do watch out for the FED speakers today. While we think QE2 is now a near certainty, last week a couple of FED members did attempt to talk down the likelihood of more QE at the November FOMC meeting.

Nonfarm payrolls fell for the first time since December 2009 when you exclude temporary Census workers.

The decline of 18,000 jobs was due to a much larger than expected decline in non-Census government workers.

Private payrolls (64,000 vs. Saxo: 65,000) and Census workers (77,000 vs. Saxo: 80,000) came in as expected, but the 83,000 decline in non-Census government job positions surprised greatly to the downside as state and locals really cut back.

The unemployment rate did not increase as expected, but instead remained at 9.6% as the household survey was somewhat better than the establishment (nonfarm) survey.

The former survey saw employment increase by roughly 141,000 while the civilian labor force rose by 48,000, so the unemployment rate actually declined somewhat, but is still rounded to 9.6%. The so-called underemployment rate, which includes marginally attached workers, rose no less than 0.4%-points to 17.1%, which is the highest rate since April.

This was due to a large increase in persons employed ‘part time for economic reasons’ rose by no less than 612,000. In other words, more than half a million additional workers worked part time in September, but would rather have had a full time position.

The very poor labor market report caused equities to rally and stocks ended the day 0.5% higher in the US. Currently, stocks rally both on good news and on all the news, which confirms quantitative easing 2 will soon arrive.

The earnings season will be kicked off by Intel tomorrow, so look for this report. This is important due to Intel’s global exposure – both towards businesses and consumers.


Christian T. Blaabjerg


This week we will have a pretty decent indication how the big global corporates expect 2011 to perform in terms of sales and EPS growth. JPMorgan, Google and GE all reports this week and this will set the tone going forward in the earnings season.

The nonfarm payrolls Friday clearly was a bullish statement in terms of how you should expect the QE announcement in the beginning of November to turn out.

These expectations have so far lifted markets quite substantially and it is hard to envision how these expectations can be met.

By Christian Tegllund Blaabjerg

Market Strategist
Saxo Bank


Credit Wrap: The Spectre of Mercantilism

In Financial Engeneering, High Frequency Trading, Law & Regulations, Quantitative Finance, Technology on 09.10.10 at 02:26

Credit market participants are still looking for some kind of signal to what the covernments and central banks are going to do to stabelize the global economy. But this week has done noting to clarify the situation – on the contrary; more uncertainty seems to have been added. Here’s the wrap, provided by vice president Gavan Nolan at Markit Credit Research.

“The Great Depression told us that mercantilist policies can only harm fragile economic recoveries. Holders of risky assets will hope that policy makers know their economic history.”

Gavan Nolan

Investors looking for direction from this week’s major economic releases were looking in vain as markets appeared to regard the next stage of quantitative easing as a mere formality.The ISM non-manufacturing survey on Tuesday and today’s non-farm payrolls report were predicted to have a major influence on QE expectations and consequently spread direction. But it didn’t turn out that way, with spreads tightening significantly over the week despite mixed US data.

The ISM services survey, representing the bulk of the US economy, came in higher than forecast and indicated a sector that was still expanding.

The other major release, the non-farm payrolls report, was disappointing.

The headline figure of -95,000 was well below expectations and the private sector created a lacklustre 64,000 jobs.

A crumb of comfort came from the unemployment rate, which remained at a still-high 9.6%.

Given that the FED was quite clear that its decision on QE would depend on the economic data, why has QE2 before the end of the year now become the firm consensus?

Dovish investors could point towards a number of factors.

First and foremost, the current recovery is one of the weakest on record, a fact not wholly unexpected after a financial-induced recession.

Reinhart and Rogoff (2009) have shown that recessions following banking crises tend to cause unemployment to stay at high levels for longer than a “normal” recession. Unlike the Bank of England and ECB, the FED has an objective to maximise employment and the dismal state of the labour market mean it could be forced to act.

Secondly, inflation is subdued, and the Fed put extra emphasis on the threat of below-target price levels in its last statement.

