2015.02.03 Short summary

Greece came to senses. Or maybe they had this plan all along, but firstly they tried to scare Eurozone before showing the real “hand”. Greece could be a major trouble even in political votes like more sanctions against Russia.

What they are offering are:

1) Growth Bonds, which would be linked to Greece’s nominal economic growth. They would replace some of the debt held by European partners, who would only be paid if the Greek economy was growing.

2) Perpetual Bonds, to replace the debt currently held by the European Central Bank.

Long USD, Short oil, Long gold, Short euro, Long bonds – all of them are taking a pounding today and the market is puking. Short squeezes can be a nasty piece of business. There is no great rule of trading a squeeze. It’s hard to tell when it will end.


“There seems to be lot of short covering on the hopes that the huge cut in US rig counts is leading to shale output being reduced to decrease the surplus overhanging the market,”.


2015.02.03 News


Once again I’d like to start with China where, in spite of slower economic growth, the central bank has allowed short term rates to begin rising again. Both the 1-week SHIBOR and the 7-day repo rates are higher. After the December spike many analysts thought the PBoC will maintain a more accommodative stance. Not so.

As a result, the nation’s short-term real rates have been quite high – as shown below relative to the US. This is creating tight monetary conditions in China – just as the nation’s housing markets struggle and manufacturing slows. I don’t understand what PBoC’s strategy is here – assuming there is one.

With recent declines in industrial commodity prices, weakness in China, and disinflationary pressures spreading, the Reserve Bank of Australia (RBA) somewhat unexpectedly cut its benchmark rate. We are going into an uncharted territory – the RBA’s rate is now at an all-time low.

The Greek finance minister Yanis Varoufakis eased some of the tensions with the creditors by proposing a debt swap instead of a debt writedown. Non-ECB held debt’s performance would be linked to Greece’s nominal GDP. Bonds held by the ECB would be converted to “perpetual debt” that the ECB could maintain at par but would never get repaid (a form of monetization?) While GDP-linked bonds have been done before, you’ve got to hand it to Varoufakis – this is creative.

The likelihood that a deal will get done relatively soon has just increased. The Greek equity market stabilized …

Political winds in some nations have shifted in that direction and may gain momentum going forward (See Podemos gaining momentum in Spain).

Switzerland is about to enter a deep recession as manufacturing contracts. The SNB may ultimately have to replicate BoJ’s policy to pull out of the deflationary spiral the nation is about to find itself in.

In the United States the manufacturing sector has shown significant loss of momentum. New orders in particular have been hit hard. Is stronger US dollar to blame? Some have also pointed to the protracted strike and labor negotiations at US West Coast ports hurting orders.

US manufacturers are also experiencing the biggest raw materials price declines since 2009. This should ultimately help with margins assuming orders don’t decline.

It will be interesting to see if this spread tightens if energy prices strengthen a bit. And it looks like we are seeing signs of stabilization in oil. A “dead cat bounce” or something more fundamental?


– Greece’s new government outlined its plans to win over its creditors by swapping outstanding debt for new growth-linked bonds, running a permanent budget surplus and targeting wealthy tax-evaders. (FT)
– Australia cut rates to a record low The Reserve Bank of Australia became the latest central bank to loosen monetary policy in a bid to revitalise economic growth. It shifted its benchmark interest rate down to 2.25 per cent , from 2.5 per cent. All eyes were on the Indian central bank after its surprise rate cut last month, but Raghuram Rajan opted to keep its benchmark repo rate at 7.75 per cent. (FT)
– China’s anti-graft campaign hit the financial sector Investigators are questioning an executive at China Minsheng Banking Corp over his political ties. A Bank of Beijing board member is also underinvestigation for corruption. (WSJ$)
– Balancing the oil market Brent crude oil rose above $54 a barrelyesterday after drilling data raised hopes of a production slowdown in the US. Meanwhile the trend for slashing investment plans has reached Asia, with Malaysia’s Petronas, China’s Cnooc and PetroChina all warning of double-digit percentage cuts in capital spending. (FT, WSJ$)


– RBA Cuts Key Rate to Record 2.25%, Says Currency Overvalued – Bloomberg Business
– German 10-Year Bond Rate Falls Below Japan’s for First Time – Bloomberg Business
– Ireland sells first 30-year bond to lock in rates – fastFT: Market-moving news and views, 24 hours a day – FT.com