News trading Recommendation

[James21]

Trade News Recommendation

A worrying sign for those looking to China to save the world economy, China's manufacturing PMI nosedived - from 44.6 in October to 38.8 in November. The export orders component of the PMI survey came out at an astounding 28.2, probably the lowest we have ever seen any component of any PMI survey. This is brutal stuff for the Chinese authorities to contend with. One way to trade this news in G7 is with a short AUD position, as AUD has founds some support recently on stabilizing commodities and rallying equities. Those supports could come under threat this weak and worries over China could add to the bad vibes for the Aussie. Beware that tonight, the RBA is set to adjust their cash target once again. The baseline expectation is for a cut of 75 bps, to bring the rate to 4.50%.

[James21]

News Trading Opportunities

ECB members were out Friday talking up the risks of further cuts, with the BuBa's Weber saying that it was necessary to tread carefully if the ECB intended to take rates to a place they have never been before and talking up the risks of negative real rates (We ask: is any positive interest rates negative when there is intense deflation? It seems that the ECB really prefers the rear-view mirror as its best forecaster of inflation...) Others in the ECB argue that they will need to see how data looks in January and February before making any further decisions on rates. This remarkably hawkish stance, especially relative to the ueber-dovish US Fed and BOE stances of late, means that interest rate differentials are rising fast in EURUSD and EURGBP - helping to propel these pairs higher. In the case of EURUSD, for example, the 2-year rate differentials bottomed at under 100 bps in late October, but the latest rounds of ECB rhetoric had pushed that spread close to 150 bps by late last week. One key factor here: the EUR is also rallying in an environment of reasonably resilient risk appetite - so the market's assumption may be that the higher rates are good for owning Euros rather than bad because the failure to cut will exert further damage on the EuroZone economy.

The Q4 Tankan survey in Japan not surprisingly came in with downright awful readings, especially for the outlook component, which matched the 7-year low at -36. What is there to be happy about when the global economy has gone into "a cardiac arrest" as PIMCO's El-Erian puts it, and your currency is making rapid gains? Apparently, the negative data was more than priced in, as the Nikkei rallied furiously on the day and helped keep the JPY on the weak side.

Looking at the calendar for the week, the obvious first focus will be the Fed meeting and rate announcement tomorrow evening. With the Fed moving into ever more aggressive action to stem the risks of deleveraging and the credit squeeze, the assumption is that they will cut rates another 50 basis points to bring the rate to a record low of 0.50%. Some are even talking up the possibility of rates being chopped all the way to 0% on Tuesday, though we consider this very low probability. At this point, it is not terribly relevant as Fed funds have often traded close to 0 recently and quantitative easing is fast becoming a reality. Now debt monetization is the next step and the Fed has even talked about the remarkable step of issuing its own debt. The pressures that will be brought to bear on the economy will be massive next year as consumers look to shore up their private balance sheets. The Fed meeting may serve as the pivot point for this USD sell-off.

The oddest aspect of the situation right now is the positive spin many commentators are trying to put on the situation. One article tries to say that stocks are a bargain because in the past, stocks rallied after the biggest writedowns were announced, citing 2003 as a historical example. The commentators on TV also seem to want to talk up the attractiveness of equity valuations on a historical basis. We detest these comparisons with recent market history- this is an intense global crunch of mammoth proportions that has entirely altered the economic and financial landscape and it is almost irresponsible to use such comparisons. This is a situation like no other and visibility is extremely poor. While it may be a short term positive sign for risk appetite that equities are able to rally in the face of so many negative data points yesterday, other indicators (like spreads on corporate debt) are showing no relief in the credit situation and we suspect that this rally will eventually hit the skids just as every previous one has. Alas, with a New Year on the way and the worst redemption pressures possibly delayed until January, this rally, or at least a ranging environment, could sputter on into the New Year. Regardless, we would not be fans of putting on risk appetite plays, and would prefer to look for reversals back to risk aversion and even buying volatility as it declines back to attractive levels.