But it was an unexpected event from Asia that cemented expectations of QE and caused gold to hit a record high of $1364 an ounce on Tuesday.

The Bank of Japan announced a new $60 billion programme of QE, 70% of which will be government debt and the rest a mix of corporate bonds, ETFs and REITs.

Given the size of Japan’s economy and its enormous debt levels, this expansion of the central bank balance sheet is unlikely to act as a meaningful stimulant. But it did send out a signal that the BoJ was ready to return to unconventional measures; QE was tried in 2001-2006 with mixed results.

More importantly it raised expectations that other central banks are ready to act, possibly in concert.

The IMF annual meeting is this weekend, and the markets will be watchful of comments on monetary policy from the great and the good. But another macroeconomic issue is likely to dominate the discussions.

Talk of an “international currency war” – coined by Brazil’s finance minister Guido Mantega – has ratcheted up in recent weeks.

The US and China have been at loggerheads for some time over the valuation of the renminbi, which the US says is kept artificially low by the Chinese authorities.

The rhetoric has intensified this week, and the two parties appear to be growing apart. Japan’s currency intervention last month didn’t help matters.

The depreciation of the yen helped its spreads outperform relative to Europe and the US but, like the effects of the intervention, this was short-lived (see chart above).

There are rumours that Japan will take the opportunity of a holiday-extended weekend in the US to intervene again.

The Great Depression told us that mercantilist policies can only harm fragile economic recoveries. Holders of risky assets will hope that policy makers know their economic history,” Gavan Nolan at Markit Credit Research concludes.



The Mercantilist Nation



A QE Fixation

In Financial Engeneering, High Frequency Trading, Law & Regulations, Quantitative Finance, Technology on 08.10.10 at 10:56

European credit markets widened Thursday, reversing some of the outperformance seen this week. Profit taking no doubt contributed to the widening given the spread compression over the previous two days. Investors are still fixated on quantitative easing, and gold reached another record high of $1364 an oune.

“The jobless claims data failed to boost the US markets, possibly due to QE hopes being dampened slightly.”

Gavan Nolan

News that the Vietnamese central bank is considering lifting its ban on gold imports probably helped the price rise. The economic data has been mixed this week, with a better than expected ISM report offset by a disappointing ADP employment survey. Either way, the markets appear to be convinced that QE is inevitable in the months ahead, vice president Gavan Nolan at Markit Credit Reseach writes in his daily alert.

Today’s better than expected weekly initial jobless claims may have given them pause for thought, and gold retreated sharply in the afternoon.

The claims figures aren’t relevant to Friday’s September non-farm payrolls but still acted as a positive catalyst for European markets, Nolan points out.

“The two central bank rate setting meetings were something of an irrelevance, as expected by most,” he continues.

The Bank of England kept rates on hold and maintained the level of QE at £200 billion.

“It will be interesting to see from the minutes later this month whether MPC member Adam Posen voted in favour of additional QE,” Nolan adds.

The ECB also kept rates on hold and Trichet’s press conference offered the usual platitudes.

Sovereign spreads were little changed Thursday, arresting their underperformance this week.

Ireland continued to attract interest after the National Treasury Management Agency issued a statement confirming that only unlisted institutions that are 100% under state control, i.e. Anglo Irish and Irish Nationwide, will see subordinated bondholders forced to share the burden of bailout.

The government also reiterated that it has “no intention” of imposing losses on senior bondholders.

AIB, which is under government control but it is to retain its listing, won’t be subject to subordinated burden sharing. Irish bank CDS spreads, never the most liquid, saw little movement on the news.”

The jobless claims data failed to boost the US markets, possibly due to QE hopes being dampened slightly.

US same-store sales gave another positive signal on the economy. Luxury retailer Nordstrom posted a 7.5% increase in sales for September, while Limited Brands also beat expectations with a 12% rise.

  • Markit iTraxxEurope 103bp (+1.5), Markit iTraxx Crossover 475bp (0)
  • Markit iTraxx SovX Western Europe 151.5bp (-1)
  • Markit iTraxx Senior Financials 129bp (+2)
  • Sovereigns – Greece 745bp (0), Spain 228bp (0), Portugal 410bp (+5), Italy 193bp (0), Ireland 440bp (-3), Belgium 129bp (+2)
  • BP 146bp (+8)

Equity Trading Highlights

Markit BOAT is a trade reporting platform which consolidates pan-European cash equity trade data from MTFs, Dark Pools and OTC transactions. The trading activity in this report took place on 7th October 2010 and was published by Markit BOAT on the same day. Trading activity reported with the “Market Condition” flag is excluded from this report. Such trading activity is not relevant because the trade price and/or trading process does not reference or correlate with the then current market price.

Unique Market Activity

The “Unique Market Activity” section lists stocks which were not active on Markit BOAT on the previous trading day.

Name Sector Volume Turnover €
BANK ZACHODNI Financials 159,918 8,706,201
THE VITEC GROUP Industrials 150,303 861,186
ING BANK SLASKI Financials 3,403 734,340
DRAEGERWERK Industrials 11,624 591,496
ERG Oil & Gas 51,559 498,542
SVM UK ACTIVE FUND Financials 250,000 488,616
SONAECOM SGPS Telecoms 309,841 449,129
POLSKA GRUPA ENERGETYCZNA Utilities 74,429 405,159
INDUSTRIVÄRDEN AB Financials 35,618 378,011
TESSENDERLO Basic Materials 16,268 370,565

Top 10 ETF

Name Volume Turnover €
UBS – ETF MSCI EUROPE I 534 24,459,870
DJ STOXX 600 OPTIMISED OIL & GAS SOURCE ETF 138,000 18,272,299
DB X TRACKERS – DAX ETF 236,310 14,804,627
ISHARES IBOXX LSC1.5-10.5 DE 120,000 13,195,800
MSCI RUSSIA 25% CAPPED INDEX ETF 528,868 11,548,354

Top 10 Trades

Name Sector Volume Turnover €
VOLVO Industrials 302,915,936 3,036,853,408
EDENRED Consumer Goods 15,461,844 227,289,104
BANCO SANTANDER Financials 14,400,000 138,241,722
SIEMENS Industrials 1,339,538 104,082,099
SNAM RETE GAS Oil & Gas 13,000,000 48,457,500
RIO TINTO Basic Materials 1,000,000 44,377,990
BEKAERT Industrials 200,000 39,649,500
RESOLUTION Financials 12,895,685 36,705,911
DAIMLER Consumer Goods 800,000 36,000,000
MAN AG Industrials 450,000 35,532,000

Major Movers

Name Sector Volume Volume (T-1) % Change
VOLVO Industrials 321,017,368 2,607,100 12213%
EDENRED Consumer Goods 17,041,933 473,473 3499%
RENAULT Consumer Goods 4,032,314 522,519 672%
RESOLUTION Financials 13,749,041 2,148,376 540%
RSA INSURANCE GROUP Financials 9,049,772 1,771,695 411%
DSG INTERNATIONAL Consumer Services 13,189,099 3,320,540 297%
INTESA SANPAOLO Financials 11,047,898 4,305,882 157%
DEBENHAMS Consumer Services 9,797,333 4,389,560 123%
UNICREDIT Financials 20,577,304 11,634,448 77%
VODAFONE Telecoms 36,873,106 22,891,305 61%


FX Market – Ben’d Over?

In High Frequency Trading, Learning, Quantitative Finance, Trading software on 04.10.10 at 01:04

According to market pros, we might be in for another great week in the forex market. The closing prices in NY Friday were on the edge of some critical levels, with the euro picking op against almost all currencies.

“I see no reason why the underlying themes will not continue for a bit longer.”

Bruce Krasting

I have to believe that the folks at the ECB are not happy with this. The EURJPY cross is very important to the EU. The dollar rate must make them sick (and angry). The back up in the EUR/CHF is interesting. In an environment where the dollar was weak and gold was strong this move ran counter to recent trends. I see this as evidence that the “short Euro trade” was getting unwound. That hit the dollar and the Swiss cross.

Market volume for all crosses was heavy all week.

There is a slow motion “run on the dollar” taking place. It is popping up in the big money centers and the small.

The markets are all orderly so there is no sense of panic. But there is a non-stop movement out of dollars.

One week it is into the CHF, the next to the Pound the Euro or the Yen. Some of it is going to gold and other PMs.

But when I see that that Brazil, Russia and S. Korea are intervening to offset a supply of unwanted dollars I get worried.

The money is moving. Once the process starts it can get messy. October is often a time for messy things to happen.

The move against the dollar is about Ben Bernanke and his non-stop hints of QE2.

The FX market is just going through the process of adjusting to the reality that will be with us as of 11/3.

More QE is coming. Bernanke has been leaking bits and pieces of his plan to the press in order to give the market a heads up on what is coming. He wants the markets to adjust to reality before it is a reality.

That way he can say that the post market reaction to QE2 was muted.

One area to keep an eye on this week is the JPY. It is possible that the Yen becomes a flash point for a jump in FX volatility and an increase in the money flow.

I have been looking for signs that would give us some hints on the tactics to be used by the BoJ in its intervention policy. I want to know if the BoJ is on offence or is it playing defense.

If it is defense the door is open for some action that could spill some milk. There are few tea leaves to look at. Some information from the Japanese Ministry of Finance got me to thinking.

MITI has reported that the magnitude of currency intervention since September 15th was Yen 2.125T. This amount is a bit larger than the Y2T that was being discussed. MITI did not confirm it, but this number makes me believe that the BoJ did a very splashy job of publicly disclosed intervention on 9/15 and they did small amounts (that were not disclosed) on at least one other occasion.

Most likely the second intervention took place on 9/24.

Consider the amount. 2.125 T. A curious number. Why such an odd amount? It could be random, the sum of the concerted intervention just happened to total to this amount.

But that does not line up with Japanese precision. So I am left wondering.

It just so happens that if you take Yen 2.125T and divide it by 85.00 you get exactly $25,000,000. That is a nice round number that makes me happy.

My take is that the BoJ made an internal decision to intervene for a fixed dollar amount. It was not an open-ended approach. I think someone (Shirakawa) said, Lets buy $25b if the dollar slips below 83.” After that we will just see what happens.”

That strategy would be defense. It means the dollar will have to grind lower.

I expect the next BoJ intervention to occur in a range of 81.80 and 82. After that round is digested the BoJ will drop its intervention to yet another lower level. Probably closer to 81.

Should that prove to be the case it will result in some big moves in all the Yen crosses. The dollar may catch a short term bid against the Europeans if we see money flow out of EURJPY.

But that will be a head fake and an opportunity to sell more dollars. If the BoJ signals that it is in an orderly retreat the net affect will be a broad move out of the dollar.

I am expecting a big volume week.

If next Friday the Buck is lower across the board and the BoJ is a bit bloodied Ben Bernanke will light a cigar.

That would be the script that he wants the market to follow. What Ben would like to see is an orderly retreat for the dollar of about 10%.

We would be able to export some deflation to our trading partners if that were achieved.

The big risk is that orderly becomes DISorderly” and some of those “partners” retaliates in some subtle way.

One or the other of them might say, If you’re going to treat us like this we are not buying your bonds. You’ve proved they are not money good”.

What are the odds of a significant blowup in the FX market? Pretty low. Maybe 1 in 5.

However, if the dollar trades to 82 this week and the BoJ is a no show, the odds of a blowup go to 2 in 5.

The NY close for USDJPY was 83.20. About 40 bips from where the rubber meets the intervention road.

An Octoberfxest.

Could be a wild party…

I am going to ignore the evidence that BoJ intervened sub rosa on the 24th. I think this may have been just a “clean up” to bring the total to the agreed 2.125T. The amounts involved were small and had only a very short impact. Future intervention will be at lower levels and it will be immediately confirmed by the BoJ (attempt at Shock and Awe). This is a critical assumption of mine. It is a big gain/big loss kind of assumption.

By Bruce Krasting.

The European numbers:
EUR/JPY +0.7%
EUR/USD +1.9%
EUR/CHF +1.2%

The USD numbers:
EUR/USD +1.9%
USD/JPY -1.4%
USD/CHF -.75%

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US Hit By $3 Trillion Bailout Estimate

In Financial Markets, International Econnomic Politics, National Economic Politics, Views, commentaries and opinions on 27.09.10 at 00:08

The talented people at Zero Hedge makes a hard hitting analysis of the next phase of quantitative easing by the Federal Reserve. Their estimate for the whole so-called QE2 is stunningly 3 trillion dollar – almost the double of QE1 with a price tag of 1,7 trillion. Here’s some highlights, and link to the full report.

Perhaps at this point it is prudent to recall what the first definition of credit is:

1. Belief or confidence in the truth of something.

By that definition, America‘s “credit” has ran out.

Recently the debate over when QE2 will occur has taken a back seat over the question of what the implications of the FED’s latest intervention in monetary policy will be, as it is now certain that Bernanke will attempt a fresh round of monetary stimulus to prevent the recent deceleration in the economy from transforming into outright deflation.

Whether or not the FED will decide to engage in QE2 on its November 3 meeting, or as others have suggested December 14, and maybe even as far out as January 25, the actual event is now a certainty.

And while many have discussed this topic in big picture terms, most notably David Tepper, who on Friday stated that no matter what, stocks will benefit from QE2, few if any have actually considered what the impact of QE2 will be on the FED’s balance sheet, and how the change in composition in FED assets will impact all marketable asset classes.

We have conducted a rough analysis on how QE2 will reshape the FED’s balance sheet:

We were stunned to realize that over the next 6 months the FED may be the net buyer of nearly $3 trillion in Treasures, an action which will likely set off a chain of events which could result in rates dropping all the way to zero, stocks surging, and gold (and other precious metals) going from current price levels to well in the 5 digit range.

A Question of Size

One of the main open questions on QE2, is how large the FED’s next monetization episode will be.

This year’s most prescient economist, Jan Hatzius, has predicted that the minimum floor of Bernanke’s next intervention will be around $1 trillion, which of course means that he likely expects a materially greater final outcome from a FED that is known for “forceful” action.

Others, such as Bank of America‘s Priya Misra, have loftier expectations:

We expect the size of QE2 to be at least as much as QE1 in terms of duration demand.

As a reminder, QE1, when completed, resulted in the repurchase of roughly $1.7 trillion in Treasury and MBS/Agency securities.

It is thus safe to assume that the FED’s QE2 will likely amount to roughly $1.5 trillion in outright security purchases.

However, as we will demonstrate, this is far from the whole story, and the actual marginal purchasing impact will be substantially greater.

A Question of Composition

Probably the most important fact that economists and investors are ignoring is that QE2 will be accompanied by the prerogatives of QE Lite, namely the constant re-balancing the FED’s balance sheet for ongoing and accelerating prepayments of the MBS/Agency portfolio.

This is a critical fact, because once it becomes clear that the FED is indeed commencing on another round of monetization, rates will collapse even more beyond recent all time records (and if we are correct, could plunge all the way to zero).

What is very important to note, is that as Bank of America’s Jeffrey Rosenberg highlights, a material drop in rates, which is now practically inevitable, is certain to cause a surge in mortgage prepayments of agency securities:

“Our mortgage team highlights a 100 basis point decline in rates would raise the agency universe of mortgages refinanciability from currently about half to over 90%.”

Full report link.

Additional: BofA Securitization Weekly 9.17.pdf

Related by the Econotwist:

The US FED Launch The QE2 – Beta Version

Helicopter Ben; Cleared For Take Off

USA Could Be Forced Into Another Trillion Dollar Bank Rescue

James Bullard: The Future Of FED

US Economic growth slows to 1,6% – Does Quantitative Easing Really Matter?

Is Quantitative Easing An Attack On Your Freedom?

EUR Knocked Off Its Pedestal



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